What with financial, regulatory and political pressures, bankers understandably find themselves in a bit of a funk these days. There is, however, one area of the industry – payments – where professionals continue to look to the future with a fair amount of excitement and anticipation, as was evident at the recent BAI Payments Connect Conference & Expo held in Kissimmee, Fla.
This excitement focused specifically on mobile banking and payments, innovations in prepaid cards and prospects for a legal/regulatory framework for mobile payments. However, in a larger sense, one could also detect anticipation of a payments world where same-day, real-time transactions will become the norm. We’re not there yet, but judging from the presentations at the conference, the financial services industry is moving in that direction.
Here is a list of five top takeaways from BAI Payments Connect, based on presentations the writer was able to personally attend:
1. This really is the year of mobile banking, according to Jaime Punishill, senior vice president, strategic planning and new channel development, at New York City-based Citibank. Punishill made the statement after referencing how, since about the late 1990s, he had anticipated every year that mobile banking was about to take off, only to see his hopes dashed. What’s different this time? Punishill cited the advent of the smartphone, which represents a quantum leap in cell phone technology, the influence of tech-savvy Gen Y customers in the market and the burgeoning growth of social media, which provides new avenues for banks to connect with their customers.
“I can advise you strongly, if you’re thinking about having a mobile strategy, you cannot do that without also having a social media strategy; they’re inextricably linked,” Punishill said.He describes the two phenomena as “colliding tsunamis” that are going to fundamentally change the way people use financial products.
Punishill predicted that smartphones, currently about 3% of handsets in the U.S., will largely replace “dumbphones” within the next three years. He said bankers need a mobile strategy that builds on that smartphone platform and incorporates the use of social media, personal financial management (PFM) applications and rewards programs to bring customers the services they really want (and will use).
2. The steepness of the customer adoption curve of mobile banking took the financial services industry off guard, said consultant Bob Hedges, managing partner at Boston-based Mercatus LLC. Hedges made this statement after noting that 11% of U.S. households had adopted mobile banking by 2009, up from only 1% in 2007, which represents a faster growth curve than seen in any other previous financial services innovation, including ATMs, debit cards and online banking. “The deniers out there no longer have a sustainable point of view,” he said.
As to why the banking industry has been so slow to catch up with consumer preferences, Hedges cited several reasons, including the current economic environment, which has “kept banks from spending a lot of money,” and bankers’ inability to build a compelling business case for the service. “It’s been more of a debate about technology platforms than end use for consumers,” Hedges said.
In a mild poke at his audience of mostly payments professionals, Hedges offered the opinion that mobile might have taken off at banks more quickly if the initiative had originated in the marketing rather than payments groups of these institutions.
3. Banks will take a 16% haircut to their annual fee income. That prediction came from David Kerstein, president of Austin, Tex.-based Peak Performance Consulting Group, in reference to the Fed’s new restrictions on overdraft fees. Kerstein said his estimate represented an average, based on his analysis of FDIC data.
Kerstein also highlighted some results from a survey of 111 bankers, credit union executives and other industry experts that his firm conducted in February. Fully 70% of those respondents said they expected that the industry would be hit by additional regulation that negatively impacts depository revenues; only 30% believed the damage would end with the Reg E changes.
4. We’re probably better off doing it before we are told to do it. Jan Estep, president and CEO of NACHA – The Electronic Payments Association, delivered this assessment in response to a question about whether the Automated Clearing House (ACH) system would incorporate same-day transaction capabilities by 2020. The query had been posed by consultant Fred Brothers, managing principal of eCom Advisors, who noted that same-day ACH transactions have been discussed in the industry for more than a decade to little effect.
Brothers opined that if the banking industry doesn’t offer faster transaction capabilities – same-day and, eventually, in real time – nonbank providers will. He noted that PayPal’s online service currently offers the fastest way to move money between more than 50 countries. “PayPal is the biggest direct bank on the Internet in the world,” Brothers said.
Rich Oliver, executive vice president and retail payment product manager at the Federal Reserve Bank of Atlanta, agreed with Estep, noting the use of same-day transactions in Europe. “In this world today, either we figure out how to do it or someone else will,” Oliver said. The Fed itself is dipping its toes in these waters with the introduction of a same-day ACH service scheduled for the second quarter of this year.
5. PayPal and Wal-Mart both look a lot like banks. Patricia Hewitt, director of debit advisory services for Maynard, Mass.-based Mercator Advisory Group, made this observation while discussing the growth of nonbank providers in the payments space. She noted all the various bank-like services offered by Wal-Mart’s MoneyCenter and the fact that 12% of all U.S. e-commerce sales in the fourth quarter of 2008 were run through PayPal, which offers debit cards and a service for small businesses to pay their employees. One reason for the success of both companies, she added, was their ability to take advantage of built-in customer bases – Wal-Mart with its in-store traffic and PayPal with its eBay connection.
Mr. Cline is managing editor of BAI Banking Strategies.
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