The Great Payments Opportunity


payments-5-20-19.pngBanks have an opportunity to deepen relationships with their corporate customers facing payment challenges. One promising product could be integrated receivables solutions.

While most business-to-business payments are still done through paper check, electronic payments are growing rapidly. Paper checks remain at about 50 percent of business-to-business payments, according to the 2016 Electronic Payments Survey by the Association for Financial Professionals. But Automated Clearing House payments grew 9.4 percent in 2018, according to the National Automated Clearinghouse Association — a trend that is forcing businesses with high receivables volumes to look for ways to process electronic payments more efficiently.

Electronic payments create unique challenges for bank corporate customers. While the deposit is received electronically at the bank, the remittance and detailed payment information are typically sent separately in an email, document or spreadsheet. The corporate treasurer must manually connect, or re-associate, the remittance information to the deposit, which creates delays in crediting the customers’ account. As electronic ACH volumes increase, treasurers solve this problem by hiring more accounting staff to reconcile these payments.

Corporates also face added complexity from payment networks, which are becoming a more common way for large companies to pay their suppliers. While more efficient for the payer, this process requires treasury staff to log onto multiple payment network aggregation sites and download the remittance information. These downloaded files require manual re-association to the payment in order to credit the customer’s account, which requires adding more staff.

Corporates are also using mobile to accept field payments, like collecting payment on the delivery of goods or services, new customer orders or credit holds and collections. However, mobile payments again force treasurers to manually reconcile them. Moreover, most commercial banking mobile applications are designed for the treasurer of the business, with features such as balances, history and transfers. Collecting field payments needs to be configured so that field representative can simply collect the payments and remittance.

The corporate treasurer needs increased levels of automation to solve these challenges and problems. Traditional bank lockbox processing was designed for checks and relies on manual entry of the corporate’s payments and delivery of a reconciled file. This paper-based approach will be insufficient as more payments become electronic.

Treasurers should consider integrated receivables systems that match all payments types from all payment channels using artificial intelligence. A consolidated payment file updates the corporate’s enterprise resource planning system once these payments are processed. The integrated receivable solution then provides the corporate with a single archive of all their payments, rather than just a lockbox.

Right now, corporate customers are looking to financial technology firms for integrated receivable solutions because banks are moving too slowly. This disintermediates corporate customers from the banks they do business with. But almost 73 percent of corporate treasurers believe it is important or very important for their bank to provide integrated receivables, according to Aite.

This is an opportunity for bankers. The integrated receivable market offers many software solutions for banks so they can quickly ramp up and meet the needs of their corporate customers.

Bankers have a wide range of fintech partners to choose from for integrated receivables software and should look for one with expertise and knowledge of the corporate market. The solutions should leverage artificial intelligence and robotic process automation to process payments from any channel, include security with high availability and be easy for the bank and corporate customers to use.

Bridging The Gap Between Retail & Business Banking



Speed, ease of use and convenience define the customer experience today for both retail and commercial clients. In this video, First Data’s Christian Ofner and Eric Smith explain what retail and commercial customers expect from banks today—and you might be surprised to find they have similar needs. They also share how banks should enhance the experience.

  • Strengthening the Retail Experience
  • Enhancing Commercial Clients’ Experience
  • Technologies Banks Should Consider
  • Evaluating Your Bank’s Digital Strategy

Four Tips for Choosing a Fintech Partner


fintech-partner-2.png

Over the last three years we’ve implemented five strategic partnerships with fintech companies in industries such as mobile payments, investments and marketplace lending. In doing so, we’ve developed a reputation of being a nimble company for fintechs to partner with, yet we remain very selective in who we decide to work with.

We are very often asked–in places like the board room, at conferences and at networking events, how we choose what fintech companies to work with. It is a great question and one that needs to be looked at from a few angles. If you’re a financial institution looking to potentially begin partnering with fintech companies, below are some criteria to consider when vetting an opportunity.

