3 Learning Objectives/Key Takeaways:
- Define payment orchestration & discover how the payment landscape is shifting with the rise of payments technology companies
- Explore Payments as a Service (PaaS) use cases, success stories and opportunities
- Learn how to use new technologies to effectively address fraud as payments speed rises
Tara Schultz (00:10):
All right. Good afternoon everybody. And welcome. So there's zero doubt that the payments landscape is quickly changing, it's accelerating, and the opportunities to embed payments into new experiences continues to grow at an accelerated pace. So today I have with me Issuer processor, Payment experts, I have Fraud data experts, as well as banking executives who have experienced firsthand success in this space to share their views, give guidance on how they are seeing success, what challenges they've experienced, as well as what advice they will give to handle the rising risk of fraud as payments accelerate in speed and complexity. So I have Derrek Bretz, VP of Payment Strategy with CSI. He has over 16 years of payment experience at CSI. Jeffery Lewis, SVP of payments for Echo Health. He has 25 years of experience in the financial services space, and truly a payment pioneer when it comes to complex technology, new markets, new strategies, and scaling successfully with payments as a service. I have Adwait Joshi. He is founder and CEO of DataSeers, and this is a winning FinTech that helps banks and payment companies by taming the data demon. He is well-versed in big data and analytics at a large scale and also a bit of a comedian in his free time. So ke mid happy hour later. We also have Mike Voinovich, who is the Chairman of Anchor Bank Corp and Anchor Bank since 2020. 2020. He is the EVP also of Echo Health and prior to that had a 20 year career in financial services. So Anchors actually headquartered in Illinois as operated as a small community bank serving farmers and their community for 125 years, and they've launched into banking as a service and FinTech services. So I have definitely a panel of experts here. So we're going to start with Derrick Bretz. Derrick, why don't you lay the foundation for us on payments as a service and payment orchestration and talk about what's changing and what you see on the horizon of opportunity.
Derrick Bretz (02:13):
Thanks Tara. So payments as a service is largely around taking this thing that's incredibly valuable for financial institutions, their banking charter, leveraging a technology partner or within in-house technology to allow you to then extend your services and allow a FinTech or FinTech brand to offer financial services out to a customer base, a targeted niche customer base. It's an opportunity to grow revenue and to extend your customer base and to build. And part of the orchestration here is you're taking that technology and you can begin to orchestrate across channel, right? Where the differentiation really starts to happen is you can simplify your orchestration, whether it's card, ACH, wire, what will be real time payments in the form of Fed Now or RTP, and the opportunity that presents to simplify user experiences for consumers in the space.
Tara Schultz (03:04):
Thank you. Jeff, what do you see as the biggest opportunities in this space for a more intuitive payment experience with choice and flexibility?
Jeffery Lewis (03:13):
As Derrick talked in the panel before talk, it's really about the payment modalities from a technology company who's in the space of delivering payments to both businesses and consumers. You are looking for the easiest way, I'll say it from the least risk perspective of delivering a payment in a form that the receiver wants to have. So the opportunities when you're delivering this multitude of payments based on volume is how easy can I originate transactions? How easy can I look at the fraud and the results of those transactions? What do I have to do when I have a problem? How open is the bank to embracing the new you just heard on the Fed now? And I think from our company's perspective, fed now is one of those payment modalities we will use. However, if a bank's going to restrict me on what I do with it and when I can use it and whether I'm worthy or not, I'm going to go find a partner based on understanding what I do and opening up all those different rails that make the most sense for the receiver.
Tara Schultz (04:21):
Thank you, Jeff. So Adwait let's start with you here. What are some of the biggest challenges that banks are faced with as payment speeds increase and how can they effectively manage fraud and risk as well as data visibility in this environment?
