Change Is Coming

By Jeff Plagge

Payments, like telephones and computers, have changed dramatically during the last five years. It’s no longer about checks and check clearing. The check is no longer “in the mail.” When you think of payments today, you should be thinking faster, interoperable, ubiquitous, electronic and mobile.

For example, mobile wallet transaction volume is still relatively low, but that doesn’t mean you shouldn’t be paying attention. There are a lot of options out there for consumers, and the media is playing them up. Today you can probably read more press releases about mobile payments than there are actual mobile payments, but it doesn’t matter. Mobile is in the news and on your customers’ minds. You need to be on top of it. How is your bank answering customer questions about Apple Pay and the other new wallet options being rolled out? Do you have a plan for getting your debit and credit cards integrated into that world?

Bankers have to think about the quickly changing world of payments from not only our own institutions’ perspectives and also from our customers’ perspectives. With each new mobile device our customers buy, their expectations regarding products, services and apps grow. We face the challenge and the opportunity of moving with them and continuing to meet their financial and payment needs along the way.

The Federal Reserve is deeply engaged in this debate as well. The Fed’s engagingly titled “Payment System Improvement—Public Consultation Paper,” released in September 2013, surfaced four general themes:

  • Agreement with gaps, opportunities and desired outcomes. There are lots of opinions on where payments are heading and how we should get where we’re going. All of these options have costs and requirements associated with them. Banks, merchants and consumers don’t want to have to gear up for multiple channels and options, so getting some agreement on desired outcomes will be critical to meeting the interoperability and ubiquity objectives.
  • Approaches to achieving payment system improvements. The big question here is around whether to build out existing systems or essentially start over. Both options bring challenges and costs. Doing both doesn’t make sense, so, again, getting agreement on direction is critical to progress.
  • Faster payments. This has been a long and, quite honestly, frustrating debate. I personally think the debate is now over. Payments will be faster, and all parties need to get on board and start moving forward. That said, speed and pricing options should still exist for all parties. Sometimes faster is critically important for the customer, but other times it won’t be. There is value in faster payments, and banks should have the opportunity and choice as to how they charge for that value. The marketplace and the forces of competition will ultimately find the correct price points.
  • Security. Security has to be front and center. This means security requirements and protocols for all parties, banks and non-banks, involved in the payment infrastructure.

Aspects of all four themes and more are being debated, of course, and a variety of entities have ideas about how and who should provide solutions. I’ve talked to many bankers engaged at various levels in this topic. Some jump into payment issues in a very granular fashion. Others focus their attention on their vendor partners and expect them to provide direction and solutions. In some cases, I’ve talked to bankers who are totally disengaged due to the complicated nature of the area. Disengagement is the most dangerous position for you, your bank and your customers.

In January 2015, the Federal Reserve followed up on its 2013 paper with “Strategies for Improving the U.S. Payment System,” in which the Fed outlined a plan for creating two special payments task forces with members representing the diverse stakeholders in the payments industry. These groups will review the different business models that could lead to faster payments and make recommendations on which method should be adopted. While the Fed is seeking consensus among the banks, networks, payments processors, consumers and merchants, it will be challenging for these diverse groups to quickly agree on decisive actions and directions in the short term.

The Fed is filling these task forces with bankers and other payments stakeholders. If you’re interested in helping to guide the future of payments but have missed the chance to register for a task force, talk to your state bankers association or the ABA, who can channel your input.

The Federal Reserve’s efforts should be applauded, but it shouldn’t stop banks from moving forward on their own. We have a real opportunity here to show our customers that we will continue to serve as their trusted, secure and innovative financial partners. Customers can have internet banking, bill pay, mobile banking, mobile wallets, P2P payments, remote deposit capture and other technology services directly with their banks. Working with us, they also benefit from consumer protection rules, real-time information, multiple levels of physical and online access and FDIC insurance. These qualities are wrapped together in a total banking relationship provided by their hometown community bankers. Bringing unregulated non-banks into the payments industry can increase the risk to consumers who may not even understand the benefits they are forfeiting by using a wide variety of payment partners.

The bottom line is that there is much to be decided in both the consumer and commercial payment spaces. Some of the change seems to be moving quickly. Other anticipated changes seem to be moving slowly. That’s in the eye of the beholder, I suppose. But changes are coming. The key for all of us is to engage in the discussion and to know our options. If all of this is foreign to you, find someone in your bank who understands these issues and make that person your internal expert. Don’t leave payments to chance.

Your customers are moving forward, with or without you. They’ll give you a reasonable period of time to bring your products to table, but their patience won’t last forever. Once they make a move to someone else’s product or service, you may never get them back. While there are certainly costs in providing these services, there will be greater long-term costs in not providing them. Losing good customers is expensive. Having a good strategy is better than having a bad strategy or no strategy at all. Even less wise is inflexibility. Expect to change your plan as time goes on. It’s the nature of the space. Stay flexible but stay engaged. Your customers are depending on you.

Jeff Plagge is president and CEO of Northwest Financial Corp., Arnolds Park, Iowa. He served as ABA chairman in 2013-14.