How shifting consumer habits are driving change in payments

The payments industry is in a year of transformation. Even with a remote workforce, banks brought on key talent and made fundamental changes to how they structure their payment and technology operations.

At the same time, consumers are changing the way they conduct their financial lives, with an emphasis not only on digital payments but also on new products like buy now/pay later.

Bank executives and other experts described their strategies during American Banker's Card Forum at the end of September. (Register to view recordings of each session here.) Here are seven takeaways from the three-day conference.

UMB streamlines innovation processes

UMB Financial has combined its product and technology teams in a bid to become more nimble. The Kansas City, Missouri-based company has named

Uma Wilson

(pictured above) its first chief information and product officer and put her in charge of the combined teams.

The job, which Wilson announced at Card Forum, emphasizes the crucial role technology plays early in the development cycle of a product, as well as the need for product expertise in technology decisions. Wilson's challenge is to make sure that the $36.6 billion-asset UMB embraces change.

"It's extremely critical, as we think about technology and products coming together, that we have [both] under one leadership so we can drive the vision, think about transformation [and] … execution in a unified way," Wilson said.

Wells Fargo unveils cards with new rewards, incentives

Wells Fargo announced the launch of its

Reflect card

at Card Forum. The product, which the company began offering on Oct. 1, is designed to reward customers for paying on time. It initially offers a 0% annual percentage rate for the first 18 months, with the option to extend that APR to 21 months based on payment performance.

In July, Wells rolled out the Active Cash Card, which offers 2% cash back on all purchases. The company also promised a new rewards card in 2022.

The timing of these launches reflects the nature of how consumers are changing their spending habits over the course of the pandemic. Active Cash provides flexibility in how consumers earn rewards as their spending shifts, and Reflect offers consumers who had cash-flow challenges over the past year an incentive to get back on track.

"All customers want a sense of control over their finances. … We need to make sure that we're constantly listening to what people are feeling about finances, about payments, about where they're spending, about where they're not spending," said Krista Phillips, head of credit card marketing, products, loyalty and digital at Wells Fargo.

Maine bank lets fraudsters win (sometimes)

Every decision a bank makes about a potentially fraudulent transaction affects a customer, whether it's a real scam or not.

Because of this, Bangor Savings Bank in Maine is willing to let a little fraud through if it means it can devote more resources to routine customer care.

The $6 billion-asset bank's own cost-benefit analysis found that each of the 500 to 650 red flags that pop up every month can take as much as a half hour to investigate, according to Andrew Grover, executive vice president and chief risk officer.

Ninety percent of those turn out to be false positives, which are transactions that the bank's fraud-monitoring system deemed suspicious but turned out to be legitimate. That leaves 10% of flagged transactions that are actual fraud — but still often aren't worth the time and effort it takes to catch them immediately.

"You could be spending a lot of money for no reason," Grover said. "The investigation is going to cost you more than the money that you'd actually get back, so it's better off just to move forward."

Later on, the bank can decide how to deal with a customer who gets flagged multiple times. But a top concern is whether the bank's risk management process is tying up honest customers unnecessarily, Grover said. "You're going to have fraud — that's a known fact."

Buy now/pay later firms seize on changes by credit card issuers

Part of the recent U.S. surge in

buy now/pay later loans

may be traced to survival tactics credit card issuers adopted in the early stages of the pandemic.

Though card issuers generally didn't tighten credit for existing customers, they clamped down on credit offered to new ones. This drove consumers to seek alternative financing options, according to Adam Hallquist (pictured above), a principal with FTV Capital, which has $34 billion invested in fintech companies and other lenders.

“As consumers were increasingly participating in e-commerce [while quarantined], they needed applications and methods to make payments and they started to seize on other products like buy now/pay later loans,” Hallquist said.

Simultaneously, credit card issuers made big changes in their own rules around fees and rewards, encouraging consumers to expect broader flexibility in credit products, added Courtney Gentleman (pictured above, on left), senior vice president and chief marketing officer for payments at Synchrony Financial.

“In response to lower consumer credit card usage, especially in categories like travel, card issuers responded to the pandemic by modifying or removing fees and changing the rewards consumers could earn based on usage. What has changed is that consumers now expect much more flexibility and personalization,” Gentleman said.

