Business payments are evolving rapidly, with capabilities advanced by technology and rising expectations from business users for simple and seamless payments. In this video, Bill Wardwell of Bottomline Technologies explains:
It’s not common to see global fintech firms and healthcare companies eagerly partner with a small bank in Weir, Kansas, but dozens of companies from an array of industries have done just that.
But the chief technology officer who’s led the way with a unique approach to blending technology and banking describes what he’s done over the last nine years as nothing more than “common sense.”
“The wheel was revolutionary for about a minute before everybody else realized they could do it too,” said Suresh Ramamurthi, the CTO of CBW Bank and CEO of Yantra Financial Technologies, the tech firm he established to bring efficiencies to banks and other companies who want to process payments or manage risk.
The state-chartered bank with just $33 million in assets, located in small town Weir, Kansas, is about as far from a major financial hub as any place in America, but the bank helped put the town back on the map. The town first rose to prominence as the place where the flyswatter was created. CBW remains one of the only things still remaining in the town’s center. Less than 1,000 people live there, and it’s the only branch the bank operates.
Ramamurthi and his wife, Suchitra Padmanabhan, acquired the bank in 2009, mostly with personal savings. He came from a career in the tech sector which included a brief stop at Google, while Padmanabhan had a career at Lehman Brothers. CBW had a rough balance sheet, and the two had to spend some time getting the bank back on a solid footing. Ramamurthi and Padmanabhan have been featured in The New York Times and Fortune, and have earned national awards and praise for their innovative approach to banking and technology. The praise is not because they give away cookies and cider in the branch as the Times reported, or that it still is one of the primary lenders to local farmers and home buyers, but because of what they’re doing with fintech.
Ramamurthi, leaning on his experience with Google and tech background, also started Yantra Financial Technologies, a fintech firm that initially focused on speeding up the payments process, which at that time could take days or even weeks if, for example, transfers were being made around the globe. From that beginning has evolved the Y-Labs Marketplace, which enables companies, regardless of sector, to explore banking and payments, specifically, within that marketplace.
CBW and Yantra are the winners of Bank Director’s FinXTech Innovative Solution of the Year, one of three annual awards that recognizes successful collaboration between banks and fintech companies. The awards were announced at Bank Director’s FinXTech Annual Summit, held this May in Scottsdale, Arizona.
CBW and Yantra have published about 500 application programing interfaces, or APIs, which allow third-party developers to build apps and connect them to the bank’s core data systems, while maintaining compliance, which in itself could be a huge financial and legal burden. It’s how banks can keep pace with the rapidly evolving digital marketplace without developing the apps themselves, and allows banks and other firms to come to market at a 21st century pace.
That, Ramamurthi says, is where the common sense lies.
“In banking, your core competence should be in the (area) that (is) the most expensive area for banking, which is compliance,” he says. “If you can digitize all aspects of compliance, then you have an advantage.”
The Y-Labs Marketplace, which Ramamurthi runs as the CEO, has grown its client list to more than 100 that includes mostly other fintech firms like Moven and Simple—known well in the banking industry—in addition to insurance companies, a claims processor, healthcare companies and hospitals, which have used the marketplace to improve their payments systems, while also automating their compliance verifications and other tasks that are often costly and time consuming.
The bank itself remains quite small, though it continues to grow steadily and supports the local community. Ramamurthi has been widely recognized as an innovator and is upending the industry by establishing what he describes as a foundation that will eventually lead to advances in artificial intelligence and machine learning for the banking industry.
And there’s no indication that CBW or Yantra plan on slowing the effort to innovate.
Later this year, he said they plan to launch a “very special” mobile app, which he described as “a common-sense approach to how mobile apps should be for banking.”
Although Ramamurthi declined to discuss details, the app will “rethink” the relationship between customers and the bank, which has traditionally started with common retail accounts and then developed into loans and other more complicated arrangements, he said.
Blockchain-based virtual currencies are gaining in popularity and evolving quickly. Blockchain currencies often are described as disruptive, but also have the potential to radically revolutionize the banking industry in a positive manner. The reality is that blockchain currencies may develop into a useful tool for banks. Their acceptance, however, is hindered by their own innovative nature as regulators attempt to keep pace with the technological developments. Potential blockchain currency users struggle to understand their utility. Despite these hurdles, many banks are embracing opportunities to further develop blockchain currencies to make them work for their customers.
What Are Virtual Currencies and Blockchain? Virtual currencies, also referred to as “digital currencies,” are generally described as a digital, unregulated form of money accepted by a community of users. Currently, blockchain currencies are not centrally regulated in the United States. For example, the federal government’s Financial Crimes Enforcement Network (FinCEN) and the Securities and Exchange Commission view blockchain currencies as money, the Commodities Futures Trading Commission sees them as a commodity, and the Internal Revenue Service calls them property. The IRS has attempted to define virtual currency as:
a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value [and] does not have legal tender status in any jurisdiction.