Adwait Joshi (04:37):
And it's not just the velocity, right? It's the volume velocity and the variety problem that makes it complex, which is why we call it taming the data. At the end of the day, the result is saying money is moving from point A to point B, but how it moves and the speed at it moves changes. So like I was talking earlier to Jeff, we have to put fraud and compliance in front of it. You can't be behind it. I mean, Jesse mentioned earlier when the transaction is going through, it's not waiting at some BSA queue to review, it's gone. So you have to make those decisions up front. And in order to make those, you have to have systems technology that can actually understand these messages. So Fed now 2 0 2 2 or RTP or traditional 85, 83, all of these have been around for a while, and that's where the technology challenges begin for banks is how do I ingest that message? It's almost like, how do I speak that language? We all communicate with each other using technology language as I call it, and understanding those data pieces and managing those data assets becomes key. And what everything is going to go down to is homogenization. It doesn't matter to me upfront what's happening. I need to be able to consistently provide similar results regardless of rails where fraud and compliance IT at the front, not at the back.
Tara Schultz (05:48):
Thank you. Adwait. So you're looking at this from a technology build perspective, and Jeff, can you talk to us about that from a sponsor, bank and facilitator perspective as well?
Jeffery Lewis (05:59):
As I was saying, if you're moving your fraud and compliance and all the things related to a payment up to the front end of everything, you as a bank are trying to basically glue the systems together. You may have different vendors for a digital banking product, you may have one core that's, as I heard earlier, they're pretty rigid in some aspects. And so from the bank's perspective, you are trying to find a thing that goes out front and can move with the rest of the market. It is about speed. It's about how fast you react to what the market is doing and how fast your teams can recognize it. And then very honestly, I call it the shutdown or the kill switch. When you see a problem, you have to be able to kill it from ever entering your bank. And the problem today is by the time you see it, you've already bled millions of dollars out the back door. And that's where you have to change from the banking perspective is see it all up front.
Tara Schultz (07:02):
Thank you. And Derrick, to you from a payment processor perspective?
Derrick Bretz (07:06):
Yeah, so one of the things we see is you got to move it to the front, right? The money's already gone, then you're just dealing with customer service issue, trying to return the funds, ask for good faith depending on the rail and the network it transacted across. So what we see happening with payments as a service is the evolution of the orchestration layer, which is combined with a directory. So we're seeing the evolution of both private directories and what we think will be eventually national directories that will help facilitate the ease of use of payments. People don't want to be able to give or have to give their routing and transit and account numbers to counterparties in order to facilitate transactions. Consumers, especially businesses will do it in order to affect transactions. But we think directories are going to be the biggest game changers here, where if we're all participating in some private or even public directories that are existing out there that give economies to scale for all parties to participate, we're resolving people's identification there with those third parties and we've distributed that control and access, then we're going to have a system in which that everybody can participate at scale. We can then start to do straight through processing all the way out to commercial related entities and they can have faith and confidence that transaction's going to clear. And you're still have all the rails in the mix. I heard the comment earlier in the Fed Now session was there was time for ACH to grow and I think 10% of traffic that is capable of going across same day ACH goes across same day ACH. So there's still a role for risk to play, but the consumers are going to go to the least cost and the most efficient and effective rail for them to try and transact.
Tara Schultz (08:36):
Well said. All right, Michael, so looking at this from a community banker perspective and what you do with Anchor Bank, So again, this is a community bank that has launched FinTech services and is doing banking as a service, payments as a service. So what is your advice to an FI that's considering partaking in their financial services to a new FinTech or a new brand?
Mike Voinovich (09:01):
Take your time. Number one, there's a much higher cost to getting it wrong than there is being a little bit late to the game. And I've had just the greatest experience over the last several years and Tara mentioned it. I don't know if it got maybe a little lost because it was already at the beginning, but I work with Jeff as well at Echo on the payment side of things. So I came into the idea of buying a bank and running a bank almost more from the perspective of doing it expressly for the purpose of finding an outlet for payments in FinTech. And what I remember most acutely about that time when we were getting through the regulatory process and getting really to the point where we could start to credibly do some transactions was going to the folks at the bank and telling them what the plan was and having them look at me like I was the most reckless, crazy person that ever existed. And then going back to the people at the payments company and telling me the exact same thing and having them accuse me of being afraid of my own shadow. And so I always felt like I was the shock absorber between those two worlds. And I think in a lot of respects, we can't all always be in all the roles, but I think we can at least have some vision of what it's like for our partners and our counter parties as they sit in their chairs. And sometimes a little explanation or empathy goes a long way in trying to bridge the knowledge gap.
