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Why Banks Will Win the Payments War

Those of us in the financial services industry are inundated with news of emerging services from upstart payments competitors: mobile wallets, bill payment and peer-to-peer payment solutions, micro-lending and personal finance tools. The general consensus is that banks are laggards held back by legacy thinking and heavy fixed costs for compliance and branches. They are constantly admonished to catch up with these new competitors or face disruption and disintermediation.

It's true that banks often move slower than startups, both in innovating and in deploying alternative solutions. But are banks really at risk of losing dominance in the payments space? The answer is a resounding no, based on several built-in advantages.

The compliance burden acts as a large and growing barrier to entry for non-traditional competitors. No one gets a seat at the table unless they can get past the regulators. Just ask Square, which coughed up $507,000 a year ago to pay a fine levied by the Florida Office of Financial Regulation for operating without a license.

Marc Andreseen and other Silicon Valley venture capitalists have been musing publicly recently about "getting around" stodgy banks and speeding innovation by building a pure software bank. However, it is faster and cheaper for startups to partner with institutions, as Dwolla has with Veridian Credit Union, or to just buy one, as Independence Bancshares chief Gordon Baird did for his payment services platform.

Moreover, branches give banks a major advantage for enrolling customers in new payment products and supporting them. We are still in the first inning of mobile banking and emerging payments. Count on these solutions to get very sophisticated over time, with banks offering the equivalent of Apple's Genius Bar to make sure customers are getting full value from these services. Barclays has already deployed 7,000 branch employees in the United Kingdom as "digital eagles" to help customers learn to use online and mobile banking tools. Here in the U.S., UMB offers a similar service.

Banks can generate both goodwill and revenue by using branches to help customers solve problems and learn to use new features.

Emerging payment players' biggest challenge is acquiring and nurturing active customers. Banks have no such challenge. They already have access to a large user base familiar and comfortable with their brand. This also gives banks cost advantages and pricing flexibility, since new service offerings are incremental.

Consider high-profile debit card provider Moven. Despite an interesting feature set and business model, their active user base only grew from 5,000 in March 2013 to 10,000 today.

They will need to spend millions just to acquire enough customers to break even. Some argue that Apple and Amazon, with 800 million and 250 million user accounts respectively, are positioned to impact payments. This may be true, but each of those accounts is tied a credit card issued by a financial institution. This gives banks a broader view of customers' buying and banking activity, up- and cross-sell opportunities, a stronger hand in loyalty programming, and ultimately greater relationship control.

Banks have a similar advantage when it comes to acquiring customers through merchants. Banks with merchant businesses have ready-made channels for promoting and on-boarding current and new consumers with any new payment offering. For example, later this year, Wells Fargo will roll out beacon technology services to merchants. While the move is intended as a promotional tool for its merchant customers, Wells could potentially work with businesses to cross-promote the bank's products and services, including alternative payments.

Banks are also better positioned to form consortia and industry groups to set standards and implement common infrastructure, as they have done for decades. Whether it is ACH, Check 21, or other initiatives, what seems glacial in speed is more often a methodical movement toward interoperability. For example, the ClearXchange person-to-person network, with Bank of America, Capital One, Chase, and Wells Fargo as member banks, is now available to more than half of all mobile banking customers in the United States. While it is still too early to assess its long-term potential, ClearXchange is an example of how banks can quickly gain critical mass to bring solutions to the mass market.

But these built-in industry advantages do not translate into individual banks' success in emerging payments. Institutions should press their advantage by acquiring outside innovation in the payments space.

The most expensive and complex approach to acquiring additional innovation is direct investment in startups. For example, Citigroup operates a dedicated venture group and has invested alongside Andreessen's firm, Andreessen Horowitz, several times. Citi also operates a venture capital accelerator in Israel. BBVA and Fifth Third also operate formal venture arms. Venture investing can deliver big returns, but it is an expensive way to stay atop innovation.

