As economic pressures continue to price many prospective buyers out of homeownership, Fannie Mae and Freddie Mac are turning to new credit-scoring models in an effort to widen access to mortgages.

The two agencies—which guarantee ​most U.S. mortgages—will now accept loans evaluated using ⁠the VantageScore 4.0 model, which incorporates data such as rent and utility payments in addition to traditional credit information. The goal is to improve access to mortgages, enhance affordability, and foster a more competitive housing market.

However, the same economic challenges that have hindered homebuying also make accurately assessing creditworthiness imperative to protecting both consumers and lenders. Moving away from a tried-and-true model raises questions about potential risks in the years ahead.

“FICO scores set the gold standard for credit scoring, and their U.S. model has been used in all consumer collateral classes,” said Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research. “It has been tested in recessions and recovery environments for more than 40 years.”

“Lenders rely on the FICO score to manage risk from stem to stern,” he said. “These scores are used at the acquisition point, as a credit management tool, a retention tool, and even through capital markets for asset securitizations. It is a steady fact, more than 90% of credit card lenders rely on the FICO Score.”

Expanding Homeownership Access

While the importance of credit scores has not been widely disputed, some lenders have adjusted how they interpret them. For example, Fannie Mae and Freddie Mac have lowered their minimum 620 middle credit score requirement for certain home purchases and refinance loans.

The intent is to expand access to homeownership for borrowers with limited credit histories and to support “near-miss” applicants—those with sufficient income or cash reserves whose credit scores fall just below the 620 threshold.

The Best of Both Worlds

While there is broad agreement that challenges persist in the housing market, easing lending standards also carries risk if not carefully managed. As a result, a blended approach—combining traditional credit scoring with more current data on payments and debt behavior—is increasingly seen as essential.

“FICO Score 10T is an illustration of how FICO keeps its iconic scoring model relevant, as the mortgage industry requires tools that open access to borrowers who may be on the fringe,” Riley said. “The model includes trended data, such as rental payments and utilities, which will help issuers broaden access while keeping the credit score as a highly predictive risk management tool.”

The post Fannie Mae, Freddie Mac Embrace Alternative Credit Scoring appeared first on PaymentsJournal.

The digital assets industry has achieved milestones at breakneck speed in its rise to mainstream prominence over the past few years. While the recent approval of Coinbase’s trust bank application may appear to be just another milestone, it has drawn pushback from the traditional banking sector.

The Independent Community Bankers of America (ICBA) went so far as to call the Office of the Comptroller of the Currency’s (OCC) conditional approval of Coinbase’s application “a grave mistake.”

At the heart of the ICBA’s concerns is the possibility that Coinbase could gain access to the federal banking system without bearing the same regulatory burdens as traditional banks. Because Coinbase wouldn’t be subject to Federal Deposit Insurance Corporation (FDIC) requirements, the group also questioned what would happen to customer assets in the event of the company’s failure.

For its part, Coinbase emphasized in a blog post that it has no intention of becoming a commercial bank. The firm stated it will neither accept retail deposits nor engage in fractional reserve banking. Instead, it aims to use the trust bank charter to bring federal oversight to its crypto custody and market infrastructure operations.

Not an Unprecedented Move

As a leader in the digital assets industry, Coinbase’s approval is significant—but not unprecedented. Circle, Ripple, Paxos, and Bridge have all received conditional trust bank approvals in recent months.

However, these firms are more focused on stablecoins and therefore fall under the oversight framework established by the GENIUS Act, which governs U.S. stablecoin issuers. Their trust bank charters allow them to issue stablecoins, hold digital assets, and manage reserves under federal supervision.

Seeking Universal Rules

As a crypto custodian, Coinbase could also become subject to the CLARITY Act if it is enacted. The bill, which targets non-stablecoin cryptocurrencies, has already passed the House of Representatives but has stalled in the Senate—largely due to opposition from Coinbase over restrictions related to tokenized equities.

