With all the jockeying in the payments space, keeping up with new partnerships, upstarts, and product innovations could be a full-time job. Prepaid cards, alternative currencies (Ven, Bitcoin), mobile payments, and person-to-person (P2P) payments are just a few of the payment schemes that may or may not threaten a bank's traditional business. Add nonbank competitors like PayPal, Google, or Facebook, and payments becomes even more challenging.
Like most banks, Home Federal Savings Bank, a $1 billion-assets institution in Sioux Falls, S.D., is wary of nonbank competitors in payments. Says Natalie Sundvold, senior vice-president, service and support, "From my seat in a financial services company, the thought of an outsider coming into payments is frightening. It doesn't feel good, especially because consumers may not understand how payment security works."
When evaluating payments players and planning their own strategy, banks would be wise to keep the words of the Chinese general and military strategist Sun-tzu in mind: "Keep your friends close, and your enemies closer."
That may seem extreme, but consider that earlier this year ABA formed a Payments System Task Force to evaluate the impact of the many new developments on banks and to ensure that banks of all sizes will have the ability to participate (See story, page 31).
Here's a roundup of some payment types and competitors to watch closely.
Is it time for P2P?
Today, true P2P payments have a very low adoption rate due to usability issues, says Nancy Langer, senior vice-president of ePayments Solutions for bank technology company FIS. "P2P is standalone and not integrated with the consumer payment network or online banking," she says. "You cannot survive with a proprietary approach to P2P." But even with its problems, Langer says that P2P is positioned for great growth.
"There is a real potential for P2P payments, especially for unanticipated transactions that need to happen rapidly," wrote Dean Seifert, senior vice-president, product strategy, Vantiv, in the report Top 10 Payment Trends to Watch in 2012. "So far, it's been a consumer-to-small business tool," said Seifert, noting that the average P2P transaction value is $300.
One example of an operating P2P network is clearXchange, the joint venture of Wells Fargo, Bank of America, and JPMorgan Chase. Langer believes it can make sense for banks to partner with clearXchange, as long as they are careful that it doesn't take away the bank's brand. (ClearXchange notes that it allows member banks to control branding.) Customers of the three banks can move funds directly from their existing checking accounts to any customer of any other bank. However, if the receiving institution is not a clearXchange member, then the recipient has to create a profile in order to receive the payment.
Fiserv is another major player in the P2P space, having acquired CashEdge and combined its Popmoney solution into Fiserv's Zashpay (keeping the Popmoney name). Popmoney allows people to pay the babysitter or the cable bill or their share of the rent, for example, using an online bank account, email, or even a mobile number.
According to the Fiserv website, 1,400 financial institutions are currently signed up to offer Pop-money--one of them being New York heavyweight Citibank, which is actively promoting the service.
Home Federal Savings Bank is moving quickly to Popmoney, says Sundvold. The bank launched mobile banking in April with great customer acceptance, and it plans to offer P2P in late summer. Sundvold says she expects bank customers to adopt P2P much in the same way they took to mobile banking--quickly.
Mobile banking vs. mobile payments
The adoption figures for mobile banking and mobile payments differ significantly. While 21% of mobile phone users used mobile banking in the past 12 months and 11% believe they will use it within the next 12 months, only 12% of mobile phone users made a mobile payment, according to the March 2012 report, Consumers and Mobile Financial Services, from the Federal Reserve Board. Mobile banking centers around balance inquiries, notifications, and funds transfers. The most common type of mobile payment was online bill payment, but most of the buzz centers around point-of-sale payments using near-field communications (NFC).
"So far, many banks have essentially just transferred PC-based internet banking to mobile banking," explained Ben Love, vice-president, Vantiv, in the company's payment trends report. "We are going to see a lot of innovation in this space in the near future as banks try to make mobile banking more compelling for consumers."
A different view on mobile point-of-sale payment comes from Rahul Gupta, president of Digital Payments Solutions for Fiserv. "The value proposition to the consumer is not clear. At a store, it's just as easy to take out your credit card as it is to take out your phone. Mobile doesn't provide incremental value."
Google, however, is betting big that it does. It introduced its Google Wallet last year to great fanfare. Also all-in is Isis, a consortium that offers a competing wallet (see "Friends or Foes?"). The Google product allows users to store payment information in the cloud and tap their phone at merchants equipped with NFC terminals.