Tara Schultz (10:26):
Thank you. That's great. Jeff, what about from your perspective, you've worked with multiple sponsor banks.
Jeffery Lewis (10:33):
I think from the sponsor bank perspective, when you look at it, you have to become a seven day a week organization, 365 days a year. You're balancing transactions that are moving on your non processing days, and you're worried about whether or not that money moving. Do you have enough in the bank? You have to understand what the payment technology companies are looking for. On the prior panel, they talked about the merchants, and you have these merchants that are card payment entities at the same time. So as soon as you think about DoorDash and the minute you pay for DoorDash, a DoorDash driver's getting paid and a card's getting loaded to go pick that up. So the merchants want the money to move same day, except you don't get the money for two to three days. So how do you balance all those things out? And it's that risk from the sponsor bank you look at and balance it out with how am I protecting the bank because I don't want to be the payment guy at the bank that caused the bank to fail. It's the last thing you want to have happen, but how do you meet the needs of the market? And that is with the systems in place, trying to understand the payments, trying to listen and finding, I hate to say it, but the balance between all of those things. And it is hard. It's not easy, but you have to look forward on the technology side. The technology will help you solve it if you embrace it and move with it, instead of saying, oh, I do it this way all the time, I don't want to change it.
Tara Schultz (12:08):
Perfect. Derrick, I'm coming in you next because you talked to banks that are sponsored banks and many, many banks that are ready to enter that space. And what advice are you giving them?
Derrick Bretz (12:19):
So, what I'm seeing is the market has kind of been proven by what I would call the first generation of platform providers out there that created point solutions to go after card interchange model to get cards into market. You had some neobanks that entered the space trying to prove the space. You had basically a subset of vendors who tried to find a way around the existing legacy players. And now what I think you see is the next generation of providers stepping up around their APIs, they're unbundling their platforms. They have the tried and true regulatory compliance that the regulators are looking for. They're putting in, they're institutionalizing the space or industrializing the space. And so they're creating holistic stacks. They're partnering with those vendors that have proven to be adaptive and effective in the marketplace. And they're becoming that, and I've used this term because a banker used it, the one throat to choke. And so they're finding that good partner to move forward with, especially one that can help provide scale. We've seen plenty of bass banks get in this space where they're offering with through basically one party and they're trying to manage all the regulatory concerns with one party and they're got bespoke systems. And so what we're seeing is the consolidation of that into full technology stacks that can address this space and address the needs for the FinTech brands while at the same time giving the confidence and the scalability to a small community bank in and rural Indiana to be able to go out there and offer this across the United States to any FinTech brand that needs to participate in financial services and create a real welcome source of revenue of non-interest revenue for them in driving payments.
Tara Schultz (13:56):
Well said. Any final comments on that question? All right. Let's go to no shortage of regulatory spiked interest in this space by any means today. So Michael or Jeff, let's start with you guys on what advice do you have as regulators'? Interest are rising.
Mike Voinovich (14:16):
Communication is always the key. And it's easy I think to paint the regulators with the brush of being the impediment to getting something done. And I'll certainly admit throughout the process of getting our change of control done and getting our transaction put together, there were times where I was frustrated, but ultimately we found is that when we started to build the credibility and again looked at it from their shoes at us, we weren't ready to do anything meaningful when we got started. It took getting the right people in place and having the right systems and processes in place to get to the point where we could even go out with the training wheels on, let alone take the training wheels off. So in using the regulators as a resource to help us define what those boundaries can be, and then having the discussions about the, well, what if we tried to do X, Y, and Z? It just turns out it's a lot easier to beg for permission than or ask for permission than beg for forgiveness.
