When it comes to long-range strategic planning in banking, what to do about payments, should be in the top five considerations up there with treasury management, capital allocation, risk tolerance, and human capital. Payments are such a central part to banking and are now undergoing such a radical change that all banks have an opportunity to reclaim transaction market share back from the card networks, card processors and even national banks. Below, we highlight our ten considerations when developing a payments strategy.
Brand or no brand: The first step to any strategy is determining if you need a brand. Brands like Venmo, Zelle, and Square rule the payment space for now and have highlighted the importance of having a brand behind your payment’s network. Many banks, core processors, processing companies, and fintechs have attempted to develop payment brands, and all have failed with the sole exception of Chase Pay (now Zelle). Community banks can create their brand, buy it is extraordinarily expensive to achieve adoption, even within a relatively small geographical area.
Cost and how to recoup the cost: Since almost all payment systems are direct loss leaders, the next major questions that the community bank has to solve are how big is the payment expense and how to recoup that cost. Closing branches, not building future branches, reducing branch staffing, creating other payment products or creating additional services are all options but not only should you have intent in your objectives but banks need to figure out how to create an executable plan. It is great to say that you will be saving transaction costs, but banks need to have a defined plan on how to move traffic from tellers and ATMs to their lower-cost payment networks.
Branch transformation strategy: Part and parcel with having a plan on how to recoup the cost of a payment platform is how that plan fits into a wider branch transformation strategy. If you are going to reduce branch, ATM, check and drive-thru traffic, then the question is, what happens in your branches? Do you turn them into sales centers, cafes, close them, shared workspaces or something else?
Core connections, data, and mobile platform compatibility: Picking a payment platform just because your core processor offers it is a bad idea on the surface. Many banks have been forced into bad technology that isn’t user-friendly as a result. Many core offerings are great for compliance and security but lack user usability. That said, choosing a payment platform that can’t span across all your channels is an even worse idea. Banks have many choices these days and need to find the right balance of usability and integration. Further, banks need to be sure of where the customer and transaction data is stored as the last things banks need is yet another data silo.
Percentage of commuters and customer intent: Its commuters and intent that drive the fastest adoption to any new banking product. The more customers you have commuting to or from your branch, the faster they likely to adopt online banking products such as payments. These time-strapped customers will love the convenience of a payments platform as will those customers that are already using the technology. If you pull debit card transaction data likely you will find that 25% or more of your customer base already use a payment application of another bank or fintech. If you are located in a metro area along the coasts, that number is likely closer to 50%. Having a feel for your adoption curve will help you determine the usage and cost of a new payment product.
B2C Application: Of course, the real goal of most banks is to extend the payment platform into commercial applications. This means that the payments platform has to have at least plans to integrate into treasury management applications, merchant services offerings, and for commercial payments. This also most likely means your application should be able to handle near-field communication or QR codes to easily affect payments. Further, schools, hospitals, utilities, municipalities, grocery stores, and many other companies crave electronic payment applications that make sending and receiving funds from consumers more efficient and less costly. This means not only must you have a commercial payments platform, but that platform needs to be able to handle one-to-many transfers. Banks need to replace card processors for this business, and electronic payments have provided the opening for this profitable line of business.
Real-time payments: Moving to real-time payments is the seminal event that will shift the industry. Instant clearing with little credit and operational risk by The Clearing House and the Federal Reserve in the future will open up new avenues for many banks. Several major payment platforms utilize these rails now, and popular applications like Venmo and Zelle will be moving to real-time clear shortly. When this happens banks either need to upgrade their core system or learn how to turn a real-time transaction back into a batch process. Either way, how you handle the changeover to real-time will help inform your decision on how to architect your payments platform.
Marketing plan: We have seen this at four out of five banks – they roll out a new payments platform with great fanfare only to stop marketing it three months later. Employees lose their training mastery and stop pushing the product, and customers overlook the bank’s platform and use Venmo instead. Over time, the bank assumes that they don’t have the customer base for payments. To keep a critical mass of customers on the platform, a bank needs to train and market throughout the year to get the right customers using the application the right way.
Putting This Into Action
The plethora of choices and the shift to real-time payments have given banks an excellent opportunity to get back into being a payments leader. While deciding on a payments platform isn’t easy, it isn’t well within the capabilities of any community bank if they think through the seven points above.
Submitted by Chris Nichols on September 12, 2019