The value in the mobile wallet likely lies in its ability to integrate a consumer's entire financial life, including loyalty programs and targeted promotions, into a single mobile device. A Pew Research Center and Elon University survey found that 65% of mobile experts believe that consumers will adopt smart devices for purchases, virtually eliminating the need for cash or credit cards at the point of sale. The marketplace, however, has yet to speak beyond a few early adopters.
Experts say that as mobile wallets become more open--meaning that multiple payment types and brands can be loaded into the wallets--adoption will increase.
Prepaid: Not just for the unbanked
Prepaid cards have existed largely outside the traditional banking system partly because banks tend to consider prepaid customers as undesirable, notes Craig Fuller, CEO of Chattanooga, Tenn.-based TransCard, a processor and manager of non-traditional payment transactions. TransCard is helping to change that view as operator of ABA's Community Bank Prepaid Program. Many banks, however, are still missing an opportunity, Fuller believes, by not realizing that the prepaid consumer demographic is quite diverse.
In fact, some prepaid consumer segments, including families, are highly desirable. For example, TransCard is partnering with FamZoo, a website that uses a virtual bank to help educate children about finance. As part of the program, TransCard offers a prepaid debit card that allows parents to load money from their bank accounts. Banks brand the cards and set customer fees, says Fuller.
The terms "unbanked" and "underbanked" often are used interchangeably in the prepaid market, but they define very different customer segments, notes Ron Shevlin, senior analyst, Aite Group. According to the FDIC, the unbanked are the 7.7% of U.S. households without a checking or savings account, while the underbanked are the 17.9% that have a bank account but also use alternative financial services such as payday loans, nonbank money orders, nonbank check-cashing services, or pawn shops.
Included in the underbanked are what Shevlin calls the "debanked," which he estimates represents a $1 billion prepaid debit card opportunity. The debanked include Generation Y, perhaps the first generation that doesn't consider opening a checking account as an adult rite of passage. Generation Y uses prepaid cards much more frequently than their Gen X and Baby Boomer elders. "Credit cards are terrible for financial discipline, and it's easy to overdraw a debit card," reasons Shevlin. "The debanked are not low-income consumers. They are highly educated and employed or employable people looking for an alternative to the traditional banking system."
EMV: Not here yet, but coming
Chip-enabled cards using the EMV standard are ubiquitous in parts of the world, but have not made a big impact in the U.S. market. EMV (Europay, MasterCard, and Visa) is an open standard for interoperability of global payments maintained by EMVco, a consortium of American Express, JCB International, MasterCard, and Visa.
EMV is widely recognized as more secure than magstripe cards since most EMV chips use a unique cryptogram for every transaction. The U.S. is the only G-20 country that still supports magstripe technology.
There is a lot of wait and see here, says John Postle, general manager, payment processing solutions at Jack Henry & Associates. He doesn't see banks doing a mass reissue to replace existing cards, but he says banks should be watching closely the progress of the chip standard. Although merchants have been slow to install EMV-enabled point-of-sale terminals, the pace will pick up with the impending fall 2015 liability shift in which Visa and MasterCard merchants without such terminals will become liable for fraudulent transactions. Postle adds, "Banks need to plan for EMV especially if they're issuing cards with a three-year expiration."
Home Federal Savings Bank, for one, is taking a measured approach to EMV. Rather than reissuing cards to all customers, Natalie Sundvold says the bank is looking at issuing EMV cards to customers who travel internationally. The bank is currently in discussions with Visa and MasterCard and plans to charge customers for the card.
Riding banks' rails
At first glance, banks may not seem as innovative in payments compared to nonbanks such as Google and PayPal. But innovation is in the eye of the beholder, says Deborah Mathews, director of payment strategies at ProfitStars, a Jack Henry division. For instance, although banks didn't invent the iPhone, they developed mobile banking and mobile remote deposit capture (RDC) that piggyback on it.
"What was brilliant about the iPhone is that it brought together the phone, camera, and internet into a convenient device that delivers a distinct advantage," says Mathews. "Banks are very astute at rolling out innovations because they understand that any innovation must improve their customers' lives. Mobile remote deposit capture is a great example of a bank innovation that provides value."