FinCEN, the agency with the most developed guidance regarding virtual currency, regards it in a more practical fashion as a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. Whatever the regulatory definition, virtual currencies need more certainty in form and function before their use becomes commonplace.
Blockchain technology brings benefits to payment systems and other transactions that are quite revolutionary. Blockchain technology is essentially a decentralized virtual ledger (aka, distributed ledger), utilizing a comprehensive set of algorithms that records virtual currencies chronologically and publicly.
Some examples of blockchain currencies currently in use are Bitcoin, Dash, Ether, Litecoin and Ripple. These currencies are constantly evolving and are being developed by individuals, technology-based peer groups or financial institutions. In August 2016, a consortium of banks, led by UBS, Deutsche Bank, Santander and BNY Mellon, announced the development of the “utility settlement coin” or USC. The USC is meant to allow banks to transact payments in real time without the use of an intermediary. It is expected to go live in 2018.
Blockchain Currency Opportunities for Banks Despite their reputation for being tools of illicit trade, blockchain currencies may be useful to banks in a variety of ways and can achieve certain benefits. Blockchain currencies could:
actually reduce fraud, including hacking or theft attempts, because the technology makes every step of the blockchain transparent.
reduce costs and risks associated with know-your-customer (KYC) programs because blockchain has the ability to store KYC information.
allow a financial institution to establish a new trading platform for exchange that eliminates intermediaries.
potentially could transform the payments industry. An obvious example is the USC, which permits payments to be made in real time, without the use of intermediaries; and strengthens the confidence in the authenticity of the transaction. Banks that are either able to establish a blockchain currency or adapt a proven technology for their operations will generate operational efficiencies and obtain a significant competitive advantage.
What Are the Regulatory Challenges? Blockchain currencies currently are not centrally regulated in the United States. As discussed above, the lack of a uniform definition is a fundamental issue. FinCEN has classified any person or entity involved in the transfer of blockchain currencies as a money transmitter under money services business regulations.
As blockchain currencies continue to evolve, however, additional federal laws and regulations must be drafted to address the most substantial areas of risk. Some states are weighing in on the topic as well. For example, the Illinois Department of Financial and Professional Regulation recently issued guidance on the use of virtual currency in which the Department views virtual currency through the lens of the Illinois’ Transmitters of Money Act.
Additionally, the Uniform Law Commission is developing regulations that would, among other things, create a statutory structure (for each state that adopts it) to regulate the use of virtual currency in consumer and business transactions. Regardless whether the federal government or the states enact legislation affecting blockchain currencies, a more uniform regulatory approach would greatly aid their development and utility.
Conclusion Blockchain currencies, and the laws and regulations governing them, are in a promising state of development. As new technologies emerge and existing technologies continue to evolve, banks are presented with real opportunities for innovation by successfully adapting blockchain for use by their customers. Those that figure it out are poised for real success.
The fintech revolution has had a dramatic impact on the financial services industry. From digital wealth management (robo advisors) to automated payment systems, a variety of disruptive technologies have made their mark on the sector. For banks, the rapid development of financial technology poses the threat of losing business to competitors that are quicker to reap the benefits of automating their operations—whether those competitors are other banks that have purchased or partnered with fintech startups, or the fintech startups themselves.
Automating back office processes offers banks a host of benefits: reduced costs, quicker customer response and easier record keeping for compliance purposes. Given the substantial advantages innovative technologies offer in this regard, a wide variety of bank processes are subject to disruption or enhancement through the use of financial technology. An article by sector expert Naresh Kirpalani lays out some of the most notable areas to watch for fintech innovation in 2016, including:
Further development of the blockchain as a crucial technology in several key segments of banking infrastructure.
Payments as an area subject to further technology disruption and intense competition.
Robotic process automation as a means of dealing with processes related to risk and regulatory issues.
Accelerated innovation at banks and a focus on taking aggressive steps to outsource legacy IT applications and replace them with interfaced applications using APIs.
Other areas that have seen increasing focus by banks attempting to add efficiencies to their back office processes include automated decisioning solutions and digital signing.
In the United States, fintech upstarts—while pushing banks and other financial institutions to evolve with new technology—have not (or at least yet) massively disrupted their businesses. This may be at least partly due to the readiness that some banks have shown to purchase promising fintech startups, preventing them from posing a long-term threat to the bank’s business.
A market worthy of the U.S. banking industry’s attention in this regard is payment processing in China, where three nonbank players now dominate the sector. The same article cites a Citigroup report that questions whether banks in the U.S. and Europe can take advantage of innovation before fintech firms gain the scale and distribution needed to disrupt them. The study expects increased technology adoption at banks to result in a decline of 40 percent to 50 percent in headcount as they make cuts in their branch networks. “Branches and associated staff costs make up about 65 percent of the total retail cost base of a larger bank,” the report stated. It further noted that automation could help remove “a lot of these costs.”