A Strategic Fit: How does this relationship fit into your strategic plan? Finding a fintech that helps advance your goals may sound obvious, but it can be easy to get caught up in the fintech excitement, so don’t allow the latest fad to influence your choice of a partner. Don’t lose sight of your vision and make sure your potential partners buy into it. It’s better to have a few, meaningful partnerships than a host of relationships that may inadvertently distract you from your goals and spread your resources too thin.

Cultural Alignment: Make sure to do some research on the fintech’s management team, board of directors and advisory board. How do they–and their company’s mission-fit with your organization’s mission? Do you trust their team? Our CEO, Mike Butler, likes to say that we have a culture of trying to do things, not trying to NOT doing things. That’s important to us, and we want to work with teams that think similarly. Spending time together in the early stages of the relationship will help set the stage for a solid partnership in the future.

A Strong Business Plan: Is the company financially sound? Is their vision viable? Back to earlier commentary on not getting too caught up in the latest technology trend, consider testing the business idea on someone who isn’t a banker, like a friend or family member. While you might think it’s a great idea, does it appeal to a consumer that is not in our industry? If the business plan passes muster, another issue to consider is the fintech’s long-term plan and possible exit strategy, and the impact it would have on your business if the relationship went away. It’s important to understand both the fintech’s short- and long-term business plans and how those will impact your bank’s balance sheet and income statement today and in the future.

Compliance Buy-In: Does the fintech team appreciate the importance of security? Do they appreciate the role of regulation in banking and finance? Do they understand they may need to modify their solution in light of certain regulations? We know fintechs can sometimes look at banks with impatience, feeling that we’re slow to move. And while some might move at a slower pace than other, we banks know that there are good reasons to proceed cautiously and that compliance isn’t a “nice to have” when it comes to dealing with other people’s money. We are never willing to compromise security and are sure to emphasize that early in the conversation. It’s critical to find a partner with a similar commitment.

We’re in an exciting time; the conversations on both the bank and fintech sides are increasing about collaboration rather than competition. Considering criteria like the above will help banks take advantage of new possibilities in a meaningful way.

Does Mobile Matter?


5-1-15-Naomi.pngThere are five services via the smartphone that the top five banks in the country all offer: mobile banking, mobile bill pay, mobile check deposit, person-to-person payments, and ATM/branch locator. Does your bank have all five?

The question was posed at Bank Director’s Bank Board Growth and Innovation Conference in New Orleans on Wednesday. With more than 150 bank directors and officers in the room, only a handful raised their hands.

The speaker, Dave DeFazio, a partner at StrategyCorps, which provides deposit account and mobile phone products to banks, said all of these services are necessary. The nation’s population is increasingly in love with smartphones. If people lose their phone, they feel out of sorts, disconnected. It’s the first thing many people touch in the morning when they wake up. They use their smartphones when they’re driving (not a good idea). They check Facebook at work.

The end result is that banks that don’t provide easy-to-use, indispensable mobile apps will increasingly find themselves losing the battle for market share in the years ahead, DeFazio said.

Mobile service vendors are not the only ones who think mobile matters. There are now more mobile phones than landline phones in the United States.  Sixty percent of smartphone or tablet owners who switched financial institutions said mobile played an important or very important role in their decision to switch, according to a survey by the consulting firm AlixPartners.

It’s important not to confuse mobile services with online services for a laptop or desktop. Young people use their phones, and less frequently, their laptops. Your customers shouldn’t have to sign up for mobile banking services using an online portal for a laptop or desktop, he said.

“I have young people in my house who barely touch their laptops anymore,’’ DeFazio said. “Make it your mission to have an app people can’t live without.”

Millennials, the generation that tends to be in their late teens through early 30s, are distrustful of the biggest banks, but a greater percentage of them switch to big banks than older generations, according to the survey by AlixPartners. The reason? Millennials want digital services that are convenient and easy-to-use, and small banks don’t provide the same level of mobile services that big banks do, in general. Millennials aren’t as interested in going into a branch and speaking to a banker face to face as older generations are.

Not everyone in the crowd at the Bank Board Growth and Innovation Conference was impressed. One attendee questioned whether his bank should want to attract millennials. He pointed out that most of the more successful banks profiled at the conference focus on commercial customers. DeFazio answered that whatever its audience, a bank should pay attention to its mobile offerings.