"Banks perceive nonbank players such as Google as innovative but, in essence, they are just tapping the existing bank payment rails built over decades, rather than creating a new way to move money," echoes Mathews' colleague Kevin Moland, product management director.
Chip Corbett, first vice-president at Hoyne Savings Bank in Chicago, doesn't let nonbank competitor concerns dictate how the bank approaches payments. "What the nonbanks do is outside my control," muses Corbett. "We concentrate on what we do have control over: Making sure customers have a positive experience with new payment services we offer."
The $300 million-assets bank with five branches offers mobile banking through Fiserv and will look at the vendor's P2P payment offering "when the time is right," says Corbett, acknowledging the time for action is accelerating. Hoyne Savings' strategy is to prepare its customers for P2P by getting them used to mobile banking. Explains Corbett, "We're not a bank that normally jumps into technology right away. We never want to be last, but are happy being third from last. That changed with mobile."
One new technology Hoyne Savings won't offer is mobile RDC, believing it is just an interim step. Other banks, however, have seen strong demand for it.
"Don't be shy!"
If all the talk about nonbank competitors and innovative, disruptive technology seems somehow familiar, it should, says Nancy Langer. In the 1990s, banks feared that Microsoft and Yahoo!, for instance, would disintermediate banks with online banking and personal financial management software. Banks prevailed because they were aggressive and leveraged the trust of their customer base. She implores banks, "Don't be shy in payments. Banks know how to securely handle money, and that's an asset. Banks have a good chance of dominating the payments space."
As for competitors such as Facebook, Langer tells bankers not to lose a ton of sleep. "Facebook may have a virtual currency, but they won't play in the banks' traditional space," she points out.
Tim Murphy, chief product officer for MasterCard Worldwide, encourages banks to think "outside the swim lanes" and understand that the mobile revolution is creating a new ecosystem in which many forms of payments and capabilities can coexist. "Banks have to be open to partnerships," he says. "There is so much creativity out there that it's not possible for any one institution to predict the future. Our strategy is to partner with innovators, and we believe that banks should do that as well." MasterCard is now partnering with Western Union, for example, an entity it previously considered a competitor.
A last word of advice: "Don't panic with every article that comes out," advises Postle. "Anything new must provide much greater convenience for the consumer. If it doesn't, you won't see large-scale adoption." In other words, focus on providing value to customers, and payments will fall into place.
Friends or Foes? A closer look at Isis and PayPal
A former foe and now largely considered a friend is Isis. the partnership between AT&T Mobility, T-Mobile USA. and Verizon Wireless. "Isis started out as a direct rival to banks, but quickly realized that creating its own payments infrastructure was too tall an order," says Celent senior analyst Zilvinas Bareisis. "Isis now allows banks to put their cards and payment credentials on its mobile wallet and is working directly with Visa, MasterCard, and American Express, and multiple issuers."
According to an Isis spokesperson, banks can benefit from the Isis mobile wallet by loading their credit, debit, and prepaid cards onto it. Banks should "tailor their cardholder service experience within the Isis Mobile Wallet to reflect their respective brands and ensure a seamless and secure experience across physical cards and mobile platforms." the spokesperson says. "Isis is open to all banks and industry players."
PayPal, on the other hand, still elicits concern from bankers and traditional bank vendors. PayPal insists that's an old headline.
Tom Berdan vice-president of product management at Harland Financial Solutions calls PayPal the "800-pound gorilla" because it has a complete product and the monetary wherewithal to pursue further payments innovation, "PayPal is the biggest threat to the financial industry," he contends, Nancy Langer, senior vice-president of ePayments Solutions for FIS. says it's unclear if PayPal will cooperate with banks or compete against them. Much depends, she says, on whether or not PayPal establishes direct connections to merchants to compete with card issuers. PayPal's Bill Me Later acquisition--which is basically a short-term lending solution--may compete with banks as well.
Notes one banker who requested anonymity, "PayPal is getting into merchants which will pose immediate risk to Visa and MasterCard, with downstream impact on banks. Most of the other start-up payment technology companies are not a risk because they fail to understand that they need merchant acceptance and transaction settlement."
Indeed, many of the analysts and vendors interviewed for this article named PayPal as a company to watch.