Concern about cash flow also fueled consumers’ interest in new ways to finance purchases, said Nubia Valenzuela (picured above, in middle), vice president of payment services at SchoolsFirst Federal Credit Union, a $26 billion-asset institution based in Santa Ana, California.

During the early stages of the pandemic, many SchoolsFirst customers withdrew substantial amounts of cash from their accounts through ATMs and at the branches, foreshadowing concerns around access to funds.

“Now buy now/pay later loans appear to be a great way to offer members cash flow control and additional payment options in a transparent manner, especially as more purchases move online,” Valenzuela said.

Federal regulations for new payment, credit products are coming

Digital payment products and alternative credit took off rapidly during the pandemic — and these technologies

did not escape regulators' notice

.

New fintech and payment services are likely to face tougher rules under the Biden administration, but the market is moving so fast that regulators can't keep up, according to a panel of financial technology legal experts at Card Forum.

"Some of these [payment] products didn't exist five years ago," said Brian Tate, president and CEO of the Innovative Payments Association, a Washington-based trade group. "We're in a pandemic, which strains resources, so it's much easier for regulators to focus on what they [already] know."

The Federal Reserve has proposed changes to the Durbin amendment to accommodate an increase in e-commerce transactions and digital payments by making banks and credit unions add new debit-routing options for online transactions. Card issuers contend this will add costs and erode interchange revenue. "Even if you aren't impacted by these [potential changes to Durbin], I guarantee one of your business partner is," Tate said.

Financial services innovations that rely on digital payments, such as buy now/pay later, early wage access, cryptocurrency and fintech-bank partnerships also need more regulatory clarity, according to Tate.

Investors bet on tech behind buy now/pay later, open banking

A Miami fintech startup called Pipe just passed the $2 billion valuation mark. That accomplishment is a sign of the investment frenzy surrounding digital payments — even though the company doesn't technically process payments.

"Pipe's not necessarily a payments company. But it looks at data about payments, how payments are being collected and how those payments can be used for lending," said Farhan Lilji (pictured above), a principal at Anthemis, a London-based fintech investment firm with more than $1 billion of assets under management. Anthemis has Pipe in its portfolio.

Many of the newest payment options — such as buy now/pay later and early wage access — are more akin to loans than traditional payments. As such, the vetting that takes place for each of these products must happen quickly, seamlessly and accurately. These tasks are handled behind the scenes by many new data-driven fintechs, which are drawing significant attention from venture capitalists even if they are invisible to consumers.

Firms invested more than $12.4 billion in e-commerce software companies during the first half of 2021, according to TheInformation, citing data from CBInsights, which defines the sector as the firms that support shopping, financial services and payment technology — rather than the actual digital retailers. The midyear tally was 51% higher than the full-year 2020 figure.

TD, Western Union team up on cross-border payments

The recent jump in digital commerce has made international payment processing a hot target for fintechs, but

Western Union

contends its established network provides a way for banks to extend their cross-border reach.

"For a long time we were kind of alone in the world. Now everyone wants a piece of our business — the startups and the banks," said Jacqueline Molnar (pictured above), chief transformation officer at Western Union.

Molnar pitched banks on the idea that partnering with Western Union would help them meet the demand for low-volume international payments. She argued that working with Western Union's online and agent network is easier than building an ecosystem from scratch.

"This is a space for banks, but in a partnership fashion as opposed to getting into the business of moving international payments $500 at a time," said Molnar, who was a schoolteacher in Hawaii before moving to Western Union's headquarters in Denver. She has also has also worked on Western Union's compliance and fraud risk efforts.

TD Bank offers branded Western Union transfers as part of a menu of options that include Visa Direct and the bank's own account-to-account service.

"Banks would be foolish to try to replicate that network," said Jonathan Prendergast, head of U.S. payments strategy for the $1.7 trillion-asset TD Bank Financial Group, who also spoke at Card Forum.

The partnership with Western Union is a way to broaden access to digital payments as much as possible, and to ensure the bank is adapting to any change in consumer payments preferences, according to Prendergast.

"Change is going to happen. Real-time payments are coming, digital wallets are here. Peer-to-peer with Zelle is here," Prendergast said. "If you are a bank, bring in people who will embrace this change."