“There are as many digital baby boomers as digital millennials,’’ he said. There are other reasons as well. Those most interested in using mobile services from their banks are the young and those with higher incomes. People who use mobile banking services tend to get a higher number of banking products from their bank than the average customer, according to AlixPartners.

Smaller banks may not have as many offerings as large banks, but some of them have leaders who don’t want their banks to fall behind. Brian Unruh, president and CEO of $600 million asset National Bank of Kansas City, in Overland Park, Kansas, says it’s almost overwhelming how many different technology companies are out there offering services to banks. But his bank is committed to offering mobile banking services. It recently switched Internet banking providers, and went with Austin, Texas-based Q2 Software, a smaller and more nimble company, he said. His bank recently hired a software developer and may hire a second, to develop mobile apps in-house.

Mobile services are definitely necessary, he said. “You have to get it to attract new customers,’’ he said.

Facebook is Hungry for Mobile Payments


Facebook isn’t just satisfied with having more users than any other social media in the world. They’re craving their piece of the future of mobile payments. With the recent announcement to offer peer-to-peer payments through its Messenger app, Facebook is seeking to establish a deeper connection to users’ finances and to take a bite out of traditional financial transactions.

Facebook Payments is completely free and will first be available via Messenger to users in the U.S. only. The feature can be used on the desktop or within the Facebook Messenger app, which launched last year as a companion to the Facebook app. Once a Visa or MasterCard debit card is linked to the Facebook account, users can open a chat with a friend, tap the dollar sign icon, type in the dollar amount and press send. That money is deposited to the friend’s bank account within a few days.

It’s a similar process to the already extremely popular peer-to-peer payments app Venmo, owned by PayPal, which was one of the first apps to take a social network approach to mobile finance. With Venmo though, you see payment interactions between all of your friends in the app. It doesn’t show dollar amounts, but the captions, comments and likes between users tell a story of what those people are up to and spending money on, and with whom, which is a lot like what you discover scrolling through a Facebook News Feed.4-17-15-SC_venmo.png

The move to make Messenger a separate app from Facebook, disassociating it with the News Feed and adding more privacy, was strategic though. Rather than mixing your payments with everything else you find on Facebook — pictures and posts from friends, games, location check-ins, advertisements — it may make handing over your payment information more appetizing if it’s in a separate app within a private message.

Steve Davis, product manager of Facebook Payments, said in a TechCrunch interview that “conversations about money are already happening on Messenger,” such as people chatting about splitting the check for dinner, travel plans or purchasing concert tickets. “What we want to do is make it easy to finish the conversation in the same place you started. You don’t have to switch to another app,” says Davis.

Introducing peer-to-peer payments into its Messenger app was rumored for months before being officially announced in early March, one of the earliest signs being the hiring of the past PayPal president David Marcus to lead Messenger. That Facebook Payments announcement was soon followed by the Facebook F8 developer conference, where Business on Messenger was also unveiled, a feature that will soon allow customers to chat with merchants directly through Messenger about orders and shipping updates. Plus, Facebook announced software tools that make it easy for third party developers to integrate with Messenger—a move that eventually may lead to accepting payments from users via the Messenger app.

While Facebook may not be charging fees for payments in the beginning, there is potential to generate additional advertising revenue in the future, which already brought in over $3.5 billion during the fourth quarter of 2014. When Facebook gains access to users’ payment details and is able to track what people are buying, it’s likely they can also deliver even more highly targeted advertising.

Facebook Advertising started out small and inexpensive but has spent years nipping away at traditional advertising, until it’s now one of the most sought after methods of targeted advertising, and it is only gaining more traction. So while Facebook may be taking small bites of payments now, it has the potential to be one of the biggest financial disruptors yet, simply because of its reach to 1.19 billion mobile monthly active users, about half of those in the U.S., and already 500 million people using Messenger.

Who knows how Facebook’s introduction to finances will settle with people, but if peer-to-peer payments is only its first course, Facebook has a lot more to devour along its way to disrupting traditional financial relationships.

