By Beth Tancredi
At the start of 2020, many financial institutions were poised to make their mark in the increasingly competitive digital payments market that has tripled over the last 10 years to 15 percent of total commerce penetration while accounting for 35 percent of all card transactions.
But with more than 25 million Americans now unemployed, and a dramatic shift underway in where and how consumers are spending their money, banks are now staring directly in the face of both new threats to and opportunities for their payments businesses.
While it is still imperative that banks set their eyes on upping their digital payments game for the long-haul, a COVID-19-created shift in spending away from higher-interchange transactions such as travel toward lower ones like groceries have had a hard-hitting impact on the industry.
“Typically, we see that on average 15 to 45 percent of non-interest income comes from interchange, and I don’t know of a business that’s a bigger piece of the non-interest income pie that gets less attention than this,” says Tony DeSanctis, director of Cornerstone Advisors. “The scary thing is that most institutions don’t know what the impact is going to be on their business until two to three months down the line. And many times, by the time they realize it, it’s largely too late.”
DeSanctis says some disruptors in this business whose operating model is solely based on interchange income may “suffer to the point of extinction” in a market in which spend has shifted so drastically.
The pandemic is also shedding light on the lack of payment executives at the C-suite level who manage these products and know what to do when the numbers aren’t meeting projections, he notes.
And, of course, no crisis would be complete without an uptick in fraudulent activity.Al Stonum, SVP and bank card services director at Missouri-based Central Bank, echoes sentiments from Karen Epper Hoffman’s recent article about fraud. “We have seen a number of phishing, vishing and smishing attacks,” he points out. “On the merchant side, we are seeing brute force attacks where fraudsters are using computer systems to generate card numbers until one hits.”
As threats emerge, so do opportunities to build both the product and the service sides of the business.
From a product standpoint, one unintended consequence of the coronavirus is the changing tide toward contactless payments, allowing cardholders to pay for products at point of sale without ever touching a shared device to swipe a card or enter a PIN. “Visa and Mastercard have been pushing [contactless payments]for the last 18 months, so demand was already strong,” DeSanctis notes. “I think this will make them even more important to execute.”
On the service side, the time is ripe to build relationships.
“Unemployment is approaching 20 percent and that’s twice the level of the 2008 crisis,” Stonum says. “This is something that was forced upon everyone; no one did anything wrong. People are having trouble paying, and banks can help customers without taking any real drastic actions.
“As a financial institution, rather than buying ads to say, ‘We’re here for you,’ show customers tangible examples of how you’re there for them,” advises DeSanctis.
He adds that bankers can “do well by doing good” for customers simply by knowing who they are and anticipating their needs.
“If I have a reasonable assumption around who my customer is, I can build the relationship by structuring payment relief to keep their short-term cash flow positive through these challenging times and build the relationship at the same time,” he says.
DeSanctis suggests banks take a look at how long customers have done business with them and evaluate options such as establishing payment holidays for loan products. Customers could then be asked to pay what they can afford, without facing late charges.
Stonum’s Central Bank is offering customers an automated skip-payment program in which all statements in April and May that are not already past due have a zero minimum payment and discloses interest will continue to accrue. Customers can make payments if they can and want to. Stonum’s team also made special arrangements for those who call in seeking assistance from COVID-19-related financial hardship.
And as a longstanding provider of unemployment debit cards for Missouri’s Department of Employment Security, Central Bank is keeping busy. “About 20 percent of Missouri’s unemployed are taking debit cards right now,” Stonum says. “From the debit card perspective, this is a break-even business for us . . . but in the long run, it helps the bank in terms of growing deposits. The state deposits unemployment disbursements into a general account at the bank that funds purchases and withdrawals from debit cards.”
A positive net result
Undoubtedly, this is a challenging time for banks and the individuals they serve, but when handled correctly, the opportunity to build on product offerings and relationships outweighs the threat.
“In some ways, this feels like it’s been dragging on forever, but we’re not that far into it,” Stonum says. “I think we just have to stay with things. We’re going to take some hits profitability–wise, but in the long run by keeping a steady hand on things, we’ll be much better off when we come out of this. We just need to hold the course.”
Beth Tancredi is a New Jersey-based writer whose focus is financial services, advertising technology, healthcare and the media.