Jeffery Lewis (15:30):
Yeah, I agree with Mike that it is communication and it's openness. I'll be the first one to say, I don't like the regulators. I'm a technology guy at heart. And the more open you are, you'll find out that your regulators as a bank don't understand the new technology that they're being hit with and trying to help you maintain what you should be maintaining. We're in a unique environment. We've had three banks that have just gone down the F D I C had to step in for, I don't think any of us foresaw that coming a year ago or two years ago. But it just highlights the fact that if the regulators and you as a bank are talking about where your risks are and being honest about it and being open about it and using them for advice, typically we push them away and say, please don't come back for another year and before you come make sure I've got the question six months in advance. And it never works that way. And so you want to embrace, you want to listen to 'em, you want to bounce ideas off. And when you're doing that on a regular basis, you'll stay out of trouble. You'll find out they'll be less intrusive because they'll understand what you're doing.
Tara Schultz (16:45):
So proactiveness is the key. All right. Let's switch it to technology, Derrick and Adwait. Now kicking it to you. What emerging payment technologies have you seen that are going to have the biggest impact on the industry in the coming years when it comes to payments as a service embedded finance?
Derrick Bretz (17:03):
So I think there is a standardization of APIs starting to happen in the space and more and more of that adoption actually occurring with the financial data exchange APIs. I think the more parties that take those on, it becomes easier for interoperability between systems and partners. It just becomes that much quicker to bring value Via digital channels or into the banking core application through partnerships. I think the directory is going to have a huge value point. Customers, it's why they use Venmo. It's easy to go find somebody inside of Venmo. They're looking for their name, their email address, their phone number. They're not looking for a routing and transit or a card number in order to transact. I do think sometimes they'll take longer. Those directories will take longer to get stood up. The ability, the whole network to receive. I think Fed Now is one of those things that's a great advent and tool, but it's a channel. And so the front ends have to build all the orchestration logic that's necessary in order to, because you're going to go and try and sell to a commercial customer and they're already trying to manage their liquidity and they're already doing ACH or same to ACH. And so you're going to want to give them channels by which our product by which they can orchestrate and they're not necessarily going to care that it went RTP or Fed. Now there may be a cost component to it, but they may have a speed consideration. So they're going to be concerned about the speed at which that transaction transactions, but not necessarily that it went down one rail versus another. They just want it to work nine times out of 10, they'll want to manage fraud. So managing it, the understanding the directory, they'll want to manage that fraud and the risk that comes with it. I think that seven day a week accounting is something that's new, and I think everyone's going to have to evolve to that. I mean, you have to have financial resources there at the Federal Reserve or at the clearing house. And so liquidity management's going to become a part and parcel to your day, especially as this network gets bigger. And if we anticipate these networks getting bigger, you're going to have larger and larger liquidity positions that are moving day in and day out. And so it's not just your ACH rails once a day, it's 365, and so it's no holidays, there's no sleeping, there's no time off. And so your technology provider need needs to be a partner in helping to, they already have staff that's watching Eyes on Glass 24 7. So you're going to have to lean on them to help manage that liquidity through partnerships.
Adwait Joshi (19:15):
And it's also going to be driven by geography and customers. So if you look at what India did with NPCI and UPI, there were no car rails. So the card rails were not that prominent. People were living in a cash economy and the vendor on the side of the street does not have electricity or a point of sale machine to actually accept payments. So we completely bypassed those rails and went to UPI. Right? Instant payment, you get notification that money's in your account goods are traded. So it's like cash. I think what's going to happen is the consumer is really going to drive that from two factors. One is you want to have guaranteed and fast payments, but it's also going to be price and cost of the payment. What rail is going to be price effective. It doesn't necessarily mean cheaper, but it means what is going to be price effective based on your use case. So all these RTP is going to be here to stay fed now is here to stay. People talk about them competing with each other and one killing the other, or OCT and FT on the visa, push payments and so on and so forth. They all have a purpose and I think it's going to be greatly defined and by the consumer of the product on the receiving and the sending end to see what makes sense for the use case. And I think what has happened is that's become easy. So with all these mechanisms out there and APIs and payments to the service or the orchestration is I don't have to think about it. I press a button, it gets done, money is moved, it's safe, done. I don't have to worry about how, when, where, and that's right, seven days a week, that's literally the model. India went to seven days a week, instant settlement and instant payments. I think that's where we will start heading, which obviously means liquidity considerations for a lot of these payments moving through, but I think we'll all learn. It'll take time, but we'll get there.