Mobile Payment Revenue Opportunities for Financial Institutions


Mobile payments will create the most significant revenue opportunities of the decade for financial institutions.  It’s estimated that mobile payments will reach $20 billion in annual revenue opportunities for financial institutions. PwC’s Mike Heindl discusses the risks and opportunities for industry players.

Download Related PwC Publication:
PwC Viewpoint: Opportunity calls – An update on the evolution of mobile payments 

Digital Wallets: Crossing the Chasm Between Online and Offline Payments


chasm.jpgDigital wallets are beginning to change how consumers shop and pay. However, the concept can be confusing and daunting. There are over 160 wallets in the market. Some refer to them as “digital wallets”, others as mobile or e-wallets. What should banks do? Should they launch their own wallet solutions? Should they partner? If so, with whom?

The retailing landscape is changing. The growing number of smartphones and ubiquitous connectivity has been pushing the retailing industry towards “online-offline convergence”. Consumers are increasingly using their mobile phones when shopping to read product reviews, compare prices, and sometimes order online, leaving the physical shop empty-handed. Equally, they might order something online via laptop, mobile or tablet, but go and pick it up from a local store. Online commerce, both e- and m-variety, is by far the fastest growing retail segment in many developed markets.

If traditional payment instruments, such as cards, were somewhat clunky but acceptable for e-commerce, they are poorly suited for m-commerce. No one wants to fumble around their mobile phones typing in 16-digit card numbers, shipping addresses, etc. Not surprisingly, both Visa and MasterCard saw the opportunity to develop their own digital wallet solutions, V.me by Visa and PayPass Wallet Services respectively, to help address this market. Other players, such as, for example, Isis have focused on bringing the mobile wallets to physical stores.

There are many different ways wallets can differentiate themselves from each other. However, fundamentally, there are two main types of wallets based on where the payment credentials are stored:

  1. Secure element-based wallets store the payment credentials (e.g. card details) in a secure area inside the phone known as secure element, and communicate those credentials to the physical point-of-sale (POS) terminal typically via Near Field Communication (NFC) technology. An example of such a wallet in the United States is the recently launched Isis.
  2. Cloud-based wallets store the payment credentials in a secure area on a remote server, or “in the cloud.” How those payment credentials are communicated to the merchant depends on the specific implementation. Perhaps the best known example of a cloud-based wallet is PayPal.

While online-offline convergence is rapidly becoming a reality for retailers, the same is not yet true for payments. It remains a challenge today to use online the payment credentials residing in the secure element-based wallet, and to use cloud-based credentials at the physical POS. For example, PayPal, a leader online, is working hard to get to the physical POS, while Visa and MasterCard are using their strength in the physical world to develop cloud-based digital wallets. Google Wallet is one notable example which does combine both secure element and cloud-based credentials, but given the transaction economics, it remains an exception to the rule.

There are a few solutions emerging as potential candidates to help bridge the divide between online and offline payments, however, most of them remain in relatively early stages of development. We believe that the payments industry will continue to try and solve this conundrum and we will see more solutions in this space emerging over the next 12 to18 months.

However, in the end, the desired online and offline ubiquity for any single wallet may prove to be illusionary. I do not share the view of those who think that there will be “one wallet to rule them all.” If anything, the mobile phone itself might become such a “wallet,” with consumers using multiple apps to shop and pay with payment credentials stored in multiple places.

In today’s fragmented world of digital wallets, our advice to banks would be to think twice before launching their own branded independent wallets. Some banks might be successful in doing so, but many others are likely to be better off by ensuring their payment credentials are available with the wallets most likely to win in the market. Supporting traditional scheme wallets, such as Visa’s V.me and MasterCard’s PayPass Wallet, should be a “no brainer” decision for most banks, but other specific market segment leaders, such as Isis or Google in the United States would also merit consideration. Banks should also remember that many already have a great asset in their mobile banking platforms and should focus on enhancing and extending them with rich value-added services, including payment propositions, such as P2P or access to card-based and other payment credentials.

