Placing Multiple Bets in Payments

Major change in payments is coming but the outlines of that change remain obscure. Which technology and business model will win out in the end? Making the right choice is the challenge facing bank payments strategists, particularly at the largest banks that feel a need to stay ahead of the curve for competitive reasons.

One answer, says David Godsman, online and mobile solutions executive at Bank of America Corp., is to place multiple bets on the table and partner with nonbank players. “We’ve got this period in time right now where everyone knows that the payment strategy of most organizations is evolving to meet what is the customer expectation and there isn’t a guaranteed winner yet,” Godsman says.

“I think that allows a lot of room for experimentation and placing multiple bets to see what ultimately plays out from a mass adoption potential.”

Godsman made his remarks in a recent interview with BAI Banking Strategies as a preview of the presentation that he will deliver at the BAI Payments Connect Conference & Expo on March 12 in a general session entitled “Flexible Payments Strategy for an Era of Uncertainty.” In addition to discussing his views on payments strategy, Godsman described his anticipation of new revenue streams that banks will be able to realize by combining marketing and payments on mobile devices.

Q: Looking at the new regulations issued over the past few years, what sort of effect are they likely to have on the payments business and how do you think banks should respond?

Godsman: In the past couple of years, we’ve obviously seen a reduction in revenue sources that have traditionally been at play within the industry. We’re seeing, at the same time, a transformation occurring with consumers, who now expect higher levels of convenience and service. Those cost money to develop, there’s no question about it, and so I think that what we’re going to see, and what would potentially play into the business model, is some new, non-traditional opportunities that can feed off of the payments ecosystem a little bit more robustly than occurs in just a transaction-driven environment. There’s a lot that can be done, hopefully, to ultimately generate a new form of revenue stream that helps us to maintain that level of service and commitment while being able to manage the development costs of these new opportunities.

Q: What are some examples of the new opportunities you have in mind?

Godsman: We have seen fundamental changes to the way people shop, conduct personal business and communicate with each other. Mobile devices, new forms of payment capabilities and even social networks now shape the customers’ expectations. These expectations are being set by a number of parties, including financial institutions, but it is the ones who get it right first who will seize the real opportunity here, which is to extend relationships with customers and maintain relevance in a much more virtual environment. If we look at the power of relevance in real time, from a consumer point of view, we can see how companies are going to want to maintain their presence and be front-of-mind or top-of-wallet.

It is not a far stretch to think that companies will begin creating new forms of marketing on mobile devices that are tied directly to forms of payment. If you think of what Google did with local search results and allowing small businesses to advertise themselves to customers looking for a specific product or service, it’s not a far leap to imagine that same model for mobile. In fact, it is already here, just not harnessed as effectively as it should be. I believe that, if banks can play a role in delivering this opportunity and remaining the payment vehicle of choice, they have a huge opportunity to create value and retention.

For better or worse, customers are allowing third parties to understand where they are located and what they’re interested in. This is being done in a much bigger way than ever before and now happens instantly. This new paradigm opens up the opportunity to bring relevance to those customers in a more cost-effective way for a company but also in a way that might open new potential exchanges.

Q: Speaking of third parties, bankers have historically been reluctant to partner with nonbank entities in the payments system. Is that changing?

Godsman: This is an age old question of whether you go it alone or join forces and go it together. New entities are emerging in the payments space – the digital service providers, mobile network operators and nontraditional payment companies all vying for a piece of consumer relevance. It is a much more complex ecosystem than it used to be and financial institutions have to look at where they stand in the mix and logically what they can afford to build versus partnership and collaboration in order to maintain market share and drive incremental value to their customers.

Another dynamic is that while some players are seeking to secure payment revenue in this space, alternative players are chasing data as well. Why? Well it’s simple: data provides context or intent and when combined with real-time location information makes for an extremely powerful opportunity to drive new forms of advertising revenue. This space is transforming so quickly that it’s difficult to lead or even keep up. Companies are clearly rethinking traditional models and beginning to open up to the concept of partnership and collaboration. I think banks and/or others frankly realize speed-to-market and flexibility is probably a better asset than owning proprietary solutions in many of these situations.

Q: So banks need a more flexible approach to payments strategy?

Godsman: Yes, exactly. This is not an original thought, but the idea of placing multiple bets right now feels like a common strategy to most people in this space. We’ve got some big new capabilities ready to come to market in another three to five years, such as Near Field Communication (NFC), and then we have some disruptive technologies that are more nimble and software-driven coming to market now, greatly shortening the adoption curve and providing the same experience in payment capability at the point of sale for a fraction of the time and cost. And, most notably, we won’t have to wait for hardware changes to enable our customers to take advantage of these new value propositions.

So, we’ve got this period in time right now where everyone knows that the payment strategy of most organizations is evolving to meet what is the customer expectation and there isn’t a guaranteed winner yet. I think that allows a lot of room for experimentation and placing multiple bets to see what ultimately plays out from a mass adoption potential.

Bottom line, we must deliver against our customer expectations in a manner that is most comfortable and useful to them. This will require an anywhere/anytime type of mindset and will place new pressure on our industry to make sure we are evaluating and fully vetting all the opportunities.

Mr. Cline is managing editor of BAI Banking Strategies. He can be reached at [email protected].