After the Financial Crisis: The Future of Payment Innovations
Jacob, Katy, Lunn, Anna, Chicago Fed Letter
The Federal Reserve Bank of Chicago hosted its tenth annual Payments Conference, Payment Innovations in the Wake of the Financial Crisis, on May 20-21, 2010, to discuss emerging trends within the payments industry and new regulation following the financial crisis.
The participants at this year's Payments Conference discussed how evolving technology and emerging payment products both challenge and complement legacy payments while providing opportunities for nonbank firms to compete against and collaborate with traditional payment providers - like large financial institutions and card networks. Moreover, given the flurry of recent legislation affecting the payments industry, the conference also addressed the legislation's policy implications for payment innovations.
Legacy payments and new technology
The U.S. payments market has always been extremely dynamic because both financial institutions and nonfinancial firms frequently introduce new payment technologies and services. Indeed, Glenn Fodor, Morgan Stanley, said that investors are attracted to the payments industry precisely because its innovations are likely to provide them with future sources of growth. However, as Stephanie Swain, Best Buy, observed, the recent financial crisis has decreased consumers' trust in financial institutions, willingness to take on debt, and readiness to use products that may result in large fees or penalties. Some payment providers, including retailers like Best Buy, have become more conservative in their sales strategies in response to such changes. For example, Best Buy is responding to the tight consumer credit market with old financing tactics, such as layaway and rent-to-own strategies, Swain explained.
Similarly, Ron Shevlin, Aite Group, argued that in the face of regulatory challenges and large-scale data breaches that threaten consumer confidence, financial institutions have been slow to react or have not reacted with the most efficient strategy. Countering this point, Jeff Semenchuk, Citigroup Inc., explained how financial institutions are currently using new technologies to implement innovative approaches to banking, which ultimately better serve their clients. These efforts, he noted, are designed to move banks away from an unsustainable business model that relies too heavily on fee income from their customers (e.g., fees for overdrafts) . Semenchuk said that Citibank is developing new electronic products that allow consumers to do what they normally would with traditional payment instruments like cash or checks - e.g., to send money; make commercial transactions; and budget, convert, and store currency. He cited a trial run in which Citibank partnered with telecommunication providers and merchants in Bangalore, India, to implement near field communication (NFC)1 payments, resulting in increased revenues for each partner. John Brady, USAA Bank, said that, like Citibank, his bank has taken advantage of new technologies. Brady explained his bank has leveraged Apple's, BlackBerry's, and Google's mobile operating systems and Check 2 12 imaging to create applications that allow customers to interact with the bank remotely and deposit checks using smart phones. Remote deposit has been very popular for the bank's customers, who are primarily highly transient military personnel and their families.
Traditional payment providers, like Citibank and USAA Bank, are using online and mobile phone technologies to update their established offerings (and develop new ones) . Yet, at the same time, other firms are increasingly leveraging these same technologies in conjunction with legacy products and networks to launch services that meet changing consumer demands. Often these demands have not yet been met by the traditional players. Several existing operating systems and payment networks can serve as platforms - i.e., foundations on which developers can build electronic applications that allow consumers to access existing services in new ways and through new devices. …