Despite the pause in the CLARITY Act’s progress, Coinbase has reiterated its longstanding support for comprehensive digital asset regulation—a position widely shared across the crypto industry, in part to address lingering misconceptions about the sector.

“There was a perception for a period of time that the larger field of crypto was kind of like the wild, wild west,” James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, said in a recent PaymentsJournal podcast. “Yet, there have been companies over the last many years that saw the value of crypto, digital assets, stablecoins, blockchain, and tokenized assets—and were begging for regulatory clarity. They were saying that there’s an efficiency gain here; there are cost reductions.”

“What’s so surprising is how willing and able companies in the space were to say, ‘Now that there’s clarity, we’re happy to look at compliance; we are happy to look at regulation; we are happy to look at governance—because we were always willing to do that,” he said.

The post Community Banking Association Challenges Coinbase’s Trust Bank Approval appeared first on PaymentsJournal.

The best time to start investing for retirement is now, but conveying this message to younger adults can be challenging. Many Gen Z and millennial individuals face pressing financial concerns today, making it difficult to prioritize saving for a distant future like retirement.

Because retirement investing is not typically top of mind for younger consumers, many financial institutions fail to engage them in conversations about retirement products.

Disha Bheda, Digital Banking Analyst at Javelin Strategy & Research, highlights in the report, The Key Step on the Bridge to Investing Maturity Path: Helping Customers Think Beyond Today, that failing to focus on future planning can leave institutions at a disadvantage, especially as more financial services firms compete for younger customers’ attention. Once these relationships are established, they can be difficult to break.

Preparing for the Unseen Future

In a previous report, the Javelin digital banking team introduced the Bridge to Investing Maturity Path, a strategy designed to help financial institutions engage and guide the next generation of investors. The path consists of six stages:

1. Build a foundation of products and create an optimized account opening experience.
2. Teach the fundamentals of personal finance to customers.
3. Shift the customer’s mindset to long-term thinking.
4. Leverage pivotal life events as springboards for investment opportunities.
5. Establish a structured coaching plan to guide novice investors.
6. Lay the groundwork for advisory relationships.

One of the greatest challenges in guiding customers through these stages is instilling the belief that completion is attainable. For many young adults, traditional milestones like purchasing a home or starting a family feel far off—or even uncertain.

“On the flip side, many of these customers have ascendant earning potential and, in many cases, are in line for a generational wealth transfer,” Bheda said. “They’re prime candidates to be prepared for a future they might not yet see.”

“To the extent that FIs are engaging prospective investors before they actually have significant assets, most institutions are solidly in Stage 2 of this maturity path,” she said. “They have built smooth account-opening flows; they have a range of financial products; they boast educational materials that seek to guide their customers in the fundamentals of personal finance. But young or inexperienced would-be investors are largely on their own to discover and explore these resources.”

Leading customers beyond Stage 2 is the most difficult leg of the journey, and many financial institutions stall there. However, banks can no longer afford to accept this level of engagement.

“The historic play for FIs has been to wait for when these customers have investable assets before attempting to initiate an advice-driven investing relationship with them—that’s too late,” Bheda said.

“Lurking outside those primary banking relationships are fintechs and specialty apps that do what most traditional banks today do not. They offer easy-to-use interfaces with enviable digital experiences, low fees, and specialized services that target specific consumer needs often overlooked by banks,” she said. “They are threats to erode banks’ ability to establish a long-term advisory relationship if they go unchecked.”

Rewiring the Customer Mindset

To address this, banks can adopt three key principles to rewire customers’ long-term investment habits: education, tracking habits through digital experiences, and setting goals.

“Education should be woven into the experience at appropriate points during customers’ digital interactions with the bank,” Bheda said. “A focus should be on emphasizing the principle of compounding to help young customers and investing novices understand that a lofty long-term goal is possible through small steps.”

