If you feel as if the payments industry seems like it’s in a blender, you’re not alone, said Peter Tapling, Managing Director of PTap Advisory at NEACH’s Future of Payments Symposium II in December of 2022. During Tapling’s presentation, he raised issues financial institutions (FIs) need to consider when developing a payments strategy, given the blistering pace of change in payments.
The history of payments: slow—then speedy
For a very long time, there was very little payments innovation, said Tapling. It started with shells, transitioned to precious metals, which held firm for 5,000 years, then turned into coins about 2,600 years ago, then evolved into paper money and checks. Cards came about only 70 years ago, and the ACH Network’s only about 50 years old. PayPal launched more than 20 years ago. However, a variety of instant and FinTech-generated options have emerged just in the last dozen years.
“Payments today is all about technology,” Tapling said. “But technology is moving at such a rapid pace.”
He explained FIs can run into difficulty when they opt for a new technology: Because it takes time to design, plan, implement, and bring a product to market, by the time it launches, the technology may have already evolved. So FIs will often opt for some combination of:
- “Winging it” without a clear plan in place—which is ripe with challenge
- Thinking two-to-three years ahead, but no more, because anything more is risky
- Creating a five-year plan, with details mapped for the next three years and the understanding that the organization will need to act nimbly
Forces of change
Tapling explained FIs must address multiple forces competing for attention:
- Regulation: There has been more regulatory change since 2008 than in the 35 years before it, Tapling said. And many regulations were written well before today’s technology—cryptocurrency, FinTechs, etc.— existed. “Back when Regulation E was drafted, they were addressing telephone orders using ACH,” commented Tapling.
- The economy: Economic changes affect how to innovate, Tapling said. For example, interest rates climbing and inflation over the past several months has shifted FIs’ thinking. Will FIs have money to spend on things that are not instantly revenue-generating? And can they help their customers address inflationary challenges with any new products they’re bringing to market?
- Security and fraud: “All of this technology that has made it easy for consumers has made it easy for bad guys to move money,” Tapling explained. As organizations build new technologies, nothing is going to operate 100% perfectly, especially when it’s brand new: This newness creates a window of opportunity for fraudsters. On the flip side, he explained, tools that are more secure usually go along with a more challenging customer experience. FIs will need to balance security and convenience as they evaluate new tools.
- Competition: FIs used to think of their competition as the bank down the street, Tapling said, but today consumers have many ways to move money and new opportunities continue to emerge. The same holds true for the B2B audience: Although an FI might have a portal for enterprise customers, there are many FinTechs servicing other business needs where an FI could potentially step in, such as payroll. “FinTechs are providing the innovation—more so than banks,” Tapling added.
- Demographic changes: People treat their money very differently depending on their age. For example, younger customers may have a bank account to service direct deposit needs, but they run their financial lives through a variety of apps. “What can FIs offer that can suit all demographics?” Tapling asked.
- Technological forces: Today’s customers enjoy a wealth of payment options to choose from—though they can be fickle. Expectations are high for continued development and the next new thing. This is an area where a small organization can make a huge difference, providing they have the right idea.
- Unanticipated externalities: Businesses are also going to face “Black Swan” types of events, such as 9/11, natural disasters, or COVID. However, the silver lining in events such as these is the ability to change how we think about the survival of our businesses: For example, the pandemic accelerated things like QR codes or tap to pay when customers didn’t want to touch cash. “Now QR codes are used for payments, not just menus,” Tapling commented.
The first option—working together
So how can the FI be the first place people think of when it comes to moving money? Part of it must involve a collaborative approach.
“Much of payments grew up in silos—ACH, wire, etc. Customers don’t think of those things as being separate; they think it should all interoperate,” Tapling said. FIs can think about payments holistically, as a service layer to all the products they offer. And innovation comes from many sources; it’s why banks can and should work together with FinTechs to foster positive change and innovation.
Plan for failure
Addressing these factors all comes back to having a plan, and the right one for your institution. But you also should realize that no matter what you plot out, something’s likely to go wrong. That’s why FIs need to have a robust plan in place that can be nimble and incorporates what to do when things go awry. It’s a four-part strategy, Tapling explained:
- Examine: Once you have a strategy, identify what could go wrong
- Implement: Institute a scenario planning exercise with your leadership team that will determine the most likely disruptions
- Determine: Decide what you will do if these disruptions occur
- Document: Keep a record of these exercises and review results regularly and rethink your plan if need be
What if things change?
But what if a product an FI builds and launches turns out not to be the right product? It’s a valid concern, especially given lengthy lead times to market. Or if you plan as much as you can, and things still go off-course? Think of it like sailing, Taping said.
“Sometimes you can’t sail directly into the wind,” he explained. “Business needs to do that, too. You might change destinations or tactics, but you’ll still get there.”
While you can’t plan for everything, you can create a framework to evaluate next steps, and your strategic plan will help you in making decisions to pull a product and/or get things back on track. Having a payments plan in place will serve as your due north for continued innovation in today’s landscape.
For more information on the developments that may impact your payments plans this year, join us for the 2023 Industry Update webinar.
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.