Payment trends: Surviving in a climate of constant change

Payments are the largest source of non-interest revenue for many banks, yet the majority of institutions do not have an enterprise payments strategy. To succeed in the rapidly evolving payments landscape, banks must develop a strategy that incorporates consumer attitudes about payments, the growth of embedded payments and the convenience of contactless cards.

Consumer experience. Financial institutions may lose their way – and customers – if they fail to understand how little people care about the economics of payments. Customers expect their bank to provide a seamless experience while also keeping them safe. Any action that creates friction, such as measures to improve security that require an extra step by the cardholder, will threaten customer loyalty.

Another payment-related consumer want is convenience. Banks have been known to block customers from using fintech services as a way to steer them toward similar services the bank offers. Such actions are unlikely to cause a customer exodus, but it is certainly leading some customers to open accounts at other institutions friendly to their preferred fintech.

If the provider offers a debit card, it might be simpler to use that card for purchases rather than the debit card offered by their bank.  The bank may not suffer much of a performance hit, but its brand could take a punch with a generation that is, by nature, distrusting of financial institutions.

Embedded payments. The most recent Federal Reserve Payments Study reveals that the volume of non-cash payments is increasing at a much faster rate than the economy. Many of these payments are becoming “embedded” – that is, discreetly woven into the fabric of the commerce experience. This trend adds to consumer convenience, and it increases the likelihood that the bank’s credit or debit card will no longer be the default for their cardholders.

Big Tech companies are experts at taking advantage of the consumer’s fixation on convenience, especially in the area of payments. There is recourse available to banks, but requires integrating personalized value-adds into the purchase experience. Banks have the necessary customer data, but most struggle to harvest and apply it.

However, these institutions already access and provide daily data in their mobile banking app that can be used to create a connection with the customer. For example, when a customer makes a purchase with a credit or debit card issued by their bank, why not push their current balance and last five transactions to them? If that’s too technologically complicated, start a loyalty program that incentivizes them to use their bank card to pay their bills online or embed it in their favorite e-commerce retail sites.

One thing is certain: Doing nothing is not an option for any institution that wants to be competitive in five years.

Contactless cards. Contactless payments – tapping the card at the point-of-sale on an NFC-enabled device on a card reader – will see a steep climb in adoption in the very near future.

Most commonly applied in the transit industry, contactless cards are being embraced by merchants of every kind. Using a contactless card is materially simpler than swiping, inserting or using a mobile wallet. The fact that many transactions can be made without the aggravation of a receipt doubles the convenience.

Offering contactless cards is another way to create loyalty while conveying to customers that the issuing bank is current with trends in payments and tuned in to the cardholder’s need for convenience. Those institutions that are late in adopting contactless cards risk losing wallet share and are allowing their brand to be seen as irrelevant.

The increasing use of debit and credit cards for small-dollar payments is one factor driving rapid growth in card volumes. Indeed, our experts forecast card payments will grow by as much as 12 percent in 2020. Moreover, the digital world will continue to push payments toward a day when the means to make the purchase will be invisible. E-commerce continues to increase the number of “card not present” transactions and embedded payments are but another step toward the consumer never touching a card to pay for a purchase.

This means, in the long term, banks must campaign for digital top-of-wallet status in their card products or face a slow march toward volume erosion. Financial institutions still hold an enviable position as the keepers of valuable transaction data. Their challenge comes in leveraging that position to increase card loyalty.

Consumers are now in control of their relationships with financial service providers. Banks must come to grips with this fact and continually evaluate and enhance the capabilities and services they offer in order to keep up and remain competitive in this decade and beyond. They must also choose which parts of the consumer relationship are worth fighting for and which parts should be shifted to partner providers.

 

Brad Downs is CEO of Strategic Resource Management, a Memphis-based independent advisory firm.