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Payments future has hurdles and benefits

Real-time payment tops the list, but future demands careful and complex decision making

Like any long-haul race, the payments game has to be run with some sense of strategy. Some leading players discuss the challenges in setting one. Like any long-haul race, the payments game has to be run with some sense of strategy. Some leading players discuss the challenges in setting one.

As banks increasingly redefine themselves as payments platform managers, they will have to deal with a formidable mix of changes in customer expectations, new competitors, and accelerating developments in technologies.

The list of mandates includes adjusting to real- or near-real-time payments; realigning strategic plans; focusing on client customization; and dealing with regulatory and legal liabilities.

“All of this combines to form a transformational stew,” said Claude Hanley, Jr., partner, Capital Performance Group. He served as moderator for a panel titled “Payments Strategy: The Road Ahead,” during the recent American Bankers Association Payments Forum in Washington, D.C.

Opportunity deepens and widens for banks

“Ten years ago a lot of banks wouldn’t think they were payments companies,” said Jennifer Lucas, senior vice-president, Enterprise Digital/Payments Strategy, at SunTrust, and a participant on the panel.

“But when you start looking at how you make your money and the daily engagements your clients have with you, how much they interact with you, whether they are checking their balance on a digital property, or swiping a debit card, or writing a check, they’re relying on you from an engagement perspective. You can look at those transactions as value added,” Lucas added.

She said that banks “have millions of opportunities to delight our customers or disappoint our customers on a daily basis. If you look at it holistically, it really changes the conversation and how you make decisions.”

Real-time payments challenge dominates scene

Top of the list as banks start to strategize how they keep up with payments developments is the ongoing effort to design and implement real-time payments.

Dominic Venturo, executive vice-president and chief innovation officer at U.S. Bank, and another panel participant, made the point that adopting faster payments involves not just adjusting the payments system, but virtually every system in the bank.

“You’re actually re-architecting everything you do, from account opening, to risk management, to settlement, to clearing, to funds, to asset and liability management, to liquidity management,” said Venturo.

He added: “Are we ready? You tell me.”

SunTrust’s Lucas commented that the industry is addressing all this, but by necessity progress has to be slow.

“There’s not a lot of tolerance for it not working, whether it’s the client or our regulators or our reputation,” she explained. “It’s got to work, so there’s a lot of complexity that’s got to change.”

On a more philosophical plane, Lucas emphasized the need for a “deliberate and intentional” approach to evaluating and pursuing payments-related technologies—including real-time payments.

“You really need to think about where you want to place your bets, to place them in a few places and not spread yourself too far,” she said. “You need to place them with your corporate strategy, not your payments strategy. Payments strategy is just [meant] to deliver on your corporate strategy.”

Along this theme Venturo commented: “Strategic alignment is one of the things that gets underestimated in terms of whatever that next new thing is. It’s one thing to make a decision to do something. But if you make a decision to do something that is not in alignment with the strategy of the company, it ultimately won’t matter because you’ll lose organizational support.”

How do you line up your people?

Understanding this, and making it happen, are two different things.

At U.S. Bank, Venturo said, management has formed several “executive steering councils” composed of leaders across lines of business, as a form of feedback mechanism. In this way, he said, those in the bank can “make sure that not only are we aligned but that we have organizational support from the top of the house, so that when we go to execute, there is no ambiguity over what we are going to do. You can all organize around that and be largely more effective.”

Similarly, Lucas said SunTrust has formed a “digital payments council” composed of executives from different silos that discuss payments implications across the enterprise, and how to coordinate investment efforts.

“It’s the first time that wholesale and retail [departments] will look at how those businesses perform,” she said. “We talk about processing relationships. We talk about network relationships. It’s an opportunity to leverage our enterprises with our strategy.”

How CFPB looks at payments progress

While such discussions go on behind the scenes, front and center stands the need to engage with and satisfy customers, and consumers in general. To that end, Gary Stein, deputy assistant director, Office of Card, Payments, and Deposits Markets at the Consumer Financial Protection Bureau, and a panel member, weighed in on the development of faster payments.

“We’ve latched onto the concept of fast payments,” he said. “The concept of letting a consumer have real-time or near-real-time access to funds, and being able to pay someone in near-real-time, is huge.”

At the same time, he said, CFPB hopes to help in the development of a faster payments system. Interestingly, CFPB appears to be interested in getting this fast, rather than perfect.

“Rather than waiting until it’s built and then maybe saying,

‘Here is what we might lament about it’,” said Stein, “there’s an opportunity to influence the plumbing design and the concept that goes into it, to ensure there’s a consumer-centric viewpoint. I think that’s been highly embraced [by the industry].”

Meanwhile, while the safety and security of consumer data has to be protected, such protections should not be so onerous as to discourage the faster payments environment, he said.

On the one hand, Stein explained, consumers shouldn’t have “to choose between two suboptimal worlds.” That is, he elaborated, either not having easy access and control of data, or bearing too many risks or costs. On the other hand, he said, “The last thing I want to do is see banks dis-incentivized from helping consumers.”

Hanley, the panel’s moderator, asked the bankers on the panel how they would balance the need to protect consumer data and the liability their banks would bear when evaluating fintech partners.

Venturo pointed out that so far there are no universal standards or agreements in place, and that they are needed before any massive faster-payments security breaches occur.

“The role of the industry is to say, look, [we need] a workable data transport standard and a set of best practices or a model set of legal agreements and a framework that says here is who is on the hook for what when something goes bad,” he said. “There’s a lot of work to be done at the industry level.”

Lucas agreed.

“It takes 18 months to hammer out [a tech-related] agreement because of those issues, just to have a 12-month agreement,” she said. “That’s ridiculous. The technology is the easy part. It’s the liability and the legal ramifications for that security issue that are really the thorny parts.”

What’s coming?

Looking ahead, the bankers on the panel were asked what the payments environment will look like in five years.

“For consumers it’s going to be, ‘Don’t make me think about it; make it really easy’,” said Venturo. “On the business side there’s going to be real efficiency opportunities that will help propel things forward.” He suggested that these latter opportunities could include improving reconciliation and accounting interfaces, and optimal payment routing.

Lucas pointed to the ongoing trend of customization.

“Technology can make it more personal,” she said. “It’s not a one-size-fits-all marketplace any more. You can personalize your clients’ preferences and experiences.”

Venturo summarized the discussion this way: “Banking has largely become a mostly IT capital investment-intensive industry. A lot is happening as bankers become IT platform managers.”

John Ginovsky

John Ginovsky is a contributing editor of Banking Exchange and editor of the publication’s Tech Exchange e-newsletter. For more than two decades he’s written about the commercial banking industry, specializing in its technological side and how it relates to the actual business of banking. In addition to his weekly blogs—"Making Sense of It All"—he contributes fresh, original stories to each Tech Exchange issue based on personal interviews or exclusive contributed pieces. He previously was senior editor for Community Banker magazine (which merged into ABA Banking Journal) and for ABA Banking Journal and was managing editor and staff reporter for ABA’s Bankers News. Email him at [email protected]

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The U.S. has come a long way in its journey to real-time payments, with TCH and Zelle in market and FedNow just around the corner. COVID-19 has accelerated that demand to move to real-time. Yet many financial institutions remain unconvinced of the need to move, with less than 3% of financial institutions signed up today.

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