Banking institutions have offered electronic payment options for years, but consumer demand is greater now than ever. People want payments to be faster, and they want the systems to be easier to use.
“(Consumers and businesses) want immediate interaction associated with their transactions and an integrated experience,” says Chris Ward, head of product management for PNC Treasury Management. “Facilitating a payment experience that reflects these new expectations is critical for banks, and the only way we can do that is through innovation.”
Making matters more challenging for banks and credit unions is that fintech companies are introducing products that address consumer demands for faster and easier payments. But while many of these options rely on financial institutions and the banking system to hold and move the funds, the services are often branded and marketed by the technology companies.
“Banks may hold the deposit funds used to make the payment and move the funds around, but the brand that is in the consumer’s mind is not the bank,” says Rodman Reef, managing principal of Reef Karson Consulting LLC.
An example Reef points to is PayPal. The payments are ultimately made through bank accounts or bank-issued credit cards, but PayPal is the brand that customers see. As a result, any gratitude or loyalty consumers feel when making a quick and easy payment goes to PayPal—not to their bank.
Zilvinas Bareisis, head of retail banking for Celent, says that even when banks work jointly with tech companies to provide advanced payment options, they risk losing customer relationships if customers perceive that their payment services are coming from these outside companies.
“Apple Pay is a great opportunity for some banks to provide a great payment experience to their customers, but the risk is that the customer relationship is lost,” he says. To prevent this from happening, financial institutions need to reinforce their role in the service through branding and promotions.
Bareisis points to Utah Community Credit Union as an example of a financial institution that used an outside technology company successfully. The credit union offers a Fiserv-provided service that creates a visual representation of payment transactions using screenshots. He says the service gives consumers valuable information that is easy to understand, and the service is branded in such a way that customers associate it with the credit union.
Another innovation is PNC Bank’s early adoption of The Clearing House’s real-time payments (RTP) network, which allows clients to send and receive funds at any time. More recently, PNC became one of the first banks to send Zelle payments over the RTP network, providing a fully digital payment experience with improved efficiency by leveraging the emerging global ISO 20022 messaging standard, Ward says.
But while it is important for banks to provide these types of services to customers, there is also a huge risk if they offer something that doesn’t work as promised or is not secure.
Another huge risk associated with advanced digital payments is related to security. Bareisis says EMV chip cards have helped reduce card fraud, “but after the pandemic started, many transactions moved away from card-present to e-commerce. Banks need to look for better ways to manage fraud there.” He believes U.S. financial institutions need to work together to develop better ways to authenticate identification in card-not-present situations, especially those related to e-commerce payments.
The risk to financial institutions is not just the loss of funds caused by fraud but also the reputation of the entire industry, says Peter Quadagno, CEO of Vality Corp. “Banks risk losing the confidence of consumers who have bank accounts. There is a lot of damage to the banking system if customers feel their banks can’t protect the safety of money they place with the banks.”
Quadagno argues that banks have focused too much of their fraud prevention efforts on data analytics. Data analytics relies on probability theories that determine the likelihood that a given transaction is fraudulent. But while he says such systems worked several years ago, advancements in quantum computing attacks on payments databases have significantly increased the likelihood that fraudsters will obtain payment information that can be used to do major damage.
“Banks need to look at systems that go beyond probability theories and look at how fraud is occurring and why databases are getting taken over,” he says.
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