Non-banks have squeezed themselves into the payments business. PayPal has thrived in the online market, reporting a net total payment volume in the first quarter of 2014 of US$52 billion, a 26 per cent increase year-on-year. At the point of sale, Square in the United States has gained a lot of traction since its launch in 2009, reporting a growth in annualised transaction processing to $15 billion half way through 2013, up from $10 billion at the beginning of the year.
These interventions have not completely cut banks out of the market as a bank account is still typically used as a store of value, from which funds are transferred.
“Until customers say they don’t trust banks to perform the payment and banking function, then banks will not be fundamentally disintermediated,” says Matthew Leavenworth, director of global payments at Bank of America Merrill Lynch. “This does not mean, however, that banks should sit back and do nothing. With this trust from clients, we have a moral imperative to innovate. Our clients want us at the table.”
Sameer Gulati, principal at management consultant McKinsey, says: “Banks are not being one-to-one disintermediated, but they are being distanced from the customer relationship, the data and the liquidity. If the primary payment moves funds from the current account to PayPal, some of the funds that sit with the banks and feed that payment process are also starting to transition away. Once the interest-bearing balance is under threat that really makes banks worry.”
New operators in the payments space are launching every year; the revenue model is steady if a firm’s model succeeds and the development costs for technology are not astronomical. In fact, it is the innovation around payments that provides the real effort. The transfer of funds cannot be made any more efficiently without a core change to the payments infrastructure that is used by all electronic payments systems. The areas of potential improvement for banks or non-banks are around simplifying initiation of a payment or improving the experience of making that payment.
“The genius is the simple aspect of things; there is a fine line to balance between ease of use and security,” says Bennett Bradley, head of payments at US retail and commercial bank BB&T. “What has become increasingly important, has been the education of clients around why we have to use certain devices or measures.”
Necessity tends to drive innovation in the banking sphere. The attacks on September 11, 2001 in the US led directly to a regulation that allowed the digital images of cheques to be accepted in lieu of their paper copies. So-called Check 21 came into force in 2003 and necessitated the development of remote cheque capture and remote deposit transfer technologies, to replace the shuttling of paper cheques across the country by private jet, an unworkable model for the industry when flights were grounded after the attacks.
Consumers may have fallen out of love with bankers for different reasons, but they still have a lot of trust in banks
Mr Leavenworth says: “Clients using our remote deposit capture application to capture cheques for deposit at their local offices do have the potential for increased cash flow. The [cheque] images can be entered through the cheque clearing stream more quickly and remote capture normally offers a later deposit deadline which enables customers to capture additional cheques that could not be submitted within the same timeframe through a more traditional banking channel. These two drivers enable banks to be in a position to grant the client faster access to the funds associated with those cheques.”
Analyst firm Forrester reported that in 2012, 13 per cent of US adults, who had used mobile banking, reported depositing a cheque by taking a picture with their mobile device. However, the advantages of such developments can be specific to a market. For example, Mr Gulati notes that the proportions of unbanked consumers in the US (10 per cent) and the UK (2 per cent), along with the geographical differences, make for different requirements around digitising paper-based payments.
Ben Green, head of mobile and payments at Santander UK, says: “Most of the mobile-banking [customer] base in their mid to late-20s do consume cheques, but do they want to send pictures of cheques to the bank? I am not convinced they do. The technology is available and there is an argument that it could speed up the cash flow for small businesses, but the volumes are small.”
Where banks on both sides of the pond share a vision is in more fully capturing the customer experience, by integrating payments channels both internally, to create a complete picture of customer activity, and externally, to deliver a seamless customer experience when working across multiple channels. This omnichannel strategy reflects the need to service clients effectively wherever they feel most comfortable.
“The mindset of customer segments towards branches is varied,” says Mr Gulati. “Our research shows that if you ask the majority of under-35 year olds whether they want to bank digital-only, the overwhelming majority say ‘yes’. But if you ask them if they would sign up to just one bank that had no physical presence, the numbers change quite dramatically. We conclude that they do not want to have to go to a bank branch, but they feel fundamentally uncomfortable without having that option, even today.”
The need for trust will keep retail customers focused on the bank as part of the payment chain, away from pure-play payment providers, says Mr Green.
“If you gave people the option of holding £10 with a bank or with new payment brand they might go either way; if it were £1,000 that flexibility disappears,” he says. “Consumers may have fallen out of love with bankers for different reasons, but they still have a lot of trust in banks.”
For banks to recapture the part of the transaction process that is being lost to non-banks, an omnichannel strategy offers a framework for them to keep a hand on the payment all the way down the line.
“The whole point of omnichannel is to give the customer a choice in the way they interact with us, while being treated in exactly the same way across touchpoints, and therefore to build trust and engagement,” says Mr Green.