Staying Relevant In The Payments Revolution

A tremendous level of disruption is occurring in the payments space today — and few banks have a strategy to combat this threat, according to Michael Carter, executive vice president at Strategic Resource Management. In this video, he explains how smart home technology like Alexa and Google Home is changing how consumers interact with their financial institutions. He also outlines three tactics for banks seeking to achieve top of wallet status.

  • Today’s Payments Landscape
  • Technologies to Watch
  • How to Keep Wallet Share
  • Threats to Community Banks

 

How And Where Blockchain Fits in Traditional Banking


blockchain-12-26-18.pngMany banks haven’t found an efficient way to deal with issues like payment clearing inefficiencies, consumer fraud, and the general limitations of fiat currencies.

Blockchain, however, may be the go-to solution for many of these challenges.

Issues Traditional Banks Face Today
Traditional banks and financial institutions have faced some challenges for decades, but we have yet to see the technical innovations to mitigate or eliminate them, including inefficient payment clearing processes, fraud and currency options.

Inefficient Payment Clearing Processes
One of the biggest roadblocks that banks face today is how to quickly clear payments while complying with regulatory procedures. The number of payment clearing options available in 2018, is not different from the options available in 2008 – a decade ago.

In the U.S., for example, same-day ACH is likely considered to be the biggest improvement during this decade. Only in recent years have cross-border fintech applications emerged that reduce payment clearing costs and wait times. For the most part, we are still stuck with old architectures that lack innovation, efficiency and the data to make a meaningful impact on money laundering and fraud reduction.

Inability to Stop Fraud
Fraud has always been notoriously difficult to stop. Unfortunately, this remains the case even today. Fraud costs are so high in the US, that interchange fees paid by merchants are some of the highest in the world. Despite an increase of available identity fraud detection systems, banks are still unable to make a material improvement in fraud reduction.

For banks, this leads to financial losses in cases where funds are paid to the fraud victim. For customers, this can reduce trust in the bank. For merchants, it means higher fees for facilities, which creates higher costs for customers. Additionally, customers often wait to receive a new bank card. In 2017 alone, the cost the data lost to identity theft totaled $16.8 billion.

Limited Number of Currency Options
Fiat currencies are limited by geography and slim competition.

When we think about fiat currency around the globe, we have seen a steady move towards standardization. This presents risks for banks and consumers. For example, a heavy reliance upon a single national currency relies upon factors like economic growth and monetary policy.

Twenty-eight nations have experienced hyperinflation during the past 25 years. Not only did banks fail in some cases, but entire economies collapsed. Because there were no currency choices, the problem could not be easily avoided.

This process continues to happen in many locations globally.

Benefits of Blockchain Over Traditional Systems
There are ways blockchain can reduce or eliminate these issues for financial institutions.

More Efficient Approval Systems
When compared to traditional payment approval processes, many blockchains are already more efficient. Instead of waiting days for payments to go through clearinghouses, a well-designed blockchain can complete the verification process in minutes or seconds. More importantly, blockchain also offers a more transparent and immutable option.

With innovations like KYC (Know Your Customer) and KYT (Know Your Transaction) transactions conducted via blockchain, banks can be more capable of preventing finance-related crimes. This means traditional finance can more effectively comply with laws for AML (Anti-Money Laundering), ATF and more.

In addition, legitimate transactions can be approved at a lower cost.

No More Fraud
While fraud seems like a pervasive issue in society, this can be reduced using technology. Blockchain can change how people prove identity and access services.

Instead of having to wait to stop a case of fraud, blockchain can stop transactions before they ever occur. The Ivy Network will have smart contracts which will allow banks and financial institutions to review a transaction and supporting KYC and KYT before accepting the deposit. Because blockchain transactions are immutable, we could see a reduction in counterfeiting of paper currency and consumer products.

