New research is revealing how the relationship between financial institutions (FIs) and their issuer processors is undergoing a fundamental shift. Issuer processors have emerged as strategic partners, directly influencing FIs ability to innovate and compete.
In this American Banker Leaders Partner Insights episode, Michael Moeser, Senior Content Strategist at American Banker, sits down with Dean Scharmen, Chief Growth Officer at i2c, to explore proprietary research on how the issuer processor/FI relationship is evolving — and what this means in practical terms for both types of organizations.
Banking leaders who attend will learn:
- Why processors are becoming strategic modernization partners
- How fintech competition is reshaping payments priorities
- What's driving the shift to multi-processor strategies
- How FIs can balance speed, cost and control
- Key steps to modernize legacy payments infrastructure
Transcription:
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record.
Michael Moeser (01:18):
Greetings, everyone. My name is Michael Moser. I'm a senior content strategist at American Banker. I'll be your host for today's Leaders Partner Insights episode. Today we're going to be talking about the role of the issuer processor and how that's changing and why that shift is impacting how banks and credit unions modernize their payments infrastructure and compete in today's more complex real-time environment. Joining me today is Dean Scharmen. Dean is chief growth officer at i2c. He's a recent addition to the executive suite and his role is to drive significant incremental growth at i2c. Welcome, Dean.
Dean Scharmen Jr (01:54):
Appreciate it, Michael.
Michael Moeser (01:56):
Well, so let's start off with the big picture. Today we're in a multi-rail real-time embedded finance environment and really would love to understand why is today so significant in the moment for banks?
Dean Scharmen Jr (02:12):
Obviously we see payments moving at the speed of life. Today, institutions are having more and more consumer expectations from their card owner base, their customers, their membership. And we're seeing technology try to catch up to that expectation that the market and everyone is seeing. I mean, we're seeing huge populations and shifts in where can I bank better? Where can I have a better financial journey? And organizations are looking for partners in how they can define their next destiny and their next brand, if you will. Got
Michael Moeser (02:48):
It. Got it. Now, as part of our conversation today, we're going to be talking about some research American Banker recently conducted, sponsored by i2c. We went out and we spoke with 168 business leaders at banks and credit unions and really was to understand how the role of the issuer processor has changed. And newsflash, a much more strategic role as opposed to a technical vendor. Now, why did i2c decide to sponsor the research? What were you hoping to get out of it? And anything that surprised you?
Dean Scharmen Jr (03:19):
Yeah. i2c has been in the industry for 25 years now. So for the last 25 years, two and a half decades, we've been building alongside our partners and listening to them intimately about the problem statements that they've had and where we can match our technology stack to their organization. But at the same time, we are one of many in the industry. We wanted to take what are common anecdotes and actually back it up with actual independent data to create evidence of what are the organizations of this market really needing and evaluating partners like ourselves or just any of their infrastructure today to have a wider lens into today's market.
Michael Moeser (04:00):
Makes sense. Well, one of the most important, I guess, right off the bat, one of the things that we found out was that 76% of those surveys said they view their issuer processor as a strategic partner, not a, say, technical vendor that's on a list of many. And we also asked the question, how has that role changed over the last three years? 73% said it's become much more strategic. And so I guess as I think about this, can you sort of tell us what's fundamentally changed in the role of the issuer processor and why have they become that much more strategic?
Dean Scharmen Jr (04:38):
Yeah. I think it's the evolution of, again, technology has moved from just common rails, what's expected for it, keeping the lights on, if you will, to meet what are the common expectations of the true market that they're serving. Where can we have interconnected experiences when that's not just a single touchpoint on a single platform, but where can it be uplifted into looking at a modernization journey of I may have a legacy tech stack that touches my digital environment, my online ecosystem, my Apple wallet, if you will. How can I have a partner that not only makes sure that my organization is running, is secure, is compliant, but also matching the expectations of the market that we're looking to serve across all of those various ecosystems of technology. So you can't have a successful organization or partnership unless that's an elevated strategic partnership. So I think that's where the market's starting to look at. We can't do it alone. Just like our organization looks to our partnerships, our clients to say, where should we create together?