Banking the Unbanked: Prepaid Cards, Mobile Payments & Global Opportunities in Retail Banking


lock-key.jpgDeloitte, a professional services firm specializing in audit, tax, consulting, enterprise risk, and financial advisory services, recently released a report on the unbanked, with excerpts printed here: 

A Large Untapped Banking Market?

Financial institutions around the world compete against one another trying to attract and retain the same middle- to upper-income retail customers year after year. Yet there is an enormous market that most banks are ignoring—and that nonbank competitors have begun to cultivate effectively: the world’s 2.5 billion adults who are either unbanked or underbanked.

By definition, unbanked customers have no checking, savings, credit, or insurance account with a traditional, regulated depository institution. Meanwhile, underbanked customers have one or more of these accounts, but conduct many of their financial transactions with alternative service providers, such as check-cashing services, payday lenders, and even pawn shops—and still use cash for many transactions.

Prepaid Cards and Mobile Payments: Recent Innovations Gaining Rapid Acceptance

The developing world is serving as a crucible of innovation for a new payments infrastructure for financial services — one that relies less on the physical presence of branch offices and more on wireless telecommunications and the Internet.

Prepaid cards. Like the holiday gift cards that have become so popular in the United States, general purpose reloadable (GPR) prepaid cards are a medium of stored value. However, gift cards are typically “closed loop” products accepted by a single merchant, while GPR prepaid cards are “open loop” and accepted almost everywhere.

Prepaid cards can offer unbanked and underbanked consumers access to online shopping and bill payment, as well as a host of other traditional banking functionalities. Moreover, many governments around the world are increasingly adopting prepaid cards as a preferred mechanism for making benefits payments to consumers because it can be cheaper, faster, and more secure to transfer funds to cards than it is to mail checks or provide cash to all recipients.

Mobile payments. At the same time that prepaid cards are taking off, payments made through mobile phones are also becoming more common. According to the International Telecommunication Union, the United Nations agency for information and communication technologies, there were 5.9 billion mobile-cellular subscriptions in the world at the end of 2011.  With a global reach of 87 percent—and a developing-world adoption rate of 79 percent—mobile phones are in use almost everywhere and by virtually
every consumer segment.  With such widespread access to mobile technology, consumers in Africa, Asia, and other emerging markets can pay bills, get cash from local merchants, and send money back home to their families—without having to step into a banking office.

The United States: An Emerging Market for Prepaid Cards

In the United States, a number of prepaid program managers are increasingly positioning their GPR prepaid products as a checking/debit alternative and targeting them to both the unbanked and underbanked population as well as presently banked consumers.

Prepaid cards can appeal not only to younger consumers looking for a cheaper, more convenient alternative to traditional banks, but also parents eager to control, compartmentalize, and track their children’s spend or their own.

Emerging online banking players are offering a broader product array, including savings and credit accounts to complement their prepaid offerings. Adding to the pressure, several established nonbank players and several large retailers have introduced everyday payment prepaid cards with fewer fees aimed at younger consumers and the cost-conscious segment of the market.

Responding to New Competitors

Stay the course and reduce operating costs. Some banks may elect to continue to grow their share of wallet among existing profitable customers while further reducing operating costs in-line with the new reality of regulatory constrained fee income.

This option is a traditional response of large incumbents when faced with disruptors. It also is a well-established playbook and might make the most sense for many banks. This option will likely require forcing out unprofitable consumers and will shrink the total consumer franchise. Typically, large national banks seem to have chosen this option, either due to a profitability imperative or to a strategic choice to focus on the affluent. Some regional banks have made a similar choice as well. The shallow profit pool of existing prepaid customers is also a common reason cited for this choice.

Protect the franchise. Other banks may decide to offer prepaid products to unprofitable checking/debit consumers, migrate them to the cheaper prepaid platform, and offer prepaid options to less creditworthy customers.

This approach will likely preserve the size and scale of the franchise and preserve the future option of migrating prepaid customers to traditional banking products as their financial situation improves. Banks that are more comfortable with middle-income and subprime customers as well as regionals looking to grow aggressively are considering this option. The risks associated with this option are a dilution of efforts and the traditional risks associated with middle-of-the-road options.