Along with education, financial institutions should create digital experiences that resonate with younger consumers and help cultivate consistent financial habits. These experiences should be informed by behavioral finance principles and tailored to individual customer needs.

Even with the right tools, establishing financial discipline is difficult, and participation may be inconsistent. This underscores the importance of streamlined interfaces and gamification techniques to maintain engagement.

Establishing SMART goals—specific, measurable, achievable, relevant, and timebound—is another critical component. Banks must help customers prioritize these objectives, understand trade-offs, and revisit goals regularly to ensure progress.

“Illustrations showing how daily actions of customers build toward or detract from goals, reminders, cost-of-waiting visuals, and positive feedback help customers build a corpus and take the plunge into investing,” Bheda said.

“Prompts built into every digital interaction with the customer and digital nudges to review their progress helps shift the customer mindset into long-term thinking and achieving goals, a key to relationship deepening and cultivating the next generation of investors,” she said.

From Oversight to Foresight

As banks work to broaden customers’ horizons, they must also rethink their retirement strategies.

“Getting customers to adjust their thinking to envision longer-term outcomes is just part of the challenge,” Bheda said. “To reach Stage 3, banks will have to set aside their usual focus on short-term revenue and consider the potential for lifelong customer relationships that prove fruitful again and again.”

“Taking this further step along the Bridge to Investing is both a short-term imperative for FIs and their customers and a longer-term play for customer trust and loyalty,” she said. “For banks, the reward is a lifelong relationship that becomes more lucrative as customers mature and seek out financial products that reflect their changing lives. For customers, it’s gaining the ability to visualize their future and the confidence of knowing they have a pathway to achieving it.”

This urgency is heightened by the rise of fintechs targeting younger demographics. Educational apps like Greenlight and GoHenry, along with teen accounts offered by Venmo and Cash App, embed financial habits at an early age.

While not all provide retirement investing yet, many are evolving into holistic financial services providers. If they are firmly established with younger customers now, they will have inroads with them as they age into retirement. This has made it more important than ever to tread the Bridge to Investing Maturity Path.

“Success in Stage 3 will profoundly alter banking relationships,” Bheda said. “The shift from oversight to foresight will reposition FIs as a proactive advisor, not just a reactive provider of on-demand financial services. Digital banking will continually reinforce the FI’s advice-giving role in achieving future goals.”

The post Young Customers May Not Prioritize Retirement Investing, But Banks Should appeared first on PaymentsJournal.

On one hand, digital banking technologies have made it possible for financial institutions to offer more services than ever before. On the other, this shift has often made it harder for banks and credit unions to differentiate themselves. That challenge is likely to grow as institutions try to stand out in digital environments increasingly shaped—and administered—by artificial intelligence.

The rise of AI-powered search is just one of the trends highlighted by the Javelin Strategy & Research Digital Banking team—Disha Beda, Lea Nonninger, Gregory Magana, Mark Schwanhausser, Emmett Higdon, Dylan Lerner, and Ian Benton—in the 2026 Digital Banking Trends report.

Bridges Vs. Doors

Another major trend this year is the continued entrenchment of wealth management tools within digital banking platforms. In the past, many banks kept their wealth services separate from their retail banking apps.

Over the last few years, however, more financial institutions have begun embedding wealth experiences directly into their consumer apps, with varying degrees of success.

“We don’t think they’re doing a very good job,” Lerner said. “We often talk in our practice about a bridge to investing. It’s a way for banks to bring their deposit customers—young people or people new to investing—over to the investment side of the house. What we see now is they’re putting in doors. They’re not building a bridge; they’re hoping you stumble upon it and walk your way in.”

This change is partly constrained by the limitations of mobile apps, where financial institutions must carefully optimize scarce screen real estate. At the same time, the number of financial services offered through a single app continue to grow, and adding wealth management capabilities makes streamlining the user experience even more difficult.

As a result, many lenders now offer apps that feel cluttered or are designed in a less-than-optimal way.

