John Stewart of Digital Transaction News moderated an open discussion exploring the most pressing issues in e-payments. It picked up on the list of 10 pressing themes raised in the November issue (pgs. 26-32). The panelists were:
Aaron Fine, Oliver Wyman
David C Stewart, McKinsey
Andrew Frisbie, First Manhattan Consulting Group
The audience fielded questions and the panelists, moderator, and even other audience members chimed in. Highlights are as follows:
On merchant interchange:
Dave Stewart questioned the strategy of merchants positioning interchange as a consumer issue, as a jobs issue. Would merchants really lower prices or hire additional people if interchange was reduced? John Stewart raised the Australia example to illustrate how interchange was cut drastically yet merchants did not pass on savings to consumers.
On cash usage:
Cash usage is increasing. As a result of consumer deleveraging – cash and debit are perceived to be good budgeting tools. Dave Stewart observed that the single biggest growth opportunity for the banking industry is to take on cash usage (offering more carrots than sticks).
Andrew Frisbie commented that many debit users, recognizing the risk of overdrawing their account and getting hit with fines, continue to do so. It isn’t as effective a budgeting tool as perceived.
Aaron Fine shared that he rarely pays with cash anymore. Yet Dave Stewart wondered how much easily displaceable cash is there? From his personal experience, knowing the merchant perspective, he feels guilty charging $5 for a taxi. Until micropayment pricing schemes gain traction, consumer guilt may inhibit widespread use of cards for what are currently cash transactions today – for instance in a taxi. Can banks offer sufficient incentives to make consumers less concerned about merchant value proposition?
Dave Stewart indicated that NFC in the U.S. is still a long way out.
Aaron Fine onbserved that if you are a bank, the opportunity to increase transaction volume via mobile payments is relatively modest. But if you are a non bank – carrier or Apple for instance – payments are incremental business, and an exciting opportunity.
Andrew Frisbie remarked that from a customer perspective, who is interested in trying all these new channels? Those interested in new means of interacting with the bank (depending on the era, ATM, IVR, debit, mobile… ) are some of the least attractive customers from a profit perspective.
Aaron Fine observed that the carriers and a big retailer such as Wal-Mart together form a formidable threat to the banks, rather than retailers or carriers acting alone.
Dave Stewart reminded everyone that even those micropayment charges that are charged to the carrier bills are ultimately paid by a banking product often a credit or debit card.
Andrew Frisbie observed that as more and more electronic transactions are linked to DDA bank accounts (as recurring ACH debits, funding of a PayPal account, etc.) it makes it harder and harder consumers to switch banks.
On banks as incumbents:
Picking up on the general session that immediately preceded the session, one audience member observed that banks are in a very defensive position with a lot to lose, versus new providers with very little to lose and a lot to gain.
“Buy ‘em and run ‘em into the ground” quipped one of the panelists with a laugh. But in all seriousness, this is the nature of being an incumbent. You ride cash cow and meanwhile, have your innovative “tiger” team focus on new stuff and be ready to roll it out as customer need dictates. Someone is going to address the need, if the need really exists, so be ready.
Dave Stewart suggested that there is actually a “ton of innovation going on at banks” right now – more than in a decade. Largely due to regulation addressing overdraft fee and threatening to address interchange. New products and functionality enhancements are giving some banks a clear competitive advantage. Investment in credit card act compliance, new payment hubs, and enterprise- wide risk management give banks an opportunity differentiate. He cites the Chase blueprint card as an example of , innovation blurring lines between credit and debit. What it takes to actually change the processing for a given transaction behind the scenes is really remarkable from an operations perspective.
Andrew Frisbie, picking up on a topic from the Digital Transaction News article noted that bank product managers have needed to innovate for the first time in a decade due to Reg E, CARD Act, etc., and they will be demanding innovation from partners as well, including Visa and MasterCard.
John Stewart observed that the best thing that ever happened to innovation in a bank is the iPhone.
Aaron Fine observed that the marketplace evolving in a way that makes the core assets of the bank less valuable than they used to be. It’s not a case of innovation as usual, or innovation accelerated. It’s more drastic.
Andrew Frisbie observed that there has been considerable payment innovation outside the U.S. and that U.S. banks could derive their innovation playbook for the next five years by emulating some of the solutions overseas.
John Stewart notes that both NACHA and BAI have played a role in fostering innovation.
Dave Stewart wondered whether it is appropriate for NACHA to take strong stance on innovation, versus rule making. An audience member noted that “utility based innovation” is ideally appropriate for NACHA, delivering core, common functionality to the industry and allowing banks to do product development. [As an aside, NACHA’s supplier directory ambition ss an example of utility innovation to serve the industry.]
On EMV/Chip & PIN deployment in the US:
An audience member suggested prepaid cards with Chip & PIN that could be sold to tourists and business people in airports for US travelers heading overseas. [Note: it was unclear whether the audience member had actually seen this product or was suggesting it as an industry opportunity – Glenbrook is in favor of this idea, given the popularity and number of comments we received on our posts highlighting the frustration of using US mag stripe cards in Europe.]
Dave Stewart noted that while EMV introduces card security that doesn’t exist today in the US, what are the incentives for banks to implement it? Thus far card issuers have not seen a compelling reason.
Aaron Fine notes that the business case isn’t strong enough, that fraud reductions are not great enough.
On the impact of social networking:
Dave Stewart notes that social networks are a good opportunity to get customer feedback. They may also provide more touch points for consumers to purchase. But he doesn’t see a provider of social networking being a big player in payments.
Andrew Frisbie notes that here is a big cultural barrier – hard to imagine Facebook thinking like NACHA or a bank. But social networks are a highly effective channel for branding, customer service, etc.
Aaron Fine notes that the flow of information available via social networks is amazing, but that the social networks are not ready to build a payments network accessing the information flow, despite the desire to monetize it.