Inflation and recession: Impact of higher interest and inflation on payments

The perfect storm of high inflation, an unpredictable interest rate environment, and a recession will leave lasting impacts on the industry. How has your company weathered the storm so far?

Transcript:

Chana Schoenberger (00:09):

Good morning payments forum. Hi, you guys all have your coffee. Was everybody up for yoga this morning? I hope you all were. And you're very chill now. So don't forget tomorrow morning. Same time, there is a morning walk. And I just want to note that this idea was inspired by Katherine Pierce, if she's here somewhere. This was her idea last year. We loved it and we stole it because feedback is an amazing thing. So this morning we're going to talk about something which I think is very both personal and professional for all of us, which is the impact of higher interest rates and inflation on the payments industry. And clearly everybody knows that inflation is out of control in this country, that the things that you buy have gone up quite a bit in price from a personal level and commercially. And I know that your customers are seeing it too. So we're going to talk about that briefly and let me introduce my distinguished panelists. Okay, awesome. I have Brandon Baines, who is the VP of Tech-enabled banking at Customers Bank. I have Melissa Tuozzolo, who's the GTS head of International Payments at Bank of America. I have Ram Palaniappan who's the CEO and founder of Earnin, which is a earn wage access company. And I have Helen Herring who's the Senior Vice President for FinTech and strategic partnerships at First Century Bank. And I'm Chana Schoenberger from American Banker. You guys all met me yesterday. Okay. So just to kick this off real quick, let's just go, we'll do a lightning round. Helen, you can start. What has been the impact of higher interest rates on inflation on your company, your customers so far?

Helen Herring (02:10):

Yeah, I mean I think it starts at the top you've certainly seen, especially after the SVB failure, so revenues aren't always enough. So the importance of having a strategic plan and being able to pivot that plan when you see if it's interest rates rising or if you see things happening in the economy, having the nimbleness both in the structure of your organization, but also in your management and leadership team to kind of adjust for those things that may come a lot more quickly than you think. And especially on the FinTech side, really projecting out how you're growing and revenue streams on programs that you have and how those align with what may be happening in the economy, whether it's rates rising or other factors.

Chana Schoenberger (03:01):

Cool.

Ram Palaniappan (03:03):

So our product helps people access their pay when they need it. And what we're seeing right now is that the demand has gone up a lot because of inflation. So having the same amount of money actually goes not as far now. And so that's leading to much more demand for us. There's also an interesting income impact that if you have faster access to your wages, you actually start earning more. And so we're seeing more people come in for that reason as well. So we're with, the impact for us has actually largely been from the consumers. We're seeing much more demand.

Melissa Tuozzolo (03:35):

So I think in general, and I completely agree with everything you said, Ram and Helen, it's all about the value, present value of money changing versus what it was previously. Right now, low interest rate, low inflation environment. And this is what we're seeing with our corporate clients especially. You can be a little bit more lax in how you manage your cash management, your cash flow, your balance sheet, et cetera. But when you get into these situations of pretty fundamental economic change, we haven't seen interest rates like this for 10 plus years. You really have to go back to basics. And what we're seeing is actually a lot of activity that we saw back at the financial crisis where we saw the companies, corporations, et cetera, that did the best of navigating through really focusing on their cash management in a way that we hadn't seen previously. So at the end of the day where, what am I doing from a treasury perspective? How am I getting paid? What am I doing from a cash flow forecasting perspective? And if I have salary, considerations, contractor considerations, C2B, B2C payments, all of a sudden, all of that becomes a lot more important.

Brandon Baines (04:53):

I would say we've seen significant impact throughout the banking markets and the economy in general, especially given recent events. And I wouldn't call these events systemic. I would say they're more systematic. And it goes back to your comment about being good at the basics, being good at the fundamentals where that's compliance and risk framework and making sure that you're set up to weather the storms. You don't want to catch yourself in a situation where you're dancing between the raindrops trying to stay dry. And the best time to get an umbrella from a banker is when you don't need it on a sunny day. But in order to find a path forward, it's really about the basics and being good at those fundamentals.

