Community bankers can be forgiven for having a hard time understanding what industry commentators mean when they say “payments.”
There are mobile wallets and ApplePay, EMV and NFC. There are same-day ACH and cross-border payments, wire, blockchain and Bitcoin. And just when you start to feel like you at least partly understand what “payments” is, you realize that it’s going through a period of tremendous change. It’s also an important change to understand as half of business owners buy payments products from someone other than their primary bank, according to CEB data.
Really, there are two important payments terms that community bankers should be on top of.
Access points: Where money moves in and out. A bank is the traditional access point for most payments – customers use their bank account to originate a wire, or perhaps apply for a credit card from a bank.
Rails: How that money moves between accounts – on the credit card rails (MasterCard/Visa/Amex), via ACH transfer between banks or, to take a more cutting edge example, across a proprietary blockchain.
What It All Means
Once bankers start thinking of payments in terms of access and rails, they can then see what’s changing and what should concern them.
The majority of community bankers’ attention (and budgets) are dedicated to improvements in their current access points and current rails but, the problem is, both access points and rails are evolving to become something completely new. Even if the rails stay the same but the access points change – as with mobile wallets, for instance – there are implications for the banks that currently control all access to the payments rails.
It’s also important to follow the money, as investigative journalists are so fond of saying. Banks make money in transaction fees (for community banks, probably the largest payment revenue stream is interchange), but the much more important value that banks get from the payments business of their customers is in funding the bank through deposits.
One executive in CEB’s financial services networks recently said, “Even if you believe there was a time when customers decided where to keep their deposits independently from how they put that money to work and moved it, that time is over now. Seeking deposits without providing quality payments services just won’t work.”
This is an important observation, because deposits are crucial to the bank’s overall funding. In an era of rising interest rates, new restrictions on what deposits can be considered for large bank liquidity ratios, and the end of prohibition on the payment of interest on commercial deposits, funding issues are a significant unknown for all banks.
Three Steps to Stay on Top of Payments Trends
Customers think firstly of their bank as a place to keep their money safe, and secondly as a way to move their money. Only later do they start to think of borrowing and investing.
Community banks need to have a clearly articulated ability to move money through the payments system, both now and tomorrow, or they will face questions from customers about why their deposits should even be at the bank.
Community banks should take three steps to start addressing the fast-changing world of payments.
Know how you make money on payments now: Understand the various fees and revenues associated with different kinds of payments and deposits, and think carefully about how closely your deposit business is tied to your payments capabilities.
Consider the implications of the current environment for funding the bank: Ask yourself, are you adequately funded through deposits, and what would the impact of a sudden change to “table stakes” payment capability mean for that funding?
Chart payments investments on an access/rails matrix: Chart a 2×2 matrix to understand where different payment capabilities fall in terms of changes to access and/or rails, and then ensure you monitor every quadrant, and don’t just pay for upgrades to current access on current rails.