Paymentgal Blog

All Posts (18)

The Little Fintech Bank Charter that Could(n't)

For now, the OCC has lost its battle against the banking industry to establish a fintech bank charter in the U.S. and will need to regroup. Establishing a regulatory definition and operating rules for fintechs that are continuing to grow their account bases in this country does not seem like an illogical next step in our banking evolution. But that depends on where you're sitting. In a country that is intensely competitive, it is ironic how noncompetitive our markets really are.
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Apple Card is About Apple, Not Credit

The Apple Card is so much more than mere credit card. It's Apple's entry point to delivering real financial services to consumers through its iPhone Wallet. This strategy is based on becoming the centralizing agent for financial services and in my opinion, that's the future of competitive banking services. Piece by piece, Apple has been quietly building out its wallet to become not just usable, but indispensable. This is the big threat for traditional financial institutions and their depository accounts, not the credit card. Apple doesn't quite have all the puzzle pieces in place yet, but the Apple Card has pushed their strategy way down the road.
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Have financial services finally come to their lifestyle branding moment? Or, are we simply confusing brand with eco-system? Recent happenings like MasterCards' new restaurant and Barclay Banks' device store and Apple's credit card are all fun to think about, but profits still lie in transactions. How financial services capture transactions is very different from what it has been. But elevating the user experience into a lifestyle brand is a big reach.
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ACH is an incredibly durable transaction type with an ubiquitous reach and user familiarity combined with an ultra-low cost of acceptance. Faster Payments is an exciting new scheme promising to upend clearing and settlement in a whole new way. But faster plays out for good and for fraudsters. Thinking through the potential impact of instant payments requires the input of those experienced in the way that our complicated industry actually works. That's what this conversation is all about.
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In a recent blog post, I gave some thought to how payment hubs are evolving and where these complex, but increasingly necessary, technologies fit into our present-day financial institution eco-systems. To gain more insight into the subject, I had the opportunity to talk to Trevor LaFleche from Fiserv. Trevor is the Director of Product Management and Marketing, Enterprise Payments Solutions, for the company and has extensive experience in designing and building platforms of this kind, Trevor and I spent some time talking about how these enterprise solutions are integrated by financial institutions and why he agrees the time is right for organizations to think seriously about implementing a Payment Hub.
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Addressing our industry's problems with digital solutions is not just the purview of start-ups, but also breathes new life into mature businesses. Case in point - commercial payments. There is no hotter segment in the industry today than commercial payments. It’s here we find deep pockets of inefficiency that can be addressed through digital payments, creating an economic powerhouse with the capability to generate highly profitable margins. The expanse of this market is also attractive, covering a wide range of potential customers from micro-business to small business to commercial and finally, large enterprise corporates. In this interview with U.S. Dataworks CEO, David Peterson, we discuss how the opportunities in this market can be hit - or missed - by financial institutions.
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The question I want to explore here though is why, other than driving down the cost of acceptance, is it so important for an entity like Uber to control its financial services? I believe it's because financial services are an integral part of the company's infrastructure and as a result, Uber could be poised to show large corporates with highly complex payments profiles how they can control much of the assets they need to efficiently operate their business.
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Deconstructing the Core Banking Platform

Open Banking, by definition, is an environment where a third party is given permission to access a bank account or account-related data in order to provide services direct to the user. That's not where the real technical evolution in banking is going to take place. Instead, I look for technologists to begin figuring out how to desconstruct core banking systems into their individual account components and then deliver them through a integration portal that allows a financial services entity to pick and choose the ones relevant to their offering. We're seeing this in the new crop of API farms that banks are accessing to deliver new services to their customers, but this takes these concepts down to the core level and that's where real innovation in banking is going to take place.
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Organizations making business decisions regarding potential new vendors, technology investments or new partnerships have to invest a great deal of time and resources in the effort. Creating a set of meaningful Guiding Principles can support a more efficient and effective decision-making process.
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What's really hard about AI or any other fintech infrastructure play is defining an implementation path that makes good business sense and then investing in that vision. Many stakeholders view these technologies as competitive differentiators and so lock their learnings up in closed rooms. Increasing the tide of information about the real experience of integrating, testing, and implementing these technologies will serve to improve and strengthen the market as a whole.
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Even though Faster Payments are taking a lot oxygen out of the room at industry conferences, the opportunity in Cannibas banking is tremendous and growing. Distributed Ledger Technology or DLT may be boring, but it's going to be an important part of our future infrastructure,. Notes from the NACHA Payments 2019 conference.
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Of all the big tech companies, Apple is the only one that's been chipping away at creating a real payments eco-system. By that, I mean successfully addressing the needs or Unlike Amazon or Google, that have healthy, functioning payment solutions for merchants and corporates or Facebook that has squandered its opportunity in financial services by becoming the company no one trusts with their information or Microsoft that continues to toy with financial services as a side hustle, Apple has to make it work.
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The new Apple credit card is an example of how that company has potentially put a product into market that could disrupt the credit card industry. Building on the concept of Customer Effort as a defining factor in disruption, I examine how this new way of evaluating technologies could be used to answer our questions about how the future of the payments industry.
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This article from Forbes discusses the slowly expanding use of mobile wallet or in-app payment forms used by brick and mortar retailers to avoid interchange fees.  How does this actually work and further, lead to the adoption of Faster Payments?  First, let's look at how a retailer builds out a private mobile wallet:

1.  Enable a private label credit card or other form of privately-issued short term credit.

2.  Leverage a direct bank transfer through an ACH scheme.

Either of these solutions will effectively bypass the global card networks and thus, their pesky interchange fees.  But, in order to offer these payment options to consumers, here's what the brick and mortar retailer actually has to do:

  • Find and contract with a private label credit issuer or short term lender or with a scheme that enables ACH at the POS
  • Integrate the final solution with existing POS, risk, and reporting systems
  • Design, build and test a mobile app and/or issue a private label debit/credit card that will work in the newly integrated POS system
  • Create new governance and service model
  • Educate retail staff on acceptance, maintenance, and servicing of the new payment form
  • Market the card to potential users

These are the high level activities and one can imagine the details from there.  The point is, it's not cheap or easy to do this on a one-off basis, which is why we're seeing either the top end retailers jump in the game or for smaller retailers, they might have to integrate with a one-stop shop which flattens some of the ramp-up curb.

How Faster Payments Fits In

All this sounds difficult and costly, and as I mentioned, for the smaller merchant (or even good sized medium merchants) it is.  For quite a while, legacy card issuers looked at this and thought the same thing, but here's where it gets interesting.  Two words - Faster Payments.

The United States Federal Reserve is continuing to take a very active role in supporting the new Faster Payments scheme, recently forming a new industry council to spur its acceptance.  Further, central banks are looking ahead and considering what their viable paths are to enabling digital fiat currency, a reality they will face at some point.  Private sector schemes, like TCH that's using the Vocalink backend to enable instant payments (reminder that MasterCard owns this platform) and NACHA, which has recently completed its same day ACH launch, are offering real-time money transfer, if not quite at the low-value level yet and not as a mandated solution either.

The core benefit that any central bank-enabled faster payments platform offers is in its ability to act as an inter-bank connective tissue which can act as a very effective means of creating the ubiquitous network that has long been the purview of the card networks.  The problem is that participants have to be incented (or required) to participate in the scheme and integration requirements must be streamlined.  What better incentive than an at par cost of acceptance, as the WFJ points out in this article?  Once acquirers are able to integrate the Faster Payments scheme at the POS (thereby eliminating the need for merchants to manage this on their own) and the scheme is enabled by financial institutions, the market is set for some real change at the Pay Now level and particularly for low value payments that are expensive to acquire via the card networks.

Coming back to how mobile wallets fit into this, one of the problems cardholders have experienced with many of the Pays is their emphasis on credit cards.  Much of that is because there are additional costs to provisioning cards in these wallets, and debit card portfolios margins can be very thin.  Additionally, the increasing proliferation of retail apps at grocery stores, pharmacies and gas station combined with offers of rich rewards to cardholders who use their credit cards at these everyday spend locations, tends to shift transactions from debit to credit.  Should merchants embrace Faster Payments at the retail level, this could help to stem that tide, albeit without the interchange bump.

However, as I've often written, card-based interchange revenues are slowly declining, interchange is regulated more aggressively all over the world and the market is slowly replacing it with a combination of other value-transfer schemes and account fees.  In other words, interchange is less of a consideration to issuers than it has been in the past.

What Comes Next

I'm not looking for a broad, near-term solution just yet, but the big retailers are pushing hard and they have the technical capabilities to make this work.  Financial institutions will enable Faster Payments for commercial transactions, the bedrock of payment inefficiencies, and retail transactions will simply follow, much as we saw with remote deposit capture for example.  EFT networks will be very early adopters of a faster payments option as means of maintaining their position in the debit processing market which will make it easier for financial institutions to participate on the retail level.

Coming back to the topic of mobile wallets, the proliferation of these form factors creates a built-in channel for adoption and merchants will use their newly saved interchange capital to offer promotions that will incent their use, especially via roll-back pricing or instant cashback at the POS.  This will create demand for issuer institutions to participate and then, Faster Payments is off and running.

 

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The Changing Face of Credit Card Features

Anyone in the credit card business will tell you that rewards drive card applications and usage. But as the ability to more finely tune offers and card features grows alongside consumer's knowledge of how to leverage these offers, the market is entering a new phase in portfolio management, where success and profitability is weighed against more than just absolute cardholder numbers.
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