The payments landscape keeps getting more interesting—and more uncertain. The initial release of Apple Pay in October 2014 created both excitement and worry in financial institutions. Was Apple Pay the payment mechanism we had all been waiting for? Would consumers flock to mobile payments, ditching their plastic cards en masse? How would merchants react? Will followers Samsung Pay and Android Pay gain market share?
The answers are: No; no; lukewarm; and likely.
But then that could change next month.
In addition to Apple Pay, other potentially disruptive payments landscape changes have taken place recently. And, like the month of March, some have come in like a lion and gone out like a lamb. The Oct. 1 EMV fraud liability shift for card-present counterfeit fraud losses came and went without a lot of fanfare. Others, such as virtual digital currencies created and held electronically, are attracting continued attention and even gaining momentum.
With all the changes, it’s no wonder that small to midsize financial institutions hesitate to get involved. The larger ones are busy partnering with financial technology firms to launch new payments products. They’ve invested in innovation labs and hired chief payment officers. Should smaller banks follow their lead?
Banking Exchange spoke to bankers from three financial institutions to gain insight into payments strategies at non-mega banks: a $860 million-assets bank in the Midwest, a $1.3 billion-assets bank in central Pennsylvania, and a $26 billion-assets regional in Tennessee.
A key point is that each banker interviewed strongly believes consumer payments play a critical role in his bank’s ability to attract and retain customers.
These bankers are not sitting around waiting for the payments dust to settle. They have taken some proactive steps, are exploring others, and, overall, are closely monitoring industry happenings.
Here are their stories.
Orrstown Bank: Bring on Goliath
Unlike many smaller banks, Orrstown Bank believes it can—and should—compete against banks many times its size in the payments space, says Ben Wallace, executive vice-president of operations and technology at the $1.3 billion-assets bank. “Payments and transactional products, such as debit and credit cards, are critical, both as fee drivers and as part of our strategy to cement relationships with our customers,” says Wallace.
Located in Shippensburg, Pa., less than an hour outside the state capital of Harrisburg, Orrstown Bank has a strong commercial banking legacy, but also tens of thousands of retail consumers “with cards in their hands,” says Wallace. Both Wallace and Chris Thompson, senior vice-president and chief architect, joined Orrstown from JP Morgan Chase, and are on a mission to ensure that the bank’s retail customers are as well served as the customers of their previous employer.
Orrstown Bank prides itself on its customer relationships, so Wallace and Thompson set out to develop and support products that leverage and deepen those relationships. For example, the bank designed loyalty programs centered around their demand deposit accounts, rewarding customers based on criteria like number and balances of additional accounts tied to their checking account.
The bank also is working on account-level aggregation, so that a customer can view balances and transactions on both Orrstown and non-Orrstown accounts.
“The customer can see their transactions, such as payments, across all their accounts,” explains Wallace, “and we see their behavior with non-Orrstown products. Visibility into customers’ payments and transaction behaviors is an opportunity to build on our relationship with the customer by offering additional products and services they may be interested in.”
Thompson explains how visibility works on a practical level. “By looking at the payment stream across all a customer’s products, we can personalize our conversation with the customer, setting us apart from the big banks.”
Orrstown Bank is researching bank-branded mobile wallets, although Wallace says that offering the wallet is still probably premature. So instead, the bank is focusing on building a foundation that will facilitate that offering when the time is right.
“We’re reviewing our account structures, incentive programs, and our data analytics, so we’ll have the infrastructure in place to take advantage of payments innovations, including mobile wallet,” says Wallace.
Another area of focus for Orrstown Bank is credit and debit cards. In addition to an offering provided by Jack Henry, the bank has built its own fraud review engine to perform geo-locate secondary review on card transactions.
“We’re trying to think creatively around fraud platforms,” says Wallace. “How can we get more sophisticated to offer even more solid fraud protection to
For example, Orrstown Bank’s opt-in service informs customers of purchases made via SMS text message and gives them the ability to confirm or decline purchases. Although many large banks offer such alerts, it’s less common at smaller institutions, notes Wallace.
Orrstown Bank also is watching virtual currencies, with Wallace calling the approach “somewhat proactive.” Thompson explains that they have a small segment of customers who use virtual currency for speculative investments, so the bank wants to monitor usage trends in case they need to incorporate virtual currencies into risk models.
“We’ll be one step ahead,” says Thompson.
Lincoln Savings Bank: active waiting
Michael McCrary, Lincoln Savings Bank’s executive vice-president of e-commerce and emerging technology, says that although the payments landscape is still unsettled, it’s time to experiment.
“We are a growing bank with a very important retail presence. We want to provide these customers with the best and most secure technology,” says McCrary. “That means we’ve got to keep abreast of what is going on in payments.”
Not too long ago it would have seemed surprising for a community bank to be so focused on innovative payments. Now, it’s another indication of the change rippling through the industry. While Lincoln Savings is still waiting to launch a mobile wallet, or even to issue EMV-enabled cards (more on why, below), it is actively looking at virtual currencies, all-in-one connected cards, and Apple Pay.
The bank also is currently exploring all-in-one connected cards with Stratos, a financial technology firm in Ann Arbor, Mich. The card, which Stratos says is the industry’s first payment card that consolidates an unlimited number of payments and identification cards into one, is roughly the same size and weight as a standard credit card and has a built-in, non-rechargeable lithium ion battery with a two-year average life span. It allows consumers to carry credit, debit, loyalty, membership, and gift cards on a single card and works using standard magnetic-stripe readers.
McCrary isn’t sure that an all-in-one card would actually disrupt consumer payments or be right for Lincoln Savings Bank, but it’s an interesting concept he’s investigating.