Michael Moeser (05:47):
It's interesting you mentioned the Apple Wallet, Apple Watch is another example. I think just even a few years ago, you'd take out the Apple, your phone, you use your Apple Wallet at a merchant and they'd be like, "Wow, this is great." Now it's like, "Hey, why isn't this working?" So it's very interesting you mentioned how that evolved, but now in the survey we saw that there was a quarter that said they view their issuer processor as a vendor and not a strategic partner. What are those banks and credit unions underestimating about the role an issuer processor can play in their modernization strategy?
Dean Scharmen Jr (06:21):
Sure. I think the evolution of the expectations that the modern market is looking. So how institutions need to evolve with a multi-generational marketplace. Payments are moving faster than ever. And for those organizations that may not look at a processor as a strategic partner, but rather a vendor, it probably equates more to the value that they're seeing out of their existing partnership. It's one that is the vendor meeting them at their doorstep to say, look, what is important to your organization? Where would you like to go and where can we align to co-ideate together? It's one of those that if those organizations are probably in a state that if the vendor isn't there, they're not going to look at it as an important or strategic partnership. Or even if it's the organization isn't enabling them or giving them choices to where it's not a negative that those organizations don't see it as a strategic partnership, but it's an opportunity for the organization to look around and see what am I preferring? Do I want a partnership of this? Where can I potentially evaluate other options in the marketplace as well?
Michael Moeser (07:39):
Now speaking of options, one of the findings from the survey research is that we saw that 65% of those surveyed say they use more than one issuer processor. And we had another five or 10% that said they were actually onboarding an additional processor. And there were a number of reasons behind that. Access to innovation was an example. I think using one processor for a credit card versus another for a debit card, et cetera. Has the multi-processor approach become sort of a defacto model?
Dean Scharmen Jr (08:14):
It definitely exists. Again, for a lot of the reasons you just mentioned some organizations have gone through mergers and acquisitions. I inherited the tech stack that the organization that I aligned with and I'm growing my strategy with currently has. And again, not to do such a rip and replace, but to merge those technologies together takes time. It's also an opportunity to see what type of partnership do any of those organizations have. Or it could be the capabilities that those partners are enabling those institutions or Issuers with. We are lucky enough that our global infrastructure is built upon a single unified platform, one that doesn't have to allow for an organization to pick and choose. But at the same time, it does exist in the marketplace that institutions have not to say been forced, but have been forced to choose. If I need to enable myself, what options exist? And I2C hasn't been around forever. So it's one that the modernization is also an evolution. Some organizations are slowly migrating those tech stacks to a consolidated model.
Michael Moeser (09:31):
Now what operational complexities I guess are organizations sort of experiencing? And maybe it might be in the case as you mentioned, you acquire another organization, you merge the two, you end up with two or three processors, but what complexities come out of that?
Dean Scharmen Jr (09:50):
There's a bunch. You can almost list it out as the taxes of having to play in that arena. Access to your data, speed, enablement layers. How can you ensure that as you're deploying any of your roadmaps, does it align across any of those multiple environments? So to add to that, it looks into the efficiency of your deployment. You also don't want to segregate your client base of, is it going to limit the potential of what you're offering one half of your population versus the other based upon things like card type? I mean, we're people. We're not a debit card holder versus a credit card holder. You want to have the opportunity to talk to Michael. And that's a significant area in which we look at the marketplace. So it's one that those institutions in a multi-processor approach need to look at again, how am I going to enable?
Michael Moeser (10:48):
How am I going to get access to the data that then supports my person at the end of the line? Right. Makes sense. Now let's talk about modernization pressure. We talked about the Apple Watch earlier and how things have evolved. And when we went out and we surveyed the banking leaders and the credit union leaders, we found that 74% say that due to FinTechs and digital first competitors, that they've had to change their modernization roadmap. 88% said it's been accelerated because of that competitive pressure. Now, when I think about modernization in payments, are banks and credit unions reacting to what's going on in the environment or is this more strategy setting the tone?
