Through modern history, banks have pretty much owned the payment business: the rules, the operations, the settlement, the technology advances and most of all, the revenue it throws off.
That’s changing—but not nearly as fast, or if you’re a bank, as ominously as some predict. McKinsey, harkening to the Internet’s early days, notes that “the payment market was $112 billion and banks owned it end to end.” By 2014, it was “$290 billion and banks owned [more than] a 90 percent share.” When the revenue pie grows that fast, a shrinking share is still a 57 percent revenue increase. And McKinsey estimates that in 2018, payment revenue will account for 43 percent of all banking revenue.
If that weren’t enough motivation for banks to compete in the payments innovation space, consider this powerful force: global rivalry for payment market dominance. A recent report featured in the Wall Street Journal notes that “when it comes to mobile payments, China dwarfs the U.S. … China’s online corporate titans are way ahead in the race to build mobile-payment services in many of the world’s fastest-growing consumer markets.” The mobile payment market last year in the U.S. was $112 billion (forecast to reach $293 billion by 2021) versus $9 trillion in China (forecast to reach $47 trillion by 2020).
With opportunity like that, you make a costly mistake if you’re a regional bank and cede payment innovation to the very large banks and the fintechs. After all, you have your own investments in the payment system to protect and your customers won’t settle for second-class payment products and services. Moreover, not all innovations require massive investment or unique technology capabilities.
These two examples show how regional banks can enhance their existing payments environment to create more innovative, profitable offerings.
Cardless in-bank mobile payments: A regional bank in an area where customers have little physical access to banks developed an innovative payment solution that requires no cards or cash, and enables customers to execute digital fund transfers with just their mobile phones to execute person-to-person, person-to-business, and business-to-person transfers.
It’s a simple solution that uses existing banking rails—a closed loop system that requires no participation by card associations—and solves stubborn problems that have long troubled the bank and the parties to personal transactions.
The bank creates a distinct P2P fund management account for each participating customer and thus insulates the activity from its core banking products. The solution incorporates security measures such as dual mode authentication, secure PIN and encryption technologies to keep hackers from swiping the transaction data. It provides a safe method of transferring money between a sender and recipient without cash, card or any other payment instrument.
Because the entire transaction takes place within the bank, there’s no vulnerability to fraud, nobody sniffing the network—and zero fees required. The logical extension of such solutions is to expand from an intrabank ecosystem to an interbank ecosystem and thus catalyze the growth of a cashless, cardless payment framework.
PCards—custom purchasing card solutions: While many banks make do with generic PCard solutions, others (especially those with rapid-growth prospects) would prefer to employ custom solutions. These could include customized underwriting rules for unique customer types, spending limit flexibility, or simply greater control.
But bringing those solutions in-house requires talent pools that regional banks can’t afford to acquire or manage. But they can access partners with custom solutions in a Platform-as-a-Service (PaaS) model. With a generic platform, these partners can apply rich domain expertise to create custom acquiring and issuing platforms to build business layers unique to the bank. The result: a fully private-labeled custom solution for the bank, completely developed by tech professionals.
If the banks also allow their partners to host and manage the solution, they can avoid the huge overhead of maintaining a sizeable IT team to do the job in-house. Instead, banks can focus on growing their business as they lean on their tech partners to help run it.
With creativity and inspired partnering, regional banks can leverage the digital revolution to their firm advantage and reap its promise of innovation and profits. Good news is the cards, or in at least one instance, the lack of them.
Bob Olson is senior vice president, financial services, for ThoughtFocus and Naganand Jagadeesh is vice president, payment and loyalty solutions, for the U.S.-based consulting, software engineering and business process management firm. They can be reached at [email protected] and [email protected].
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