Chana Schoenberger (05:36):

Great. Okay. So yeah, I mean, sunny days are the best time to think about how efficient your company is and what sort of rails you're using. You should not have to think about this stuff in an emergency, so it may already be too late, but you should probably do this now. So how should companies plan for shocks these when they do things like negotiate contracts or model pricing? I mean, if we could predict the future, we would all be hedge fund managers who wants to take those on?

Brandon Baines (06:04):

I'd say in money hasn't dried up. VC money's still out there. And for our partners, for FinTech companies, that's one of the most important things are the funds, there is the capital, there is the profitability still there, but VCs are being more choosy now because the money costs more. And so it's really separating the winners and the contenders in the space.

Helen Herring (06:25):

And it's also understanding the programs themselves and how they operate. So if you look at even a couple of years ago during covid, there were a lot of banks like us. We did a lot of disbursement card programs, especially during covid. So you saw an increase in revenues from some of those, but you also saw funds actually sitting and earning interest for a long time, and this was before some of the interest rates had increased as well. So really understanding your programs well and how they will react to changes in the economy are really important. Brandon and I were just talking about a credit builder program for instance. So how that program grew two years ago very well, but if we're heading into a recession or kind of a pseudo recession, whatever you want to call it, how is that program going to function when people may be more focused on putting food on the table and gas in their cars and maybe not as focused on building credit? So it's really understanding programs and doing really thorough projections when you're, you're looking at revenue streams, and I think this goes, this is the case for any economy or kind of where you are. But if you can have pricing models on programs where you have diverse revenue streams so you're not as impacted if one thing changes, I think that that generally works really well.

Chana Schoenberger (08:02):

Someone did a story the other day in the paper about cash that apparently people are literally going to a bank branch and withdrawing cash and paying for things in cash because they find that the friction is better for spending less money, which is kind of a total reversion of everything that's happened in the industry in the last 20 years or everything. Ram do you want to talk a minute about earn wage access and how that fits into the whole pricing and consumers being able to deal with their lives?

Ram Palaniappan (08:40):

Yeah, so I think earn wage access helps you in two ways. With the rising prices, usually what people are concerned about is that incomes are not rising as quickly and that expenses are going up and that's going to squeeze people more. What we've seen is that when someone starts using our product, their incomes actually rise faster than inflation. So even adjusted for inflation, we're seeing wages go up faster.

Chana Schoenberger (09:01):

Why is that?

Ram Palaniappan (09:02):

We've understood some of the mechanics. So one is very simple is when you give people access to their pay very quickly. So when the reward is very quick to the effort, they're trying to get more overtime, they're trying to get more shifts, so there's a higher motivation to work. And so they're actually working more for my customer segment. They're not the type to lock $50 in their gas tank, so they're filling gas 10 or $15 at a time. And then if something unexpected happens, then they don't have money to buy gas and they miss work. And so with our app, they can download the previous day's earnings, and then they go into work. And so we're seeing that they're working maybe two to three hours more per week. And there's lots of other smaller mechanics that happen. So I spoke with someone who works at retail, and there's different types of jobs at retail. With one role, you're tied to a particular store location with another role that pays higher. You're tied to a department in the store, like a cosmetics department, but you covered two or three different locations. And she was offered the higher paying role. I was tied to the department to cover a few locations and she didn't take it the first time because she would've had to pay for the gas and then wait to get reimbursed, and she couldn't afford to float the company. And so she didn't take it the first time. The second time she was out for that job, she had her app and then she took the higher paying job. So you see that the other thing that's also, so you see there's an income effect. Incomes are going up. We're also seeing that their expenses come down a little bit. So for our customers, the median bank balance is about $125. At the same time, the median accrued, but unpaid wages is $640. And so just think of how you're making your decisions. If you have $125 in your bank account, the only thing you're trying to do is get to payday. And so if you have a bill that's due, you don't pay the bill, you wait for payday and you pay it with the late fee on the bill, you might actually take an overdraft fee on purpose because that's the prudent thing to do because it's only paid back on payday. But if you see that you have 125 plus 640 that you've won, so you see that you have 765, then you start making decisions differently. You actually pay your bills when they're due and you don't have the late fees. And so when you see things like late fees come out, their expenses actually come down as well. And so we see incomes go up and expenses come down.