“Even the giant FIs are seeing challenges,” Lerner said. “The wealth experiences in their retail apps feel out of place and out of touch to the core retail audience of mass market consumers. It feels like you’re stumbling into somewhere you’re not supposed to be.”

“Banks need to be more methodical and strategic about how they’re cross-selling investing services to deposit customers,” he said. “You can’t just put a door in front of them; you have to build a bridge. They’re struggling to put in that effort.”

In the Wake of AI

Delivering this level of tailored guidance is essential for financial institutions because it has become harder for them to stand out.

When the internet emerged and Google became the leading search engine, search engine optimization (SEO) was critical for banks to appear in web searches. Today, however, this paradigm is shifting with the rise of AI.

“It’s not just that you can ask ChatGPT, ‘What’s the right bank for me, what’s the right account for me, or where should I go to manage my finances?’” Lerner said. “It’s also the fact that if you go to Google and you type in something, the first thing that comes up isn’t the list of results—it’s the Google AI Overview .”

“And not only are there more consumers using it, it’s something that banks have to think of as another marketing stream,” he said. “That’s another tool that both their customers and their prospects are using to ask questions to potentially learn about financial services.”

While SEO remains important, financial institutions must also asl whether their websites are optimized for AI. As language learning models crawl the web, banks and credit unions need to present their business models in a way that ensures AI highlights their organizations rather than competitors.

AI-powered searches also provide users with richer information. Historically, a Google search might return a straightforward list of results. In contrast, platforms like ChatGPT, Perplexity, and Gemini can offer deeper context, and users can ask follow-up questions to receive personalized recommendations.

“It’s not enough just to be the first result in Google,” Lerner said. “You have to think about how AI is going to interpret my website and know how to put my product first and foremost. You can’t just focus on rates and the usual stuff. You have to involve the digital banking team when it comes to guidance and advice on building websites.”

“You have to think about your public site, and does it have everything on there?” Lerner said. “You can’t hide everything behind the authenticated site. You have to make sure some of it is publicly available because now there are web crawlers that are not just trying to find a result, they’re trying to build a conversation with a client.”

The FedEx Model

In addition to website and wealth management overhauls, financial institutions must make their money movement options clearer to customers. The payments industry has exploded with choices in recent years, but the abundance of solutions can be overwhelming for many users.

For example, a customer looking to move money might use a standard transfer, an external transfer, Zelle, or a bill pay service. On top of that, they could leverage peer-to-peer services such as Venmo, PayPal, or Cash App. Understanding the nuances of all these options is a tall order for most customers.

“The more strategic perspective is you don’t want your mobile app to just be a tool in their pocket,” Lerner said. “You don’t want your customers to perceive your app as a bunch of ways to send money.’  You want that mobile app to be a portal to building deeper relationships with your customers.”

Designing a solution that accommodates all these options can be difficult within a mobile app. Most institutions are unlikely to dedicate the majority of a smartphone screen to display every possible money movement option. Instead, many banks consolidate these features into a single money movement menu.

While this approach may work for savvy customers, it can still overwhelm others. Therefore, organizations must also focus on educating consumers about the best ways to navigate these payment types.

“It’s important to have a one-stop money movement hub where they can get guidance on choosing which option to use,” Lerner said. “It’s helping customers, guiding them on which money movement option to choose. The hard part is, how do you do all of that on a small screen? How do you explain the difference between bill pay, transfers, external transfers, bill pay, Zelle and broader P2P?”

“The future is more akin to intelligent payment routing, where you just tell me what you have, and the bank will automatically use the optimal rail,” he said. “It’s what they might call the FedEx model—I don’t worry about how my package gets there; I just know my package needs to get there.”

The Right Time and Place

Across all the trends shaping digital banking this year, one theme stands out: financial institutions need to deliver more tailored experiences—a feat that will be challenging for many organizations.

