The Bank Payments-Driven Race to Smart Commerce: Start Your Engines!
The last session I attended at BAI Payments Connect 2014
(March 10–12) was a discussion of the concept of “smart commerce.” Smart commerce
is generally defined as the ability to intelligently meet consumer expectations
for value and convenience within their shopping and buying experience—in other
words, the digital retail landscape in a nutshell.
Essentially, the idea is for the bank to invite merchants
into its franchise in order to forge mutually beneficial buying and payment
experiences for their customers through digital channels. Driving this strategy
is the fact that banks are increasingly being pushed back in the value chain.
So, for example, formerly lucrative card payment transactions have been
transformed into expensive ACH transactions or lost all together. This concern—I
might even say in some cases, fear—was pervasive at the BAI conference this
year. We can see financial institutions are beginning to realize that while
consumers trust them and often look to them first for payment services, the
payments business is no longer the industry’s right but has become instead a new
The words “commodity” and “utility” were used more than once
at BAI to describe where a bank might find itself on the payments value chain,
and the implication of this directionality is profound. What banks see they are
facing is a dismantling of their core retail business model, the traditional
model in which interchange and acceptance fees provided reliable revenue
streams and fixed costs were rationalized against those streams. That model is
no longer the case, and we are seeing the first concrete indicators as to how
the industry is going to reshape itself and build out a new business model.
Some financial institutions, those that have the resources
to execute on strategies like smart commerce, will slowly distribute their
revenue risk across an array of nuanced consumer fees based on new services and
combine that approach with participation in revenue sharing arrangements with
application developers, merchants, card networks, and other partners. Others
will form alliances to pool resources in order to remain competitive, a trend
that is shaping up rapidly in the credit union industry in particular. Still
others will focus on core consumer lending such as mortgages, auto loans, and
equity loans and essentially exit the payments business as an investable
product set. M&A activity in the banking and credit union markets will
continue at a steady rate as weaker institutions are unable to evolve.
The bank-driven payments industry race to change has begun
in what will most likely be a decade or more of recalibrating its original
business model. In our opinion, the
fundamental change banks are facing is that they are going to have to become
sellers of financial services, not providers of financial services. This simple
word swap speaks volumes to the material change in store for an industry that
can no longer afford to be complacent about its future.
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