Melissa Tuozzolo (11:18):

And that's so interesting that as you explain that, Ram, because I think what we're seeing with our clients who have, they're looking for people to work at their organizations. Cause the reality is, even in the world that we're in right now with higher inflation, higher interest rates, et cetera, there's still a talent squeeze. It's still difficult, it's still competitive to find people, especially in the services world. And for some corporates, this is actually a competitive advantage when they're able to have the flexibility you're talking about in being able to pay more instantly, pay more real time, again, have that kind of engagement with their workers about paying them when they want to be paid, how they want to be paid. And the other kind of interesting thing with this is that the industry, the payments industry has moved substantially forward over the last 10 years or so and really developing those mechanisms to allow this to happen in a more efficient way than it has in the past. And in the US we've got real time payments, which is starting to take hold. I don't think we're quite at the point of ubiquity yet, but it's getting in that direction. But then when you look further a field into the world, the world of payments, when you look into countries like Brazil and India and China, et cetera, these instant payments schemes and the ability to have more flexibility in how and when you pay people, and also how when you get receivables is also incredibly important. I mean, we've heard of companies that do things like electricity, insurance, et cetera, actually able to turn on people's electricity instantly when they've missed an electricity bill because they know that the funds have cleared because it's going through an instant payment scheme. We heard this example in Australia where it's 24 by seven, et cetera, and they previously wouldn't have been able to do that. So again, we're kind of at this, we're getting into this more difficult phase from an economic perspective. But I do think when we look at the tools that the industry has developed, we actually have a lot more tools at our disposal than maybe we did 10 years ago.

Chana Schoenberger (13:33):

Although my concern about realtime payment, and we talked about this yesterday on stage, is it's super efficient and it means that you can get paid right away, which means the person who's paying you doesn't have that money right away. And a lot of business models are kind of dependent on inefficiency and float.

Melissa Tuozzolo (13:51):

Yeah, I think it depends, right? And I think this goes back to the flexibility. And I also think this is where in a country, the us, we actually haven't seen the uptake that we've seen other places in the world because we are used to, ACH is very efficient, it's cheap, we know how to use it. Especially for something like payroll, it's quite easy. However, if you're in a situation where for whatever reason your company has missed the deadline to get that ACH payment in, even for same day ACH, what do you do? Are you going to be in a situation where your employees might have to go three days without making a payment? So from a contingency perspective, it's actually a really interesting use case that we've seen some clients really want to look into. The other thing on real-time payments, which we're seeing again on the corporate side, is really that for a first into realtime receivables. So again, going back to that example of a utility company, being able to get that receivable in real time and allowing the people that are using that utility the longest time possible to be able to pay in without having electricity turned off their insurance not be effective, et cetera. So, I think we're at this point where we're all trying to figure out how do we use this new tool, which is quite interesting, very powerful, but maybe not right for every single use case. I mean, the other thing that it we're especially seeing outside of the US is this push even by regulators and governments to try to use real time payments to circumvent the card rails and really put pressure on interchange fees and things like that. Again, not to say what's right and wrong there, but we see this kind of emerging around the world. So yeah, it's all about flexibility and choice in giving those options.

Helen Herring (15:34):

Turning to your point, about 10, 12 years ago, everyone was saying checks are going to be a thing of the past and nothing much has changed, right? You still see, especially B2B payments, so many are still made by checks. I was talking to someone yesterday and he had signed a contract and the company paid him the setup, the $300,000 setup fee with a check still in that world. And so is that a product of wanting to capitalize on the float? So a more strategic approach, or I think you do still have, especially in the accounts payable space, you do have people that have done it this way for 20 years and haven't been maybe presented with a reason to move. And I do think we're, to your point, we have more options now more than ever. But I think checks are, I don't want to say they're here to stay, but I think they're one of many tools. I think we're all seeing that they're not going to necessarily go away.