“We know there’s a lot on your plate right now as a bank, including what goes into your mobile app, but here’s a couple of places to stop and think about how to be more strategic,” Lerner said.

He added: “Whether it’s where you’re placing your investment cross-sells, how you’re building your public sites to ensure that it’s properly set up to grab the attention of AI crawlers, or how you place money movement options—are you putting the right thing at the right place at the right time in front of the right customer?”

The post Digital Transformation and the Challenge of Differentiation for FIs appeared first on PaymentsJournal.

As digital banking has evolved, financial institutions have acquired new ways to reach their customers. However, these communications are often less than meaningful. For example, a bank may send an email to notify a customer that they have a low account balance when many customers are already painfully aware of this fact.

In the case of alerts, these communications are often vague and, in the worst cases, irrelevant, more of a nuisance than helpful engagement. In the How Customers Really Feel about Alerts: They’re Annoyed report, Lea Nonninger, Digital Banking Analyst at Javelin Strategy & Research, examined how customers respond to alerts and how financial institutions can leverage this underutilized channel to develop customer engagement.

Standing Out in the Sea

To gauge the effectiveness of the alert process, Nonninger researched the commonalities among customers who are dissatisfied with their banks’ notifications.

“Overall, we did find that there are quite a few consumers who are not happy with the alerts that their banks are sending, which wasn’t all that surprising,” Nonninger said. “I think that’s something banks have been struggling with for years, which is a shame because it is such a key way for banks to reach out to their customers, especially with consumers focusing more on the digital banking relationship.”

Instead of being a conversation starter, alerts have often turned users off. These customers can quickly become desensitized to alerts and to other communications, and that’s a significant missed opportunity for banks, leaving customers to their own devices to conduct their financial lives without guidance from their financial institution.

Even when alerts are relevant, as many consumers are inundated with a daily flood of notifications. These emails, texts, and push notifications come from an array of organizations, and it is a struggle for banks to stand out amid this sea of information.

Another reason banking alerts are often lost in this notification bombardment is that many are vague or generic. These communications often get mistaken for marketing attempts.

“There doesn’t seem to be a great distinction between what’s an ad and what’s something that’s meant for me,” Nonninger said. “An alert should be something that’s personal to the customer, for example to alert them of fraudulent activity in their account like abnormal spending—going as far as spending insights into whether they’ve spent more or less in the month or don’t have enough funds to cover upcoming payments.

“But if banks aren’t able to bring that level of information across to the customer, they will just ignore it—and then the whole thing is lost.”

A Call to Action

One of the keys to making alerts more beneficial is ensuring that the communication does not start and end with an alert. Instead, each alert should be treated like a first engagement in an interactive relationship.

“For me, the biggest advice would be that every engagement and every notification should always have a call to action, a next step,” Nonninger said. “What can a customer take away from this? If there isn’t anything to take away from it or if there aren’t any actionable next steps, then how valuable can that alert really be for someone?”

Although many alerts contain relevant information, they are often superfluous because they are retrospective. Nonninger found that many customers said their bank didn’t alert them to critical events until days after the occurrences.

When there is no value to the alert, the banks’ brand and messaging are compromised. As banks seek to optimize these communications, they should consider the recipient.

“It shouldn’t just be one alert and that’s done,” Nonninger said. “Banks should also be asking the customer: How do you feel about that alert? Is that alert useful? Would you like to know more? Asking for feedback allows the FI to personalize that interaction to the customer. This helps to avoid customers getting the same notification over and over again that they don’t care about, while also opening the opportunity for customers to opt out of some alerts—and opting into others.”

From Afterthought to Priority

This personalized alert process can be a critical mechanism for financial institutions to start conversations with customers. However, alerts are often an afterthought within banks’ apps or websites.

The alert settings are often tucked away within dedicated alert dashboards or even behind multiple menus. Even once customers find them, many alert settings aren’t explained clearly, making navigation difficult.

