Each year, Cornerstone Advisors puts out a report called, "What's Going on in Banking," and in 2022, it predicted "The end of the Paycheck Protection Program (PPP), non-transitory inflation talent attraction and retention challenges, excess liquidity, and increasing regulatory burdens all add up to create significant challenges for the industry in 2022."
But according to the report's author, if you thought last year was a bumpy ride, you'd better buckle up for 2023.
"While we weren't at the height of optimism in 2022, I think we're going to see a lot of pessimism in 2023," said Ron Shevlin, Chief Research Officer, Cornerstone Advisors. "You have inflation, the economy, interest rates, and more, and I don't think the industry is going to be anticipating a banner year, especially from payments perspective."
And reasons for this pessimistic perception abound. Possible regulatory shifts may have reverberating impacts on revenues. Ongoing competition from Big Tech and FinTech may further eat away at payments potential. The wider availability of instant payments with FedNowSM may increase customer expectations and demand. And the list of the ways in which FI-centric payments are being threatened continues to climb.
"I think there's going to be a doubling down on payments strategies, because of regulatory impact, and the downturn in the economy means reduced lending and puts more pressure on the payments side of the house," Shevlin summed up.
Take the CFPB's recent acts as very public evidence. As those rulemaking endeavors move forward, they have the potential of greatly impacting FI business models, and reshaping lines of revenue.
"If you see a decline in overdraft fees, where are you going to make it up? In 2023, it won't be in more lending, so the burden will fall on payments," Shevlin remarked.
And payments do offer opportunity. For example, Shevlin points out the potential in capitalizing on the symbiotic connection that exists between credit products and payments. But in order to do that, FIs will need to consider their offerings, and possibly even their structures, in a different light.
"When you look at overdraft not as a deposit product but as a payment being made, you can see it's a payment transaction that triggers a liquidity issue. The response is a credit opportunity, but because of organizational structure, you have credit on one side, and deposits and payments on the other. You have to transcend those silos and determine where the credit opportunities are in payments and where the payment opportunities are in credits," Shevlin advised.
But Shevlin is also the first to point out that if your customers and members don't find what they need from you, they will find it elsewhere. For example, consider the rise in buy now, pay later (BNPL) products over the past couple of years, which specifically address liquidity issues with an alternative credit concept.
"Millennials have anywhere from 30 to 40 payment-related relationships, so having the checking account relationship is hardly a guarantee, and it doesn't even begin to scratch the surface of payment behaviors," he surmised. "The question is, what are you going to do about it? You can't build everything."
He points to FinTech partnerships as a solution, but only if your institution is staffed to manage them. Shevlin sees these relationships as a big, but necessary, investment for FIs, and recommends ramping up staff in technology areas to manage new partnerships and product development.
"The takeaway is it's not buy versus build anymore; it's buy and build and partner. The old 'I-just-need-one-new-product-home-run' mentality is not going to get FIs anywhere; it's got to be a lot of different things with smaller volume and higher margin. And we need more people with payment expertise in the space for FIs to capitalize on that," Shevlin advised.
While 2023 will bring with it a tumultuous payments landscape, the good news is that FIs have weathered the storm before, and by monitoring and proactively responding to the trends that are shaping the industry, they can come out ahead.
AUTHOR: Joe Casali, AAP, NCP
Executive Vice President
As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.