Chana Schoenberger (16:38):

The other thing that's interesting is that a lot of the fees have become more transparent. So as a consumer, I find that if I walk into a store and I'm making a small retail purchase and they tell me that there's a card minimum, there is not legally a card minimum, but I usually don't want to fight with a retail clerk about it. Or if they're telling me that there's, there's a sign that says there's a 4% upcharge for paying with a card, I will pay cash.

Helen Herring (17:04):

We're still seeing people that a check option is free, but it's a charge if you pay , ACH or a card. And so you do have some consumers, to your point, that are wanting to avoid that fee. And it's sort of backwards, right? Because it's super expensive to print and mail a check, as we all know.

Melissa Tuozzolo (17:23):

But I will say on the checkpoint, so last year for the first time we saw Zelle volume overtake check volume, and that was very significant. And it's also kind of funny when I've got teammates around the world when I travel, one of the things I always hear from them, I don't understand why the US can't get off of checks. It's just a pretty consistent thing. When you go outside of the US, very few. I mean, I don't think any countries are as dependent on cze as we are a country. And actually in Europe, there's a really big push to get off of checks as a community from an ESG perspective as well, thinking about the paper, et cetera, the mailing, all of that, that you can lessen given all of these additional tools. So to your point though, it takes time. This isn't something that happens overnight. And then when you have a very efficient market we have in the US for these things, it's difficult to have something else come in and take that place.

Ram Palaniappan (18:18):

I think it's interesting. Payments has progressed a lot in 10 years with RTP and push to card and things like that, but it's still way behind what technology is capable of. And so I think while it's moved, it's, it's so far behind. We're all working today. So we've earned some money when we open our bank account. Why is that money not there? I mean, because the employer system knows that you're working, but the bank system doesn't, as a technologist, it's really trivial to move data from one system to another. But we have no protocols to allow this. So I think if you think of what is possible, it is far in excess of what we actually have.

Brandon Baines (18:55):

Do you think we'll get to the point in the US where we're paid daily?

Ram Palaniappan (19:01):

You'll get to the point where you're paid every second.

Brandon Baines (19:04):

And I agree with you, technology is a little slow to catch up, but being pragmatic, I don't see realtime payments as an industry disruptor. I see it more of an industry enhancer. Cause we have to look at the risk, the compliance and the cost associated with realtime payments and how that impacts our institution as a whole. I mean, if you look at Fed now, it's what a million dollar transaction limit. So if you need to initiate a hundred million dollars worth of transactions a day instead, a hundred different file drops.

Ram Palaniappan (19:33):

Yeah. I think if you might be familiar.

Brandon Baines (19:37):

You missed the ACH deadline, you can then use the real time payments.

Melissa Tuozzolo (19:41):

Well, we have actually started to see on RTP clients using RTP to actually make acquisitions over the weekend, which I found really interesting. So again, there's a million dollar limit, but they make six transactions, six relatively small acquisition, but they were able to do it on Sunday instead of having to wait for Monday and getting the interest until that was so, but to your point, it's not going to completely disrupt everything. It's additive to the overall payments ecosystem.

Chana Schoenberger (20:15):

So all right, as the US heads into a recession or a slowdown or something that's not as good as it was the last few years ago, whatever we want to call it, what role are payment systems going to play in helping consumers, banks, and companies cope?

Helen Herring (20:35):

I'll start. So I mean, whether it's a recession or a great economic, if you have a great economic situation, people are always going to have a need to move money. So that doesn't change. So talking about, as Melissa just said, all these additive solutions and payment models, I mean, those really are beneficial whether you're in a recession or not. I mentioned a minute ago was a great example of how much money was really moving at a fast pace, and you really saw a lot of innovation come out of that as well. And you hate for things like covid to push people into innovation, but that actually is what happens sometimes. So yeah, like I said, people are going to have to move money, especially at a quicker pace, even in a recession.