McCrary also has his eye on virtual currencies and talks to firms, such as Coinbase, that buy, sell, and use Bitcoin. But he is wary.
“From a compliance standpoint, Bitcoin is terrifying,” he says. “It was originally designed to be used by people who want to be anonymous.”
However, the technology underlying virtual currencies, called blockchains, is exciting. McCrary predicts that blockchain’s multiple points of replication will facilitate peer-to-peer payments delivery.
Lincoln Savings Bank has not yet launched Apple Pay, although the bank will likely offer it in the near future as a positioning and branding strategy. McCrary expects that the majority of the bank’s customer base will be slow to adopt mobile payments.
“We’re in no rush to offer Apple Pay, but because it is so low cost, we may go through the steps to tokenize our payments cards, with the thought that we can use that tokenization for additional mobile payments offered by Samsung Pay and Android Pay,” when customers are ready, he explains.
McCrary loves the idea of mobile wallets, but predicts that consumers will only find value once the wallets extend beyond payments and converge loyalty programs and membership cards that totally replace physical wallets.
When asked if banks should invest in a bank-branded wallet or one from a provider like Google, McCrary suggests they offer both.
“There is branding value in having our own wallet,” he says. “And we can ensure that our card is top-of-wallet.”
The bank plans to roll out EMV-enabled credit and debit cards, but did not feel the urgency to reissue cards before the Oct. 1 fraud liability shift.
“Everyone started rushing to meet the October deadline, but when we thought about it, we found the deadline wasn’t as scary as it first sounded,” explains McCrary. “We are currently going through the steps to make our cards EMV-ready and will probably start reissuing them this year.”
First Tennessee Bank: a payments foundation
Daniel Dent, senior vice-president, consumer deposit and emerging payments solutions manager for First Tennessee Bank, sees banking as a three-legged stool: deposits, loans, and payments.
“Take away payments and your stool won’t stand,” says Dent.
First Tennessee Bank, with $26 billion in assets, isn’t exactly small, but the bank knows it can’t compete directly with the mega banks in terms of scale in offering payments products. Dent is confident that a group of small, nimble banks—with the right partners—can provide innovative and personalized payments services that bigger competitors cannot.
Dent has his eye on financial technology companies that can offer First Tennessee Bank a path to bank-supported payments products. For example, First Tennessee Bank is the bank of record for Social Money (recently bought by Q2 Holdings, Inc.), a financial services software company that offers apps like SmartyPig, a free online piggy bank for consumers saving for a specific goal.
The bank offers Apple Pay, and even though the consumer adoption has been low across the industry, Dent believes that it’s important for banks to offer new technologies to differentiate themselves in the market. To encourage customer usage of Apple Pay and make sure its card becomes top-of-wallet, First Tennessee Bank has offered cash incentives.
Mobile wallets are another area of interest. But rather than consider offering a bank-branded digital wallet, Dent is more inclined to work within an existing mobile wallet to move First Tennessee Bank’s card to top-of-wallet with loyalty and incentive programs.
“I don’t think that investing in a mobile wallet, as a midsize bank, is the best use of resources right now, since consumers are still figuring out what wallet they will use,” he says.
First Tennessee Bank has not yet invested in or devoted resources to virtual currencies, but that is an area it’s watching, particularly as it pertains to domestic and international regulations.
The regional offers several card products that the bank uses to deepen customer relationships. The Fast Funds Card is a reloadable, prepaid card marketed as a financial teaching tool to parents of teenagers. The card is not connected to a checking account, and is accepted anywhere Visa debit is accepted.
It’s “a great way to teach teenagers about budgeting,” says Dent. “It also allows parents to monitor spending activity.”
The cards have been so popular with some customers, he says, that teenagers continue to use the cards into adulthood.
Several years ago, the bank started offering affinity debit cards logoed with University of Tennessee mascot Smokey, University of Memphis’ Tom the Tiger, and the Memphis Grizzlies’ basketball team. Spurred by their success, First Tennessee Bank expanded its line to include premium debit cards. For $8, customers can select from a variety of designs associated with sports, hobbies, the military, and even their favorite Tennessee city.
In 2016, the bank will roll out debit cards associated with a to-be-named nonprofit. The bank will donate any fees charged directly to the nonprofit.
“These cards are a way for customers to show what they are passionate about,” says Dent. “Not only do we expect that this new card will attract customers, but it’s a positive way for us to increase charitable contributions in our community.”
“Be on the field”
These bankers are optimistic about the role of payments in their institutions. And they aren’t discouraged by a constantly changing payments landscape or the deep technology budgets of their much larger competitors.
“If small and midsize banks say they can’t play in consumer payments, I would ask them why they would want to give up the leverage payments gives them to grow deposits or their lending portfolio,” says Wallace of Orrstown Bank. “We view payments as an important part of the banking ecosystem. Payments, deposits, and lending complement each other, if you are smart about it.”
Dent agrees: “Payments is very important to how we do business, especially with fewer customers coming into our branches. We need to have different channels for customers to access their money and make payments, both as a differentiator and a way to deliver a great customer experience.”
Adds Dent: “You may not have to rush out and offer innovative payments right now, but you absolutely need to be looking at these technologies. You need to be on the field.”
McCrary doesn’t know if any of the payments technologies that Lincoln Savings Bank is looking at and experimenting with will have legs with consumers. But he’s not taking any chances. He offers this advice to other bankers:
“It’s not too early in payments to get involved. Just educate yourself, and be ready to jump when the time is right.”
The article originally appeared in in the February-March 2016 Banking Exchange magazine. Read the article in magazine format.