Embrace the disruption. Still other banks may choose to create an enterprise-level focus on the unbanked and underbanked markets initially around prepaid offerings and actively prepare for the upward march of this new banking solution. Of course, this option can be especially attractive for banks in fast-developing markets where the non-consuming segment is 70 percent or more of the population.

Traditional banks could acquire one of the prepaid specialists or create their own program-management capability. The upward march would involve migrating the product functionalities and positioning to help meet the needs of selected banked segments, whether lower-middle class or younger affluent segments that do not want or need traditional banking relationships.

For access to the full report, click here.

Will clearXchange Be a P2P Game Changer?


mobile-payments.jpgIt looks like there’s going to be a big rumble in the person-to-person payments jungle.

An announcement last week that three of the nation’s largest banks—Bank of America, J.P. Morgan Chase and Wells Fargo—had teamed up to offer their customers a new person-to-person (or P2P for short) service called clearXchangesignals that these institutions are serious about taking on the industry leader, PayPal

Although details about the new clearXchange offering are somewhat scarce at this point, the three banks’ customers will be able to send money directly from their existing checking accounts to another party using just an email address or mobile phone number. This is pretty much what consumers have already been able to do through PayPal, which has used its Ebay Inc. connection to build a customer base of some 85 million users.

Not to be outdone, Google Inc. also announced last week plans to create a digital wallet that will permit consumers with Android smartphones to pay for their purchases with their credit or debit cards by waiving their phones in front of a special reader at the cash register. The card information would be linked to a special chip in the phone.

Both initiatives will most certainly accelerate the growth of mobile payments, which my colleague—Executive Vice President Al Dominick—has written about in several recent posts. But from the banking industry’s perspective, clearXchange offers the best hope to date that the fast-growing P2P market won’t end up being dominated by e-commerce heavyweights like PayPal and Google.

Hank Israel, a partner at the New York-based consulting firm Novantas, explains that the value of any payments network “is defined by the number of endpoints that it has.” Those endpoints are in fact customers, and Israel estimates that the three banks combined have about 25 million customers (minus some overlap for, say, BofA checking account customers who have a home mortgage with Wells or Chase credit card). With 85 million endpoints (i.e. customers), PayPal is still the “big bad gorilla” in the P2P market, says Israel.

But by all indications, clearXchange intends to open itself up to other banks in an effort to create as large a network as possible—which will be critical to its success. “It wouldn’t be in [clearXchange’s] advantage to say there’s a group of banks that it doesn’t want to be in the network,” says Steve Ledford, also a partner at Novantas. “The value of a network to everyone becomes greater—exponentially greater—the more participants you have.” A BofA spokesperson confirms that clearXchange is in discussions with other banks about joining the network.

Indeed, there are approximately 280 million individuals with checking accounts in the United States, according to Israel. And the average checking account has 360 transactions a year, compared to just 13 for PayPal—which means that a large bank owned network could eventually generate a sizeable customer base and very significant volume.

According to Israel, clearXchange would do well to embrace the digital wallet concept and incorporate additional payments options including credit cards since this would greatly increase the service’s utility. PayPal already allows its users to send P2P payments using a variety of mechanisms including multiple credit cards and transaction accounts.

While PayPal and Google would be formidable competitors for any fledgling e-commerce venture, clearXchange has other important advantages. PayPal requires its customers to set up a separate PayPal account in order to use its P2P service, while clearXchange’s bank customers will simply be able to use their existing credit and debit card accounts, which would appeal to those P2P users who prefer to deal with a single entity. And initially at least, Google’s new offering will be restricted to smartphones that use its Android operating software, and will also require merchants to install new point-of-sale technology. These factors may limit how quickly Google can build a customer base for its digital wallet.

Despite PayPal’s clear lead in the P2P market, Israel believes that clearXchange has a good opportunity to catch up. “To the extent they can work collaboratively, I think they’ll be very successful.”