When it comes to payments, U.S. banks have adapted by offering their customers the ability to pay bills online as one method of accommodating the demands of the Internet age. Nevertheless, the success of digital payments firm PayPal and the cryptocurrency Bitcoin shows that this is a market ripe for disruption. As a result, it is no surprise to find that a number of banks have announced that they are working with or investing in blockchain technology to develop their own next generation payment systems. Along these lines, global investment bank Goldman Sachs, private equity firm Bain Capital and MasterCard have invested in firms using the blockchain technology for applications dealing with the Bitcoin cryptocurrency.
In another major development in the field, IBM announced recently that it has finished a pilot project in conjunction with China UnionPay, a Chinese credit card company, to help share loyalty bonus points between banks via the use of blockchain technology. The system the two firms has developed is designed to allow consumers around the world to swap bonus points from their banks, enabling them to choose the rewards they desire. In the United Kingdom, Barclays is the first bank there to partner with a virtual currency company, Circle, which uses blockchain technology to aid its goal of building a template for borderless currency.
Workflow automation is another innovative process attracting interest from banks looking to use technology to improve their operational efficiency. The attraction of the technology for many banks is the ability of these types of solutions to eliminate paper as much as possible and improve the productivity of their overall operations. A study on the benefits of automated workflow solutions revealed that the majority of the institutions queried believed that the ability to increase approval and routing speed was the most significant benefit associated with an electronic routing system.
Thirty-one percent of the banks and financial institutions included in the survey indicated they “desperately needed” a system that was more automated so they could close more loans. One respondent bemoaned the difficulties caused by combining paper documents with a mostly paperless process, as the lack of electronic signature functionality caused the need for a paper signature form, which at times would get lost.
These concerns have led to the spread of digital signing technology, which has allowed banks to improve the efficiency of their back office processes. With the passage of the Uniform Electronic Transactions Act, and the adoption of electronic signatures by leading banks such as JP Morgan Chase & Co. and the Royal Bank of Canada, the practice has spread widely among banking institutions.
In addition to enhancing efficiency by speeding up account origination and other basic tasks, digital signing allows retail bank employees to access customer records more easily, improving their ability to interact with and service customers when they visit a branch. In an article about the process, JP Morgan Chase’s Alan Varrasso was quoted as saying of e-signatures: “This has changed the way we open accounts, manage workflow and provide checks and balances and controls.”
The ultimate result of the fintech revolution for banks in North America and Europe is as of yet unknown. Will banks be able to adopt cost-cutting and customer-friendly technology rapidly enough to stave off upstart fintech competitors? Or will banking as we know it be disrupted as other industries have been by technological innovation? A bit of both may be the most likely answer. In any case, what can be said is that the technological innovation unleashed by fintech startups has already had major effects on bank operations—and there is likely still more to come as the automated processes introduced by innovators in the sector continue to work their way through the operational infrastructure of banks both large and small.
Venmo, a P2P leader that focuses on the millennial market, processed over $7.5 billion in transactions in 2015, and over $1billion in January 2016 alone. Now owned by PayPal, Venmo may not be a direct threat to banks, but it’s certainly worth paying attention to. Let’s dig in a little deeper_
Venmo is a great example of the ease and convenience that consumers are looking for when it comes to payments. With the ability to connect by Facebook, phone number or email, anyone is able to transfer money within seconds once they have registered. Not only that, but users can insert emojis and comments for their friends to see. CEO Dan Schulman says that this social feature is what keeps the typical user visiting the app between four and five times a week without any intention of transferring payment. The opportunity for users to see what their friends are up to, not to mention the ability to pay anyone in their contacts or social circles with a process that’s both free and easy–now that’s any millennial’s dream.
Perhaps these social and convenience factors are two attributes banks should look at from an emulation standpoint.
Uncertain about the demand and worried about the costs, banks have been slow to add P2P payment to their consumer products arsenal. If Venmo is indeed making significant progress in providing payments for their customers, this poses a serious threat to their growth and profitability. Give the recent partnerships announced with companies such as Papa Johns and HBO, and Pay With Venmo–a new retail payments program rolling out just now thanks to PayPal—banks have a real problem on their hands as the fees they are used to receiving on credit and debit card transactions could soon be funneled right into Venmo’s pockets, leaving traditional FI’s out to dry.
Venmo has had its share of critics and bad press–and just recently it was announced that the Federal Trade Commission is investigating it for “deceptive or unfair practices,” so stay tuned.
Our Verdict: Foe
Any brand that customers choose to trust their money with over a bank is quite simply a threat to the traditional bank model. How should banks respond? Payveris or Popmoney, offered by Fiserv—a large provider of core processing services to the banking industry–are two examples of fintech solutions that offer up the same consumer proposition. But if banks really want to compete in this market–and not to be reduced to the dumb pipe that transactions flow through, they better act quick and work hard on promoting this feature to their audience. Loyalty is something earned–and right now, Venmo is doing just that. It’s time for banks to catch up!