Ram Palaniappan (21:31):

One of the things that I think about, and I don't know what the right answer for this is, we talk about it's not how it helps companies, it probably hurts companies, but you look at the background and it happened at a certain pace and maybe information went faster because of Twitter, but if you could also move money instantly from your phone, you could actuate that background into hours instead of taking over a day or so, it's like how do you react that quickly? So that's actually a bad thing. That's a bad thing.

Melissa Tuozzolo (21:56):

And I think one of the interesting things, I mean, I think you're absolutely right. This world of moving money at the speed of information. I mean, that's really what it comes down to. How do you move money at the speed of information, but also try to account for the risks that come with that? Because sometimes friction is good, sometimes it slows things down, gives us time to think and react, et cetera. And we've seen this over the past couple of months. We're having a little bit of time to slow things down and think about next steps is actually quite important. But going back to your point about the importance of payments and money movement in a recession, I'd actually think it's even broader than that. I do think that there is this broader, almost geopolitical view, especially when you get out outside of the US and in the US as well, about the importance of payments to the banking industry overall and to economies and making economies competitive versus other economies around the world. And also the sovereignty and importance of your payments ecosystem. So you get into places like India that has invested huge amount of money in their payment system to really bring everything into the digital sphere, be able to pay people instantly, bank get people into the banking ecosystem is so powerful when you have a broadly banked population and you get into Southeast Asia where it's a similar thing. You see all of these instant payment schemes come out, these modernization of their payment infrastructure, which they're spending a lot of time and money and effort into. And you see this collaboration happening across Southeast Asia where they're actually interlinking their payments ecosystems with each other. So you can pay somebody in Malaysia instantly from Thailand, instantly from Singapore, instantly from India. And that's really incredible as well, because now you have these countries that previously maybe from an economic mite perspective, have been smaller individually, but they're creating their own consortiums. So I do think it's an incredibly interesting time for payments. It's no longer just to move money from A to B, but I think in a lot of places around the world, it's really seen as economic competitiveness, sovereignty, supporting your own ecosystem within your country, which is again, it's an exciting time even with everything else we're dealing with in the payment space,

Brandon Baines (24:26):

Whether you're looking at GDP or in your individual wallet, the velocity and volume of payments of all these be important and getting in with everything happening, it's forced banks to partner with technology companies to get out ahead of the risk and get out ahead of the payment before it post.

Melissa Tuozzolo (24:46):

I think risk mitigation is, I think there's two things that when you're talking about fintechs and the traditional banking sector kind of partnering, because I see all of this as partnership. There are things that fintechs will always be better than banks at banks are not going to be great. We're not great at everything. We're not going to be great at everything.

Chana Schoenberger (25:08):

Well, Also fintechs aren't regulated.

Melissa Tuozzolo (25:10):

Exactly. And I think the two areas where fintechs can really support is that kind of risk management and data management, and then pure data management and value added services, especially as, again, thinking about the payments ecosystem as the traditional payments infrastructure moves to the ISO 2022 standard. First of all, banks need support in actually moving to iso. We're still through this journey. It's incredibly expensive. It's a long transition. But then secondly, once all of this additional really standardized data is in our payments ecosystem, what do we do with it? And I'm already hearing really interesting things that our clients want to do with it. But again, I think that's where bringing in that partnership with fintechs to help manage that data is incredibly interesting and important. And then going back to risk management and all those other things, how do you build the right risk models now that you have this really powerful data standard?

Chana Schoenberger (26:07):

I did an interesting interview not long ago with an executive from a different bank who was telling me that they were using AI for this sorts of payment risk management. And what they did was they could figure out when a risky payment was about to occur based on whatever's in the black box there, the model and a popup would appear on the screen of the staffer and it would say, please confirm that you've typed this in correctly, that it's going to the right counterparty. Take a deep breath, slow down your communications. Don't hit send until you're absolutely sure, because the computer knew that certain conditions had been met, and it was likely that it was either going to the wrong person, it was the wrong amount, there was a fraudster involved, not of course the staffer, but that it was initiated by a fraudster in some way. And I think that application is really cool.

