Something might be getting lost in the payment debate among banks. At conferences and publications, most of the information targeted at banks is whether banks should go on Apple Pay or other payment platforms; should a bank get a mobile wallet; and, our favorite, can banks still win the payment game? The answers to those questions are: Yes, banks need to get on Apple Pay and all other payment platforms readily available. Yes, banks should support some mobile wallet in order to get their card in the payment stream. And, yes, banks, save for a few large ones, have already pretty much lost the payments game. While those questions are mildly amusing, they are not materially strategically relevant for a community bank. The question that is more strategically relevant is - what can community banks do within the payment space to generate fees and support their core mission? In this post, we will offer an answer to that question.
Due to competition, the payment space, at its core, has limited upside profitability. The space is competitive and operating margins are small. Further, if you assume a non-bank cyber currency will not catch on like bitcoin, then all major payment systems are utilizing the banking system. As such, it stands to reason that you can cede a payment channel as long as your bank remains in the chain. It also stands to reason that due to profitability, what community banks really want is to capture or retain the primary account of households and businesses since those assets are multiple times more profitable than small scale payment operations. If you agree with these assumptions, then we might have a suitable strategy for your community bank to pursue.
The goal, it seems, is to package all the funds transfer mechanisms such as ACH, debit card, credit and wires and deliver value added tools on top of that. Banks, for the moment at least, have the distribution channel (the customer) and have the ability to bundle various solutions such as the checking accounts, alerts, savings, credit lines, sweep account and a payment platform. Combine these payment blocks together and banks are in the best competitive position to retain control of the operating account.
One critical mistake community banks made back in the 1980s and ‘90s is to let merchant credit card processing be the responsibility of the business. Banks should have retained these solutions in some form to be able to present a turnkey solution to their business clients. As a result, community banks lost out to large bank processors such as Chase and Bank of America or subjected their customers to the influences of large non-bank processors such as First Data, Vantiv, Paypal, and others.
Now, community banks have another chance. Only about 12% of payments are digitized. The bulk of the activity in the U.S. still takes place with a physical card and in-store presentment. This trend is rapidly changing. Think of the Ubers and Airbnbs of the world that are quickly taking payments away from the physical world and moving them more digital. Add to this the fact that online and mobile commerce is growing at a rapid clip and you have a changing industry. As can be seen below, 61% of merchants use a different processor online than they do for physical card presentment. Finally, there are only 16% of merchants that have a mobile payment solution presenting more opportunity for banks to insert their influence.
How To Make a Difference To Your Customer
One example of how banks can become more relevant to their customers is to partner and provide a gateway solution. A payment gateway is similar to an in-store payment terminal but able to handle online and mobile payments. Many merchants, particularly small businesses, are stuck with smaller card processors that cannot handle electronic payments.
This current situation presents an excellent opportunity for community banks to partner with these major gateways such as Braintree/Paypal (we use), WePay (we use), Worldpay, Adyen, Stripe and others and provide solutions to customers that are merchants. Many of these processors, like First Data, also provide point of sale terminals like the popular Clover Station below. This tactic has been popular with Bank of America, PNC, and Suntrust and has been a material driver of new business.
Banks can also pair this product bundle with a rewards program such as CLOUT that drives business to merchants plus fees and balances to banks.
Many Other Ideas
Banks can also offer their business clients the ability to make one-to-many disbursements, provide APIs to help businesses connect not only to payments but to the data an allow payment in multiple currencies. Banks can also integrate ACH solutions, provide escrow services, confirm (and guaranty) identity, provide accounts payable processing and support the whole process by offering credit against receivables or payments. There is also fraud protection that comes with most gateways that banks can augment as well as compliance checks such as FINCEN and OFAC. Payments and payment processing continue to change rapidly, and community banks have the ability to get back into the game and be relevant again to their small and mid-sized business customers. We are not implying that banks need to offer all these services, but our point is that banks can create their own solution package to add substantially more value than competing alternatives.
The U.S. online/mobile processing market is estimated to currently be worth $11B this year and is projected to grow to $20B in the next five years. Community banks that bring in payment gateways and other tools will be in a prime position to disrupt legacy card processors that are not moving fast enough or don’t have the motivation to invest in their business. Banks are in an ideal spot to bring a wide array of services together and regain the position in a payment solution.
Submitted by Chris Nichols on September 08, 2016