For example, a financial institution may group alerts by accounts or cards, but this categorization may not be clear to the casual user who is searching for one setting. This added complication creates another missed opportunity, as most customers aren’t likely to scour alert dashboards to make their desired selections.

Even rarer in apps and websites is relevant guidance from the financial institution as to how users could better leverage alerts. For example, the bank could suggest that a fraud-conscious customer opt into an alert that notifies them when any large purchase is made on their account.

This guidance should not end when the customer makes their initial alert selections. Consumer preferences shift over time, so organizations should solicit continual feedback on how to make alerts relevant and engaging.

“A key thing would be for banks to allow for customization and personalization,” Nonninger said. “I think the one-size-fits-all approach doesn’t apply for alerts. People interact so differently with their banks, and a lot of customers aren’t aware of all the options that they have. It’s up to the banks to reach out to the customer proactively to show what kind of alerts are available and not just leave it to the customer to explore the apps.

“How often do you go into the settings of your banking app and look at all the alerts that are available to you? For the bank to be proactive and start the conversation themselves, I think that’s really important.”

The post How Banking Alerts Can Reach Customers Who Are Bombarded with Notifications appeared first on PaymentsJournal.

As fintechs and digital-first banks have entered the industry, many financial institutions have searched for ways to reach new customers and build stronger relationships. Although many consumers have student loans and are concerned about their ability to repay, banks often neglect to address this critical aspect of their customers’ financial lives.

In Student-Loan Debt and Anxiety: How Fintechs are Beating Banks, analysts from Javelin Strategy & Research examined the current state of digital banking, the increasing role of fintechs in the market, and how financial institutions can leverage student loans to build stronger relationships, even when they don’t originate the loan.

More Than a Menu

The student loan opportunity has arisen from the new reality in digital banking. Digital banking was originally devised to reduce costs at bank branches and give customers a convenient way to execute transactions.

Now, this transaction-oriented model has become the central touchpoint for consumers, a shift that has brought digital banking to a turning point.

“The digital banking experience has to be more than the McDonald’s menu board saying, ‘We’ve got burgers, we got fries, tell us what you want and we’ll serve it up quick and easy and consistently,’” said Mark Schwanhausser, Director of Digital Banking at Javelin Strategy & Research.

“It has to be about trying to figure out how to become an advisor and developing a relationship that can last over time—and position the bank to be at the front of the line when a consumer says, ‘I think I need a new savings product or a new loan product,’ whatever the case may be.”

Many digital banking services amount to little more than a do-it-yourself collection of tools and services. This may be sufficient for savvy customers, but it doesn’t serve the needs of the many consumers who require more personalized financial guidance.

When these customers encounter a financial roadblock, they rarely turn to their bank’s digital banking platform. This is largely because many financial institutions are more preoccupied with selling a product than solving the issues their customers face.

More often than not, these concerns revolve around the prudent use of debt.

“If you’re looking for a conversation with Americans, virtually every American has debt,” Schwanhausser said. “It might be good debt; it might be bad debt; it might be overwhelming debt. But we’re all sitting around the kitchen table, and sooner or later we think about, ‘Are we managing it wisely?’

“There’s no conversation around that with the bank. Typically, when banks talk about debt, it’s something like, ‘Do you want a consolidation loan? Do you need help because you’re falling behind, and you’ve been furloughed? Do we need to set up a payment plan?’ It’s very transactional; it’s very tactical; it’s very do-it-yourself. But they’re not talking about the management of the debt, and ‘Which one should I pay down first? What are my priorities with managing this?’”

The Commoditized Comparison

This transactional mentality also means customers don’t typically engage with digital banking platforms for long periods. Once they check their balance or verify a transaction on the app or website, they move on.

As a result, a bank may have substantial digital banking activity, but it’s not the deeper engagement most banks seek.  What’s more, this impersonal model doesn’t give financial institutions a way to differentiate themselves from their competitors.