Increased Digital Payment Options
While blockchain has many use cases, this is one example of how technology can change finance and the global economy. In the early days of cryptocurrency, there was really only bitcoin. Now, there is a range of coins and tokens like Ivy that serve important purposes within existing regulatory and legislative frameworks.

One of the biggest misconceptions is crypto and fiat payment systems have to be direct competitors. By creating a blockchain protocol that links fiat and cryptocurrency, businesses and consumers can have more, better market choices and use cases for cryptocurrency.

At the same time, financial institutions can serve an important role in the future of digital payments and fiat-crypto currency conversions.

As financial institutions look to solve many challenges they face around payment clearing inefficiencies, consumer fraud, and the limitations of fiat currencies, blockchain is a viable solution. Financial institutions that fail to embrace blockchain’s potential will face heightened monetary and reputational risks, and miss opportunities for growth and innovation.

Why Banks Are Slow to Embrace P2P Payments


P2P-7-3-17.pngMost banks have been reluctant to offer person-to-person (P2P) payments services, although the market—which the research firm Aite Group estimates has at least $1.2 trillion in annual payments volume in the United States alone—probably deserves a closer look.

Writing in a May 2017 research report, Talie Baker, a senior analyst in Aite’s retail banking and payments practice, argues that a P2P payments capability could be a “competitive differentiator” for financial institutions as they fight for market share in a crowded mobile banking market. And it’s a market that could be heating up as both traditional banks and fintech companies with their own payments offerings jockey for competitive advantage. “The P2P payments market is seeing growth in the adoption of digital payments, and both bank and nonbank providers, including tech giants such as Facebook and Google, are looking for ways to secure a piece of the P2P payments pie,” she wrote.

Most financial institutions offer a P2P option either through the Zelle Network (formerly clearXchange), which is owned by a consortium of banks and launched its new P2P service in June, or Popmoney, which is owned by Fiserv, the largest provider of core technology services to the industry. A total of 34 institutions currently offer Zelle, including the country’s four largest banks—J.P. Morgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup. Alternative providers include Facebook Messenger, Google Wallet, Square, PayPal through either its PayPal.me or Venmo services, and Dublin, Ireland-based Circle.

With 83 percent of the digital P2P market share in the U.S., compared just 17 percent for the alternative providers, banks are clearly in command of the space. Some of that advantage is attributable to the industry’s large installed base of mobile customers. “They have a captive audience to start with … and that gives them a one-up on, for example, a Venmo or a Square that don’t have a captive customer base and have to go out and build their business through referrals,” says Baker. However, the banks need to be careful that their big market share advantage doesn’t result in complacency. “Alternative providers are catching up from a popularity perspective and are doing more volume, and banks probably need to step up their game a little bit from a marketing perspective to keep their market share,” Baker says.

Why hasn’t the P2P market grown faster than it has until now? For one thing, P2P providers generally will have a difficult time charging for the service since consumer adoption has been slow. “Checks are free today, it’s free to get money from an ATM, so if [the services] are not free, I don’t know if they’re going to be popular for the long haul,” Baker says.

Another obstacle is the enduring popularity—and utility—of cash. Baker says that many potential users are still comfortable using cash or checks to settle small debts with friends and family—which is still the primary use case for P2P services. “I love being able to make electronic payments personally, I just have found that my peer group is not as up on it,” says Baker, who did not give her age but said she was older than a millennial.

The biggest impediment to the market’s growth, however, is the lack of what Baker calls “ubiquity,” which simply means “being available everywhere, all the time.” Cash and checks are widely accepted mediums of exchange, while most P2P services run on proprietary networks. “All of them are lacking in interoperability, so if we want to exchange money and I am using Venmo and you are using Square, we can’t,” Baker says. Baker points out that this is not unlike how things worked when email was becoming popular in the early days of the internet, where you could only exchange emails with people who shared the same service provider. Of course, a common protocol eventually emerged for emails and Baker expects the same evolution to eventually occur in the P2P space.