Tara Schultz (20:52):
Hit a button. Payments sound easy now? Yeah. All right. So think of questions because we're going to do a biggest takeaway from each one of these and then we'll open it up to the audience for questions. So Michael, we'll start with you. What is the biggest takeaway that you want the banks to walk away with today?
Mike Voinovich (21:08):
Yeah, I think the best thing about being in this space for banks is that it's not winner take all. And in fact, by not having it be winner take all, we actually do ourselves, our clients in the industry as service, creating the opportunity to have multiple parties, service multiple or a singular client. And I want to mention too in case anybody's here from our relationships with other banks, that we love those banks and they've been with us for a long time and we've had strong historical relationships and we wouldn't be around if we weren't for them. So by no means at any point are we looking to kick anybody at the curb and we look forward to the opportunity to be second or third on a given relationship. And I think that that's a winning model for you.
Derrick Bretz (21:52):
Yeah, I think that point probably isn't as widely talked about in the space, especially in mature FinTech brands out there. They're looking for to eliminate points of failure and any single point of failure. So as you're entering the space or considering entering the space, you may not be the primary on the relationship from the sponsor, but they may be the secondary. There's opportunity to participate as a secondary or a tertiary. The idea is that there's a lot of opportunity. I think it's 20 to a hundred banks depending on which survey you said are actually participating in any scale. In the bass space, I think there's a huge opportunity for all banks to participate during non-interest income. There's vendors in this space that help them to, they should that take their time evaluating vendors that allow them to scale this and still meet their regulatory obligations and at the same time improve their technology that they're able to offer to their existing customers. It's a twofold strategy. They can benefit their existing base while extending themselves to FinTech brands.
Jeffery Lewis (22:49):
The biggest takeaway, I think there's multiple, I'll start with compliance. When you think about compliance and fraud, you're always thinking about you as an originating institution. You now have to think about who's receiving the payment. So you have to play both sides regardless of where it's going. That's number one. Number two, whoever's receiving a payment, as Adwa said, the receiver's going to decide how much they want to pay for something in the financial space. We're used to charging the businesses or the consumers, all of those sorts of things. And my favorite, I have two favorite examples on that. Wire is a good example as wire income. I always question why is a wire $35? Why? Because it's revenue for a bank, it's good revenue, but then if you flip it over to the other side, why do you pay $4 to take money out of an ATM in a hotel lobby? You need the money and it's there. So it's convenience. It's the receiver. You have to shift how you are thinking, your pricing models and how you manage that risk in those things. The senders and the receivers will decide the channel, be able to capture it on both sides and think about it from both sides, not just who your customer is and what they're doing.
Adwait Joshi (24:11):
Last thing to add, bankers generally are not known as technologists, right? The whole reason why FinTech exists is because somewhere along the banking life cycle, consumers did not get what they wanted out of it from a technology perspective. And tech comes along, starts doing all these crazy things, and at the end of the day, that's just your digital marketing arm if you think about it. So as more and more things start happening, people are going to have to invest in technology or at least partner with folks who provide that technology. Without that, it's almost impossible to scale because we are living in a world of AI right now. I don't know if you guys saw CFP's questioning of chat G like AI out there, right? It's here. It's here to stay. It's not going to go away. So how do you embrace it, understand it, and risk it? Right? There is a risk involved and you have to understand what it is. So you have to look at technology and adopt it, which traditionally has not been the way for a bank. Don't think of bank and technology. They don't go together generally. It's like bank means no technology. But that is changing now. A lot of folks are bringing on innovation officers and digital officers and data officers because they want to compete in the space. And the way to compete or way to do something is automation and literally using machine learning and AI to solve some of these problems that people have been trying to do manually.
Jeffery Lewis (25:33):
The other takeaway I had, and I heard it earlier about the technology stacks and being in this business a long time, all the banks I've come across believe they can build anything they can and you can. Your technology guys will die on that hill that we can build at, and three years later when everybody's passed you up, they're still building it. My advice is you with the way technology is changing, with all these things, integrating the way they have to become the integrator. Don't be the builder, be the architect. Understand what you want. Don't be the builder, because by the time you're done, you'll be three years behind what everybody else is doing. The technology is there, research it, look it up, get your best price and move forward with it. Don't wait on your teams to do it.
