In 1965, when the internet had not yet been created and modern computer science was still in its infancy, an engineer named Gordon Moore made a simple but profound observation about the trajectory of technology. Moore predicted that computing power would continue to double roughly every 18 months, resulting in the exponential growth of technological capabilities.
This maxim—known today as “Moore’s law”—is evident in the rapid technological evolution that has taken place since the early 2000s. In less than 20 years, high speed internet access has become available across the globe, banking transactions can be conducted entirely online and mobile devices have reached ubiquity. These changes and others have laid the groundwork for the exponential expansion of technology to continue, and it will have fundamental consequences for the banking system.
As fast as technology is growing today, Moore’s law posits that it will only continue to rocket forth at a staggering velocity. Bankers must be prepared to respond to the technological evolution and shifting customer behaviors with innovative solutions that are fast, simple and delightful for customers to use. In this special report, the ABA Banking Journal delves into several key trends will shape the conversation around payments in 2019 and beyond. Read on for further insights on faster payments, open banking, security and more.
—THE EDITORS
1. Mobile is everything.
Today, 77 percent of the U.S. population owns a smartphone, and many consumers are choosing to conduct ecommerce transactions primarily through their mobile device. Accordingly, the mobile payments experience will continue to play a central role in banks’ overall payments strategies.
While Apple Pay, Samsung Pay and the like were initially slow to take off, adoption of mobile wallets is increasing. In addition, thanks to APIs, consumers have more options than ever when it comes to how they choose to pay. That banks need to have mobile as part of their payments strategy is a given; the question now becomes: how can banks ensure that they are top of wallet when their customers make a payment?
2. Contactless is coming.
In 2015, the U.S. began the migration from magnetic stripe cards to EMV-enabled chip cards. As a result, more than 2.9 million retail locations today are EMV-enabled, and counterfeit fraud is down 75 percent among those business and down 50 percent across all merchants. The one significant downside: transactions take longer.
The solution? Contactless payments. Contactless payments ride on the same rails as EMV; in addition to the chip inside, the card is equipped with a small antenna that can communicate with the payment terminal, allowing customers to pay quickly and easily by simply tapping their card to or waving their card near the terminal.
The contactless payments trend is growing quickly outside the U.S.—countries like Australia, the U.K., Brazil and Canada are already running on contactless payments, and adoption among consumers is increasing daily. In most of these cases, card issuers led the way by beginning to issue cards that were enabled for contactless payments. In turn, merchants began to transition to point-of-sale terminals that were fully enabled to accept contactless payments.
In the U.S., the situation is the opposite; many merchants already have terminals that can accept contactless payments—they just haven’t enabled the technology yet. But as customers increasingly demand faster transaction times, it’s likely that issuers will soon begin rolling out contactless cards in earnest. Banks need to be thinking now about what their strategy will be for getting these cards into their customers’ hands.
3. The mobile natives are here.
There’s been a lot of hype in recent years about how millennials are fundamentally transforming banking. But even most millennials can still hearken back to the days of dial-up internet and landline phones. By and large, this cohort was born and lived at least a few years of their lives outside of the always-on, constantly connected, mobile-driven world that we know today.
The next generations will be different. Members of the Generation Z cohort (those born roughly between 1996 and 2010) have never known life without technology—they live through their mobile devices, and they’re a fast-growing consumer segment. In fact, within the next four years, Gen Z will account for 40 percent of all consumers, and their expectations for fast, seamless and secure banking experiences will be higher than ever.
4. The customer mentality is ‘always on’ and ‘instant.’
Consumers today are being inundated with new digital experiences, and banks must find a way to stand out from the Amazons and Apples of the world. It’s no longer enough just to offer an online and mobile banking platform—consumers now expect a fully integrated, fluid digital experience.
Payments are at the heart of banks’ digital relationship with their customers, and the more banks can do to make the payments experience fast, easy and enjoyable, the more engaged customers will be. And research shows that having more digitally engaged consumers can affect banks’ bottom line; a recent Fiserv study observed that digitally engaged consumers (those who used multiple digital applications within the bank) generated 16 percent more revenue for the institution, showed a 10 percent increase in engagement on digital platforms versus in-person transactions, had a 1.7 percent lower attrition and had a 41 percent increase in bill payment use.
5. Banks and fintech firms are collaborators, not competitors.
Banks and fintech players may have gotten off to a rocky start several years ago when a slew of new startup companies burst onto the scene vowing to disrupt the banking system. But that road has long since smoothed, ushering in a new era of strong partnerships and exciting synergies.
Fintech companies recognize the advantage of having financial industry partners that understand the regulatory framework and have access to the payments system, while banks are reaping the rewards of working with smart, savvy innovators and bringing exciting new products to their customers. The result of these partnerships is a better customer experience and a greater sense of unity in the effort to modernize the payments system.
New ideas need the right environment to grow and flourish, and banks will need to continue developing their processes for evaluating new ideas and forging strong, safe partnerships with tech firms.
6. Security is paramount.
Consumers have legitimate concerns about the security of their data. With new reports of personal data being misused or compromised making headlines daily, many consumers are taking a harder look at who has access to their data and how it’s being protected.
The good news is, banks have an advantage in this area: an ABA poll found last year that six in 10 American consumers trust banks to safeguard their data ahead of alternative payment providers, retailers or telecom companies. However, research also suggests that security concerns can have a significant effect on whether and how consumers choose to adopt new financial services technologies. For instance, a recent Fiserv study noted that among consumers that have not used mobile banking, a majority—57 percent—cited security concerns as the top reason why.
Data protection and privacy will continue to be at the center of the technological evolution in the years to come. New laws are already on the books (like the European Union’s General Data Protection Regulation, or GDPR) regarding the collection, storage and usage of customer data. As the payments system evolves and new technologies emerge, banks can capitalize on the existing trust relationship they already have with their customers. But they should remember that a data breach can have serious reputational and operational consequences.