Why should banks care about a free service like P2P payments? Baker says that based on her conversations, many smaller institutions “don’t seem to understand that P2P helps drive consumer engagement. I think that P2P services keep them right at the center of a consumer’s life and keeps driving engagement with the banking brand.”

Digital Directors: A Powerful Boardroom Addition


3-21-13_Russell_Reynolds.pngDigital transformation—the confluence of social, mobile, cloud computing and data analytics—is dramatically changing the banking business. As electronic transactions become the norm and customer expectations shift accordingly, banks are fundamentally rethinking both their products and services and their marketing strategies.

Because digital transformation affects the evolution of the entire institution, there is an increasingly recognized need within the banking industry for the board to provide oversight and counsel to the CEO regarding digital strategy and the development of digital talent across the C suite. But this addition to board responsibilities means that the board itself must have a certain critical mass of digital capability and experience.

Nominating committees have begun to respond by adding “digital directors”—executives who have either management or board experience at a company where digital contributes a large portion of revenue, where digital channels are crucial enablers of business or where the company is regarded as a digital transformation leader in its industry.

But as powerful an asset as adding a digital director can be, doing so successfully requires forethought and planning. The following can serve as a checklist of questions and issues the nominating committee should consider.

Know Where the Bank is on its Digital Trajectory

Some banks are building out their basic mobile strategy, while others have infrastructure already in place and are now leveraging analytics to incentivize usage and engage and retain customers. Still others may be looking to extend their network of partnerships. The specific digital issues the institution is facing now and over the next several years will help determine the type of digital experience most needed on the board.

Understand the Varieties

While one can speak broadly of “digital directors,” the term actually encompasses three distinct types: The first type of digital leaders comes from “disruptor” companies—the social, mobile, cloud computing, data analytics and other firms that are actually driving the changes at a root level.  The second type of digital director comes from “transformer” companies outside the realm of technology that are examples in their industry of successful digital transformation. (The retail, transportation and consumer packaged goods industries are good sources.) The third type of executive comes from either disruptor or transformer companies, but approaches digital less from a strategic than a technological perspective, typically as chief technical officer or chief technology officer. Each type of digital director will have his or her own perspective on the process of digital transformation.

Show Commitment

Expect that any potential digital director will regard an offer of a board seat with a level of healthy skepticism. He or she will have to be persuaded that the CEO has truly embraced digital change, rather than merely responding to pressure from the shareholders or the board.

While a commitment to digital transformation will mean different things at different banks, it will generally include having already begun to build a digital management team to lead efforts in mobile, digital payments and digital marketing. After all, the role of the digital director is to advise on digital strategy—and this presupposes that there is a basic digital capability already in place. No digital director will sign on if he or she is expected to drive the digital transformation process.

One Isn’t Enough

Just as no digital director wants the responsibility of building digital capability from the ground up, he or she will not want to be the one to whom all faces turn when a digital issue comes up. Think of digital expertise like financial expertise: Even outside of the financial services industry, the well-composed board will include several financial experts, representing various perspectives and experiences, to ensure the best possible collective thinking about a critical function. Similarly, bank boards should aim to have at least two or three digital directors around the table.

Don’t Just Transform the Bank

The bank cannot undergo a digital transformation without the board doing so as well. Use tablets to access board documents, as well as online collaboration tools. Spend more time out of the boardroom seeing and trying new technologies first-hand.

But if adding digital technologies will nudge boardroom culture, the addition of digital directors will have a far greater impact, given their likely expectations for high levels of directness and transparency. The challenge here is to add directors who bring disruptive experience without being disruptive themselves. This can particularly be an issue for digital directors who have not served on a public company board before, or on a board outside of the digital realm. Mentoring from a senior board member can be helpful here. But it would be a mistake to expect to smooth the edges completely. Nor should one want to: As more digital directors take their place in the boardroom, it is likely that they will make a positive impact on board culture in ways that cannot now be foreseen.