Another approach now common in the startup world is the acqui-hire, that is, acquiring a company as much for its talent as its product. This was likely the reasoning behind BBVA's recent purchase of online bank Simple and Chase's purchase of Groupon-clone Bloomspot in December 2012. Banks acquiring startup solutions are in a position to drive product development more quickly and in-line with their strategy.

A more straightforward approach is to hire talent away from other innovators. Capital One recently poached Dan Makoski from Google's Advanced Technology and Projects team, while Chase has acquired talent from the likes of Yahoo, Google, and even Huffington Post. This is an approach that even smaller institutions can take to stay ahead in payments, ecommerce, and other areas of innovation.

While the industry's inborn advantages all but guarantee banks will win the payments war, individual institutions will need to win their own battles. Acquiring innovative companies and employees from the outside can help any bank stake out a competitive advantage that protects the business and contributes to long-term growth.

Glen Fossella is a technology industry executive with a background in payments and branch automation.


(6) Comments



Comments (6)

What you will see adopted by Apple, since Amazon revealed they will be doing standard credit card payment processing like Square, is real-time, fully digital check payments via the patent held by MyECheck ( This alternative payment method is already cover by The Check Clearing for the 21st Century Act and the Federal Reserve is in talks to amend Regulation CC to more accurately include check images that have never been scanned.

This alternative to the ACH framework will expedite transactions and improve safety for all parties. MyECheck's technology links to any bank account, clears checks instantly, has no interchange fees, and utilizes QR codes and biometric authentication for authorization.

Apple will most likely adopt this payment method to stand out from competitors, innovate, and hold to their continued apprehension of NFC technology. This theory is strengthened as one reviews the information released on Apple's upcoming payments app: Pass.

Merchants will adopt this payment method as it will be a significant savings compared to credit card processing, require no special hardware, and improve cash flow.

Don't bet on the banks yet, disruptive yet compliant technology is on its way.
Posted by Jbudy | Thursday, August 14 2014 at 12:28AM ET
Interesting points. But one thing is for sure - the online start-ups are definitely pushing banks to re-look at their businesses in new ways.

You may find my article on this subject interesting too....
Posted by avinash.swamy | Thursday, July 31 2014 at 10:18AM ET
Gents, thanks for comments. RE Bitcoin, it clearly functions well as a repository and payment network, and potentially threatens existing payment networks and players (including banks). But as a currency, it is subject to regulation and we don't know how that will play out, plus it is still volatile and poses some long-term unknowns---just my opinion.

RE: MCX, this is certainly a bigger risk to banks (and the card networks) than small startups. Key ingredients for any ubiquitous network include infrastructure, interoperability, and scale; MCX has that. Now the consortium has to get it working :)
Posted by Glen Fossella | Wednesday, July 30 2014 at 2:27PM ET
I appreciate the points stated in the article. I would also be interested how the MCX initiative would fit into this context of discussion. Thx, BeRiFfm
Posted by BeRiFfm | Wednesday, July 30 2014 at 5:35AM ET
The author completely ignores digital currencies like Bitcoin. Why not discuss the explosive growth of companies accepting Bitcoin payments, and the fact that there IS NO company to acquire to gain control of Bitcoin.

Bitcoin empowers everyone that uses it to make their own transactions without paying a bank. Bitcoin allows cryptographic audits that don't require trust of an auditor. And Block Chain technologies will extend to proof of existence, and proof of process to allow cryptographic proof of business practices,not just accounting.

This is not something that will go away. Claims that banks can win this game is like the predictions that newspapers and fax machines could never be replaced by the Internet.

Frankly they have, and cable and even phone service is next. Banks may be completely restructured to the new cryptographic reality even sooner.
Posted by PaulSnow | Wednesday, July 30 2014 at 12:31AM ET
Yes, government regulations will protect us (banks) just the same ironclad way that they are protecting taxi companies from Uber...

This said, I think the author's suggestion to partner with startups is good advice.

And by the way, the big man's name is spelled "Andreessen", not "Andreseen".
Posted by Simon Jaud | Tuesday, July 29 2014 at 4:21PM ET
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