Helen Herring (26:59):

And it shows. So we talk so much about banks being so good at compliance and risk mitigation and what an asset that is to the fintechs that work with bank partners. But it's really interesting because as you see banks trying to grow and scale, they really do have to lean on a lot of technology that fintechs bring into the market to enhance those compliance programs to help banks scale in an efficient way. So it's really this, I hate this word, but it's really this continuous synergy where you really do lean on each other both to start and then growth as well when you're talking about a FinTech and a bank working together.

Chana Schoenberger (27:41):

Okay. We're going to pause here to see if there are any questions from the audience. And if not, I have lots more questions. Yes.

Audience Member 1 (27:50):

So I was intrigued by what you were saying about, it kind of seemed to me you were describing the payroll account almost as a shadow bank account that you could withdraw money from in real time. And I'm wondering where you see this going. Do you see in the future with real time payment systems that it could be like the daily cash you have with Apple Card or some of these things where you could in theory, get paid by the hour or by the day and have access to that to spend in a much more seamless way than you do now? Or you have to ask for it to be sent out?

Ram Palaniappan (28:51):

So the money that someone has owned is actually, it's their money. It just hasn't moved to the payment system yet. So it actually is their money, but it's kind of locked up and invisible to them in the way systems have worked traditionally. And what we're doing is giving them visibility and allowing them to transfer it. And we use the payment mechanisms to transfer it to get to buy the second access to it. I think you could do by the day with the transfer, I don't think it's going to be practical to do a by the second transfer. The way the transfers work today, you kind of need a different paradigm. What you will need is that the bank's ledger has visibility into the payroll system that when there is an attempt to make a call to a read on the ledger in the bank system, at that point, it's actually pinging the payroll system to know what has been accrued at that point in time. So I think, not the payment mechanism itself, but it's probably an information sharing that can update the ledger. And then, it's kind of interesting because what is a payment? It's actually just moving information anyway, but it's probably a different paradigm from what we're used to seeing today with like RTP or push to card or Fed Now, I think to get to buy the second payment, the ledgers are actually not equipped to be incrementing by the second. So you need a different type of underlying technology to make that happen.

Chana Schoenberger (30:12):

Yes.

Audience Member 2 (30:18):

So Melissa, when you were talking about the, it's about flexibility and the optionality. I am curious in the context of higher rates and inflation on both the payable and the receivable side, do you feel like it's become a forcing mechanism to accept and take more types of optionality? We always have that always constant. Certain people don't want to take certain types of payment types for whatever reason.

Melissa Tuozzolo (30:41):

Yeah. So I do think there is a competitive advantage depending on the industry that you're in and the type of payments that you make, the type of payments that you received actually have that element of flexibility and really think about two things, what will make it easier potentially for my suppliers to pay me? And what will make it easier for me to pay? Again, to Ram's point, really to attract talent, especially in the services world, the contracting world, et cetera. And that really comes down to flexibility. I know at Bank of America, we created this capability called Recipient Select, which I know one of my colleagues here, Alison Sherard, is the one that runs it. So if you have any questions, find her. But it really gives people the ability when they sign up for receiving payments to look into, do I want to be paid via ACH? Do I want to be paid via RTP? Do I want to be paid via Wire if I'm outside of the US and I can't receive it another way? Do I want to be paid to a card? So offering that flexibility, it does two things. Number one, it kind of simplifies that outreach for companies that want to provide that flexibility for the people they're going to be paying. And again, it gives that extra element of competitiveness if they really want to attract people to their organization. So again, we see that as being really important in the future. And again, like I said, all of this is additive, right? It's not like everything is going to move to real-time payments. That's not right in every situation. But again, it's giving people that element of flexibility, being able to be paid as fast, cheapest, and the way that they want to be paid.

Chana Schoenberger (32:24):

Great. Okay. We are out of time. I want to thank our wonderful panelists. This was super interesting.