Alternative payments strike paydirt
Apple Pay. Affirm. Bitcoins. Samsung Pay and Android Pay. And: Don’t forget online consumer finance programs that let customers finance high-priced goods … in their shopping carts.
Money may not grow on trees, but it can certainly sprout in cyberspace these days.
“There are a lot of new companies extending credit so that customers can buy things online,” says Ali Raza, principal with Phoenix-based CCG—Catalyst Consulting Group. “From the banks’ perspective, they are often competitors.”
Granted: These relatively new ways for consumers to pay for goods and services, both online and in brick-and-mortar stores, are still nascent by and large. Yet many payments experts believe 2017 could be the year these programs to take off.
But what these non-bank offerings mean for banks? In years past with FinTech, financial institutions viewed such disruptive offerings with alarm and suspicion. But with 2017 just a figurative mouse click away, banks have a potential opportunity to embrace new technology—and the expanded payment options customers will increasingly come to expect.
Here’s how it could work: Raza notes that banks might make smart investments in tech upstarts, or partner with some to get the banks’ own payment and finance options in the hands of more consumers.
“If one of these companies were to really take off, banks would want to take advantage of that opportunity,” Raza adds. By way of analogy, banks can provide a high-powered engine, with payments-related companies supplying the rocket fuel.
Even banks that insist on developing their own tech-based solutions don’t always want to go it alone. “These can be good sources of new ideas and new concepts,” says Andrew Gelb, executive vice president of global financial solutions for First Data Corp., a payments processing company that works with (and sometimes unites) technology companies and banks.
“Using third parties is a way for banks to get involved in new solutions quickly and accelerate their go-to-market time,” Gelb adds.
The investment angle also offers compelling prospects. Raza points to a $100 million investment by Morgan Stanley in Affirm Inc., a company founded by former PayPal executive Max Levchin. Affirm offers customers instant installment payment options when they make purchases online.
And for banks that green light partnerships, there are many high-profile options—including the digital wallets offered by such technology companies as Apple, Samsung and Alphabet, owner of Google and Android Pay.
Zilvina Bareisis, senior analyst for Celent’s banking group, also sees opportunities for banks to work with large retailers on their digital wallets, such as Walmart, which has its own WalmartPay. Some of those wallets have the potential to link credit cards to coupons and loyalty offerings.
Then it becomes a matter—politely speaking, of course—of butting to the front of the register line.
The trick for any bank, Bareisis says, is to get in early and promote its card heavily so customers will choose it over others in the wallet: “There is going to be a rush of banks to support these programs. Banks want to get their customers to register their card first.”
One early adopter of the technology, Walls Fargo, offers a proprietary Wells Fargo Wallet while also participating in the Apple, Android and Samsung programs.
“Customers should have the ability to make payments when, where and how they want,” says Jim Smith, head of Wells Fargo virtual channels. “We want to allow our customers to pay from any mobile wallet they choose.”
Banks can tiptoe into emerging programs, if they like, that are connected to the growing number of online networks that offer customers instant financing when they buy high-ticket items.
One such company, getfinancing.com, hooks up customers, retailers and lenders when a customer is about to make a high-ticket purchase. The consumer sends getfinancing.com a loan application, which immediately matches them with potential lenders. The company is working with seven lenders, including one bank, and while expanding its financing options.
“Lenders give us their requirements and we only bring them customers that fit their criteria,” says CEO James Kern. “There is no cost for a bank to sign up and no obligation to fund any offers we bring them. The only fees they pay us are when they approve a loan.”
Such shopping-lending networks resemble the online programs many banks already participate in to make auto loans, explains Raza: “Partnering with these companies gives banks a big economy of scale. Banks can present their financing options without having to make a big investment in technology, or going to hundreds of retailers to sign up each of them.”
And many of these networks are targeting customer segments banks want to reach—especially Millennials. “They appeal to younger customers, some of whom do not have a credit card yet,” Bareisis says.
Despite the appeal of many of these tech offerings, risks do exist. Because the third parties often deal directly with the merchants and consumers, there is the potential for fraudulent practices or just shoddy service that could tarnish a bank’s name.
To mitigate this risk, banks should conduct thorough background checks on partners.
“Banks need to perform a lot of due diligence on the operational capabilities of the companies they work with and make sure they have all the necessary controls,” Gelb says. He offers this tip: “Make sure they understand the regulatory environment banks work with and have a common philosophy.”
Still, not all new payment possibilities will appeal to banks. Many alternative financing operations offer their own options at retailer checkout pages rather than those that represent banks, Bareisis points out. “The opportunities for banks are limited with many of these alternative financers because they have only one or a few banks underwriting their credit offers.”
Yet others will look to bitcoins as the future. But without a central bank, known creator, or a lack of volatility, the peer-to-peer “cryptocurrency” rightfully has a reputation for riskiness. Early on, bitcoins became the currency of choice for drug dealers, fraudsters and financial criminals.
That reputation has calmed somewhat; some universities and sports teams even accept bitcoins like cash. Still, Bareisis may have it nailed when he concludes: “Bitcoins are volatile and unpredictable. Most banks tend not to want to deal with them.”
Lauri Giesen, a contributor to BAI Banking Strategies, has spent more than 25 years covering banking technology and payments for many financial publications.
Correction: The original version of this article attributed a $100 million investment in Affirm to a another financial services organization. BAI regrets the error.