Dean Scharmen Jr (11:31):
I think a lot of it can always be correlated to pressure from external forces. Competition's greater today than it ever has been. And so is that coupled to the expectations of the marketplace? However, it's not a wrong answer to also take your time as an organization and feel things out. So it's not to say that it's a blinding silver bullet that organizations are defining their strategy on what others are doing. There is realistic pressure on those that seek to enter new territories that will start to take away from their population or their defined ideal client profile, if you will, will start to take away from that customer base or membership. So how can we be proactive and ensure that we are meeting those needs? So fintechs are definitely rising expectations to set some of that expectation. But I think banks, credit unions, the financial institutions of today are still setting the pace. So looking at from a technology perspective, I think the key focus is ensuring that an institution, if they are having their strategy, it's also aligning strategy to timeline. Where can they actually execute? So those outside pressures are real, but it's also the leaders that we see are not those that just be reactive just to combat the external forces or those that look just to outspend or to potentially outpace. It's those that out execute, right? Plan it, have a defined vision.
Michael Moeser (13:15):
Now as banks and credit unions deal with the competitive pressure, does this push the issuer processor toward a more strategic role in the modernization efforts of banks and credit unions?
Dean Scharmen Jr (13:29):
I think it definitely does because I'm a big proponent, even just from my personal chair of partnership. It's the greater good of all. Institutions, again, are owning their client engagements. It's their brands on the line. It's their reputations. But where we see the most success is joint collaboration and allowing our technology might to meet the needs and the flexibility of those technology levers to empower our partners. So that's where I do see the elevation of issuer processors, especially those that allow for those choice and that flexibility to have a greater seat at the table for a strategic partnership.
Michael Moeser (14:12):
In terms of the research, what we found is that the capabilities of the issuer processor have a direct correlation on the ability for a bank to modernize its payments infrastructure. And looking at a few items, platform flexibility, API availability, speed to market are all influenced by the issuer processor platform. And so a question is how important are things like API flexibility and real-time configurability to a bank or credit union today compared to just a few years ago?
Dean Scharmen Jr (14:44):
I Think it's the common norm now. If you're not allowing for a composable structure to allow an institution regardless of the markets that they're serving to take the pieces of the technology and use them as you will, I think That's more crucial than ever. It's debilitating for any organization that if the technology isn't flexible to allow you to serve your market base, because again, every institution has their defined niche. Again, there's a general population of where we can sway some of the market of defined behavior of credit activity, debit activity and the like. Consumers can have those macro trends, but at the same time, how can you allow for that customization, that personal fee of the organizations that you're partnering with? You got to give them that flexibility. And that's where again, a true partner should allow for that from a technology enablement perspective.
Michael Moeser (15:45):
Let's talk about the partnership. Sure. What role does the transparency that an issuer processor shares with their roadmap, shares of their roadmap with a bank in terms of building that relationship?
Dean Scharmen Jr (15:57):
Oh, it's all built on trust. And you have to be tragically transparent. And I say that in the most positive way possible. If we're not held accountable to what we are looking to invest in and where we're going to deploy things from a timeline perspective, that's where again, strategy can fail. These institutions that we're partnering with are depending on us as processors to meet with them and to deliver where we're promising because they're making the same promises to the expectations they're being upheld to the street. At the same time, it's also the capability of not being just the smartest folks in the room. How can we have the collective to take any of our prospects or client's information, even the industry events that we all attend and even something like this that can provoke where is the industry headed or the independent data that we saw that American Banker put together with polling the institutions that can help drive the future of any roadmap. So to have transparency is again, crucial to have any sort of trust in the market.
Michael Moeser (17:10):
Now, one interesting thing we asked the audience of those we surveyed we asked what's more important? Speed to market or cost efficiency? And if you get one direction, it's very easy to move the ship toward that direction. Exactly. But the challenge is that we had one third say speed to market was the most important priority. One third said cost efficiency was the most important priority. And then one third said they were both equally important. And so it's a challenge. And so I guess does speed to market outweigh cost efficiency?