Tara Schultz (26:32):
I think that goes for all of us. It does. So we're going to open it up. We have a couple minutes left. Open it up to audience questions.
Audience Member 1 (26:46):
After the great financial crisis, the way regulators positioned the large banks is for them to be risk reverse, which opened up the gamut of the community and regional banks to pivot to the fintechs once it became big. And in this era, what we're seeing in the market, is there going to be a pullback from the neobank and some of the community banks sponsoring some of these fintechs?
Mike Voinovich (27:19):
Yeah, I think so. I think we've kind of gotten to the point where it's a bit of a, it's a tester and if you weren't really committed to it, it's probably a good time to cut your losses and bail out. So yeah, I think there is going to be some spread of that diminishment of options.
Adwait Joshi (27:40):
I would say that there is a crawl walk around. The banks are running are probably going to keep running. The banks that we're crawling are going to stop crawling for a little bit, trying to figure out what is happening in the market. And there will be some correction. Some folks will pull out completely and some people will just keep going.
Derrick Bretz (27:58):
I agree with the statements everyone else is making here. I think we woke up to concentrated risk and the guest VB was a concentrated risk event, and that's why you saw funds starting to move around. When there's 7, 8 trillion of uninsured deposits at financial institutions, it's the same concentrated risk that some of these banks portfolios had that were in this space. They were very concentrated in one line of business. And so I think you have regulators looking at that very closely. And so I think there's going to be opportunity for more and more banks to participate and also push. I think we didn't really talk about the ledger, but the idea is that the ledger will move further down in the stack that the bankers that are sponsors of this will have more clarity to what's happening by the FinTech brand that's participating, will have a better understanding of the customer, if not partial ownership of that customer.
Tara Schultz (28:47):
Any final? All right. Oh, one more.
Audience Member 2 (28:54):
So the industry is continuing to evolve and obviously technology is a big piece of the puzzle to Meet the demands of today. However, we hear a lot of talk about resiliency. So if a bank is looking just to meet the needs of the payments industry today, that doesn't necessarily prepare them for what's coming in the future. So can you speak to that at all about how can a bank basically use technology to become resilient and to be able to adapt with future changes in the industry?
Derrick Bretz (29:36):
So I'm coming from the technology firm that partners with financial institutions We met, we invest in the R and D. And so I hope that they're choosing somebody like CSI as a technology partner because we are constantly evaluating what's happening in the marketplace, looking at trends, trying to predict where things are going, making investments or bets, whether CBDC, is going to be a real thing into the future, what role the government may have in it, what our role may be in custodian it, how we facilitate custodianship for banks. And so it's about making those investments and helping. And I think if you were a bank, you'd be looking to find partners. And it probably speaks to your comment about finding technology vendors who are out there in that space rather than trying to build it because you're probably already behind.
Jeffery Lewis (30:17):
Well, it's hard. I've been in a lot of different spaces. I've been on the technology front for banks where as a bank processor, I've lived a long time in the card space as a card processor. I work for a bank where I was driving payments. And I think as I think about the future, I think about a tomorrow, I don't know what that next payment will be. I don't know who will want to use it. And so I try to imagine how do I price it in a way that makes sense for me to reduce my risk? And I've done that with different things. I also think about what does it do to my back office? It's interesting when you start taking point solutions, the area that gets hurt the most is the back office because there is no automation flowing to the back office. So as you evaluate different solutions, and that also goes on the fraud front, how does it impact your back office? I think about things like dispute processing. So if I do a card transaction or I see one on my statement, why is it so hard for me to dispute that? Why do I have to call someone? Why can't I just select a transaction, take a deep look at it, know exactly what it is, and then either decide it's a dispute or not, but we put barriers in front of everything instead of trying to make our life simpler and reduce those costs. So think of the back office would be my other advice.
Tara Schultz (31:58):
Well said. All right, we are at time, so thank you all. Wonderful panel. Thank You.