PayPal itself begs to differ. Dan Schatt, general manager of financial innovations, says that distrust is misplaced and based on old history. He admits that "PayPal didn't have anything to offer to financial institutions prior to three years ago. Although PayPal has always worked with banks, banks were relegated to back-office functions such as processing, cash management, and ACH transactions."
That changed, says Schatt, when PayPal opened its platform to banks. "A lot of uncertainty and doubt was sown those first ten years. We never had an ability to put together collaborative products. Opening our platform allows banks to take advantage of our capabilities for their customers," he asserts.
Schatt cites PayPal's Send Money for Financial Institutions as one example of the vendor's willingness to partner with banks. With Send Money, bank customers can send money to PayPal users around the world with an email or text. The recipient logs in to PayPal to access the funds. PayPal charges a low per-transaction fee that banks can then choose to pass on to their customers.
According to Schatt, Send Money offers banks engagement opportunities with consumers they may not have had access to. Since 75% of this type of money-movement transaction happens within a 25-square-mile radius, says Schatt, chances are that the recipient is within the bank's footprint.
Another example of collaboration, says Schatt, is PayPal's partnership with the Bancorp Bank, a branchless commercial bank with $3 billion in assets. The bank offers Instant Account Creation for bank customers to fund new online accounts with PayPal.
Bareisis, for one, is not convinced that PayPal's intentions are all good. "PayPal has entered the mainstream and has a great opportunity to allow consumers to make payments at the point of sale. That's clearly a threat. The banks may still own the rails over which some of these payments will run, but the customer relationship with the bank will change."
He adds, "PayPal is very keen to position itself as a friendly face and partner, but if anyone can be a disrupter to banks, it's PayPal."
ABA task force zeroes in on security and access
For some bankers, payments are a necessary utility. But Jeff Plagge has always had a keen interest in the payments system, especially since he served on the board of the Federal Reserve Bank of Chicago. A key issue then was why it was important to have the Fed be the "universal policeman" of the payments system, says Plagge.
Now, with so many different innovations springing up, that role is more important than ever, he adds.
Plagge, president of Northwest Financial Corp., Arnolds Park, Iowa, and ABA vice-chairman this year, is not averse to change. His bank was an early adopter of mobile banking and is currently exploring person-to-person (P2P) payments. He believes, however, that rapid developments in the payments system--particularly mobile and P2P payments--calls for a high-level focus by the association, which is why he urged ABA to form a Payments Systems Task Force earlier this year.
ABA already has a Payment System Committee, which works closely with the Federal Reserve, ACH network, and others, dealing with rules and regulations. But Plagge felt there was a need to complement that group to raise awareness of fast-changing payments issues, and to help banks understand that many players were trying to take the payments system--or key parts of it--away from banks. ABA leadership agreed and asked him to lead it. (The group has eight banker members in addition to Plagge. For a list, go to http://tinyurl.com/aba-payTF).
Interoperability is one of the biggest issues being addressed. "Innovation is healthy and good," says Plagge, "but at the end of the day, systems have to talk to each other if I want to pay you by my mobile phone, for example." If a P2P payment system only works with customers of one vendor or group, that's not going to work long term.
He believes all parties need to be part of the discussion, including nonbanks and retailers, as well as the Fed. The task force has already had conversations with Fed payments system people. One of the subjects they've discussed, other than interoperability, is payments system safety and soundness.
"One point I make," says Plagge, "is that younger people are more interested in 'fast' and 'innovative' than 'safe and sound.' But you can't ignore safety and soundness. There must be security protocols."
He maintains it would make sense to use the "rails" already in place for automated clearing house and other existing payment types. "There ought to be basic security protocols in place that banks and nonbanks have to meet," he says. "Nobody can define those better than the Fed and other clearing organizations."
Another task-force mission is to help ensure that banks of all sizes have access to P2P and other new payment forms, including any revenue streams. "We don't want these things to just be a cost center," says Plagge. He adds that ABA has an important role in ensuring community banks can easily opt in to mobile pay, P2P, or digital wallets.
At the same time, Plagge reminds bankers to pay attention to the discussion. "Engage your younger staffers," he advises, "because they gravitate to this. Talk to your core providers. This is not optional."
--Bill Streeter, editor & publisher
By Lisa Valentine