The increased use of digital and contactless payments in the wake of the pandemic is well documented, but something that remains less clear for many financial institutions is what role they can expect to play in payments going forward.
The announcement that Twitter was exploring new consumer ecommerce options within its platform makes a timely reminder that banks and credit unions face significant challenges to their current position in payments.
“As we see the entry of nontraditional players into financial services more and more — and not just the fintechs, but media companies, music companies and others — there is the growing potential risk that the customer experience itself gets disintermediated,” says Alison Hoover, PwC partner in an interview with The Financial Brand. “If the customer experience begins to belong to someone else, even to another industry, that can leave banks with only a remainder share.” The expansion of Intuit, Stripe and Square into more elements of business banking matches the rate and level of change being seen on the consumer side of the business.
Financial institutions must make sure their payment solutions are modernized and supported by state-of-the-art expertise.
Will Institutions Make CX Or Payments ‘Plumbing’ Their Business?
Hoover, leader of the firm’s Banking Transformation team across Retail Banking, Commercial Banking, and Payments, thinks that as banking emerges from the COVID exigency, some strategic decisions about each institution’s future must be made.
One is what role they want to play in both consumer and commercial payments as the economy continues to come back.
“They need to begin focusing on making a choice regarding whether it is still important to them to be part of a customer-facing experience and to what degree they would prefer to be the pipes and plumbing of the business, facilitating the transactions but being invisible to the public,” says Hoover. “There is money to be made in both places, but they have to decide which role they can best monetize.”
This decision is wrapped up in other decisions, even those so large as whether to remain independent or to merge or be acquired, according to Hoover. Related to such options is whether to seek partnerships to offer services or to be the partner that enables more non-bank players to come into banking and payments.
Smaller institutions have traditionally seen themselves as owning the customer relationship, but that connection has loosened.
“The marketing cost of customer acquisition and providing customer experience can be very expensive,” says Hoover. It’s no accident that many of the institutions providing Banking as a Service to nonbanks of various stripes are smaller banks, she explains.
“The smaller bank that doesn’t have a massive footprint or a major media presence or a large marketing budget may make the choice to focus on BaaS as a strategy,” Hoover suggests.
Smaller Institutions May Prefer Not To Go It Alone
None of this is occurring in a vacuum. “There’s a bit of an arms race coming right now,” says Hoover. Some of the bigger players are ripe to enter the BaaS space more deeply than they have before.
There’s a bit of a BaaS arms race coming right now.
— Alison Hoover, PwC
Even the large banks face the choice of following public or private payment roles. The Google Plex project, where financial institutions will partner on banking accounts with Google, includes institutions as large as Citibank. Former Citi CEO Michael Corbat early on raised the issue of whether traditional banking institutions risked being a “dumb utility” used by, in this case, a big tech.
Yet for smaller institutions the right fintech partnerships might be what they need to pursue to stay in the game as either public or unseen player, depending on how payment services evolve.
“As digital payments grow and banks are looking to make sure they remain relevant in that space, fintech partnerships are one logical way for institutions that lack sophistication and maturity in payments to continue to expand and grow, without trying to build everything from scratch,” says Hoover.
To help make partnerships more practical, Hoover believes traditional institutions need to scrutinize their legacy payment processing.
“They need to look at open banking and an API [application programming interface] approach to facilitate some of their potential partnerships with fintechs, to make it easier to work with those firms,” says Hoover.
Cryptocurrencies May Be a Norm Sooner Than Later
Digital channels came into their own during the pandemic, but the other payment method that came into the spotlight was cryptocurrencies like Bitcoin and Ethereum.
Eye On Payments:
With entities as diverse as Microsoft and Tesla announcing that they’ll accept cryptocurrency, and PayPal adding crypto-based services for consumers, there’s growing reason to monitor crypto developments.
“The hype of 2020, for better or worse, has really increased the profile of cryptocurrency,” says Hoover. “The sales of non-fungible tokens and other digital assets have really brought it to the front page.”
For most banks and credit unions it’s still early days. However, Hoover says “there are people making money here, and wherever there is money being made, there are going to be financial institutions figuring out how to manage it. Crypto is going to become a default payment mechanism, sooner than we think, on both the consumer side as well as the business side.”
She adds: “Just don’t ask me to put a date on it.”
At present, even as PwC itself acquires more expertise in the crypto area, a small handful of its larger financial institution clients have started providing crypto services with the firm’s assistance. Typically they venture first into the business side, as a treasury management function. Hoover thinks this is where smaller players should begin, as businesses begin to ask for crypto-related service, though for the most part that time is not here yet.
Partnerships, possibly with large banks, could very likely be the way most institutions get into crypto to any significant degree, Hoover says. Smaller players won’t have the expertise to handle either the regulatory risks or the tremendous potential volatility that cryptocurrencies pose.
“We’re still in a watch, wait and educate mode,” she explains. “Other than a few experts, most people only understand the first inch of the pool, and many can’t even go that deep yet. But we absolutely believe that as we look at the evolution of the broader payments ecosystem, crypto will unavoidably become an important component for the foreseeable future.”