Dean Scharmen Jr (17:46):
I think even the data as you mentioned with the three tranches of the market all having their favorite profile, there's not a right answer in which. You have to be aware though of the opportunity cost for each choice. Going fast, but being sloppy, going slow and it being costly. What again is the choice that an organization needs to both meet their market, but the longevity of what is the strategy of the organization vision? It's crucial to have that understanding and what is going to be the result.
Michael Moeser (18:19):
What is the impact then as an organization evaluates its modernization ROI? You're fast but sloppy or slow and methodical. So how should they evaluate that modernization ROI?
Dean Scharmen Jr (18:31):
Yeah. They have to, again, look at what resources both A, do I have internally? What am I leveraging partnerships for? Because just because you're fast doesn't mean that it has to be sloppy. But again, if you're not having either a robust tech stack that can allow for that speed to marketplace, you're going to run into some bumps. And we all learn from our mistakes, but again, those can be costly. So it has to be both operationally viewed internally to their organization. Is it supported throughout the vision of the entire organization versus a siloed view of is it important financially, efficiently? Is it an experiential play for the organization? And then again, how are they aligning those needs and expectations to their partnerships? And so that way it can really deliver what they're needing.
Michael Moeser (19:24):
Now let's talk about alignment and partnership. One of the questions we asked the banks and the credit union leaders was how willing would you be to get deeper into a relationship with your issuer processor? Yes, absolutely. Yes with controls, no, et cetera. And the predominant answer was yes, most people would be more interested in deepening that relationship, but some said yes with controls. What does control mean in the current payments environment?
Dean Scharmen Jr (19:54):
I think control, not to be domineering. It's allowing for choice. Flexibility for an organization to drive their own destiny. It's a very important decision for anytime a new feature gets turned on, anytime an organization decides to align themself with a technology partner. This has to be something that not just lights on in the room. It's where are we going not only today, but in a year from now, five years from now, 10 years from now. If it's something that I get a year in and see that this isn't working, I don't want to feel like I'm locked into not having the capability of, not to say unplugging something that would be traumatic to any sort of industry, but allowing the flexibility to turn on and off features or having the flexibility to drive their destiny. Correct.
Michael Moeser (20:52):
Now you mentioned the future. What does the issuer processor/bank credit union relationship, how will it evolve? What will it look like in say the next three to five years?
Dean Scharmen Jr (21:03):
Partnership with a capital P. I would rather say instead of who is processing your business, that age old question of who is your processor? Who's your partner? Who's empowering you? Who's enabling you? I think that becomes the common rhetoric or should be the north star of how we're defining our relationship, moving away from any sort of vendor relationship as some of the research led to a true partnership who is enabling.
Michael Moeser (21:34):
That makes sense. That sounds like a formula for success. So as we think about formulas for success, what should a bank consider doing say in the next 12 months as they try to set themselves up for success?
Dean Scharmen Jr (21:47):
I'm a planner by nature, so I always have to lead with that of look at what your annual plan is for your organization. If you don't have one, start questioning why. But also at the same time, in that plan, looking at your partnerships, looking at your processors, your partners, looking at someone even like I2C, I challenge any of our partnerships to do that today of hold us accountable. What are we doing to assist? Where are we making things more efficient, less friction to the organization's success? And having some measurable criteria of where do we want to go and really seeing, is this where we need to be? And I think that is my biggest call to action is be curious, not just we've always done it this way. Because the market is ever changing. There's going to be choices that get made. Some will be right, some are wrong. But again, you have to take the choice. You have to take the leap. So be curious and start looking at your organization and are we aligning to where we really want to go?
Michael Moeser (22:52):
Makes sense, Dean. Thanks for the insights. And folks, that's all the time we have for today. So thank you for joining us and listening in. For more insights like these, please visit i i2c.com. Thank you. Goodbye.