The payments landscape as we know it has grown more complicated than ever, with numerous players participating in the process as consumers and business owners adopt new methods of paying for goods and services.
This is especially true in the ongoing pandemic landscape, with many stores requiring either cards or contactless payment methods for shoppers, in order to reduce person-to-person contact.
A survey, “North America Online Payment Methods 2020 & COVID-19’s Impact,” shows that nearly one-third of American consumers became first-time users of contactless payments during the pandemic, and the majority of them planned to continue making contactless payments post-COVID-19. As such, contactless payments in the U.S. are projected to increase eight-fold between 2020 and 2024.
Opportunity Knocks … And Maybe Just in Time
The evolving new normal is pushing consumers to adopt these changes more rapidly than expected. This opens up tremendous opportunities for banks and credit unions.
The payments shift started pre-pandemic with person-to-person payments significantly increasing over the last year and more. Zelle usage bypassed Venmo as the product of choice in April 2020, with over 800 financial institutions contracted and over 7,000 already participating in the Zelle Network. This means Zelle reaches an estimated 86 million users — over a quarter of U.S. population.
The original creators of the payment landscape, banks and credit unions, are now being challenged by retailers, fintechs and technology providers. All of them are competing for consumer’s attention for everything from money movement to making payments and, soon, paying bills.
The upside for the banks and credit unions is that with great attention comes great opportunities. The question then becomes how can the traditional institutions win back their piece of the payments pie and stay ahead of the competition?
Financial organizations must respond to this challenge by creating easier-to-use mobile platforms, providing more options for money movement, and increasing customer value by focusing on product innovation.
And they must do this soon.
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Nonbanks’ Incentive is Access to a Rich Data Stream
While the financial industry has struggled to make payments easier, we have seen examples across the ecosystem of other players, like the retailers, fully embracing the use of mobile products. This has resulted in a positive impact on their business and on their relationship with their customers. Retailers are creating mobile applications which store debit and credit card information for use in purchases and provide value-added services in the mobile app, which motivates consumers to utilize their mobile app instead of the traditional institution’s card.
We are still taken aback by the Starbucks stat in the Wall Street Journal in 2016 stating that “Starbuck’s customers in the U.S. have loaded at least $1.2 billion onto the company’s cards and app, a number higher than the deposits held by Customers Bank ($780 million) and the Green Dot Corporation ($560 million).”
Consumers choose to keep their money on their Starbucks app because the experience provides value to them and offers them a more seamless experience while in shop while also allowing them to accumulate points and discounts towards future purchases, a prime example of consumer behavior driving the experience.
The tech giants are actively pursuing these opportunities as well and are succeeding with Apple Pay outpacing Starbucks as the most popular mobile payment option in the U.S. last year, up 38% from the prior year, according to eMarketer. Another very valuable outcome for new entrants is the data they are able to collect.
Payment transactions contain a wealth of information about the consumer’s behavior and what is important to them. Banks are best positioned to monetize this information and have earned the trust and confidence of the consumer that it will be kept private.
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Community Banks and Credit Unions Face Strategic Choice on Payments
The challenge for community banks and credit unions, especially, is where and how deep to enter the payments stream.
For many financial organizations, maintaining a transaction account provides enough strategic value for deposit gathering. Providing debit card access, ACH, wires and a dwindling check processing capability is as deep as they want to wade into the payments pool. While this strategy is understandable, it may be short-sighted, as larger banks and the non-banks will continue to build capabilities which embed payments capabilities into the day-to-day activities of consumers and business owners via mobile products, eventually boxing-out the smaller traditional banking institutions.
However, enhancing payment capabilities is not something that these institutions have to do alone. Banks and credit unions can take a page out of the playbooks of Target, Walmart and other retailers and implement capability to evaluate QR codes and make payments using their credit or debit cards.
More strategically, local banks and credit unions can work with small business owners that they already serve, and create closed loop payment systems by making payments directly from consumer accounts to business accounts. They can look to outside parties like fintech players for partnership opportunities that enable them to meet their customers (both consumers and commercial) where they are when they need them.
We were in a conversation recently regarding a top ten bank that partnered with a fintech startup to provide money movement outside of typical banking hours so their clients could work in a way that was more meaningful for them, on a 24/7 clock. The partnership also enabled the bank to work with clients from a broader geographic region as well, specifically prospects in Hawaii.
Community banks and credit unions must find their sweet spot to stay competitive. As the lifeblood of America, community banks and credit unions are critical to the success of the towns and businesses who rely on them for services. Although some financial organizations may not be ready, now is the time to determine what role you and your origination will have in offering payments as part of your mobile platforms now and in the future.