“This model doesn’t help you with how to decide between this credit card and that credit card, other than typically to focus on rates and fees and minimum deposits, things that every bank competes on,” Schwanhausser said. “It’s commoditized, and if we continue to put ourselves in this position, it’s very hard to win. It’s, ‘My rates are better or worse—if it’s worse, I’m out of the game.’’’

These challenges have been exacerbated by the increased competition in the financial services market, from rival financial institutions and fintech companies that are equipped to take unique approaches to the market.

Many fintechs have identified the issues that debt usage poses for consumers and have stepped into help, with general debt management and with the particular challenges that arise from student loans.

“They’re helping people learn how to build their credit scores, which banks do in a nominal way by giving you a credit score and some education,” Schwanhausser said. “They’re engaging in some cases specifically with your employer to help you with your debt. They’re helping you figure out when it might be wise to accelerate payments.

“They’re coming up with other forms of loans that could perhaps be a better option than the student loan that you’re carrying now. They’re all coming at this and saying, ‘A lot of people out there are worried—is there something we can do?’ They’re not trying to be the be-all, end-all; they’re going to very specific markets.”

Influential and Fundamental

Conversely, many banks are seeking to serve a broader audience with an array of products and services. Although this presents difficulties, it also creates an advantage for financial institutions, because banks are typically the central hub where customers go to manage their finances.

This constant interaction creates an opportunity for financial institutions to have daily conversations with their customers and share insights and guidance.

“If financial institutions do things right—and most of them don’t take this course—they can provide this holistic view and show you not only what you’re saving and what you’re spending, but also what your debt obligations are,” Schwanhausser said. “They can help you develop a plan for how to pay yourself first and how to divert money into the loan payment system that you develop internally. They can be part of your life in a way that is more influential and fundamental.”

Random Acts of Insight

Applying this approach to student loan debt can pay substantial dividends for financial institutions because most banks are seeking to engage with younger consumers and identify ways to serve them profitably.

Many younger customers have student loan debt, and a significant number among this group are concerned about whether they will be able to repay these loans. This creates an opportunity for financial institutions to engage with their customers about an issue that is close to home.

Once banks begin these relationships, they will be able to leverage another advantage: time. Student loans are long-term products, and banks can be there every step of the way.

“These relationships aren’t transactional; they’re something you build over time with random acts of insight and advice and guidance and coaching,” Schwanhausser said. “This whole conversation about student loans is about building that kind of relationship. As a banker, you may not ever want to lend or do a consolidation loan or get into the product side of things—but you can get into the financial guidance side of things.

“Digital banking’s future is in the guidance and the coaching. It obviously has to sell—every bank has quarterly earnings. But the long game for digital banking is to win share of mind so that one day they will win share of wallet.”

The post Why Student Loans Should Be a Touchpoint for Financial Institutions appeared first on PaymentsJournal.

More retirees are struggling to stay on top of their finances, which is one reason Bank of America is launching its 401k Pay platform.

The platform is designed to help customers convert 401k assets into retirement income. It also includes management features, such as the ability to set up recurring withdrawals from 401k funds.

Many retirees are uncertain about the best way to manage their retirement savings. To address this, 401k Pay will offer guidance on retirement spending and provides tools to help users monitor their funds.

The platform is designed to determine the appropriate retirement income a customer should generate from their 401k account. This calculation is based on a holistic snapshot of the user’s  finances and takes into accounts factors like cost of living, state and federal taxes, and required minimum distributions.

Feeling the Pinch

Retirement fund management tools are increasingly important, as macroeconomic factors have caused many retirees to feel the same pinch as the broader population. A combination of inflation and rising interest rates have strained budgets for years, often forcing retirees to rely on credit cards to meet their obligations.

According to the Employee Benefit Research Institute (EBRI), over two-thirds of U.S. retirees had outstanding credit card debt last year, marking a substantial increase from years past. Much of this debt was carried into retirement, as those entering retirement today tend have higher levels of debt than previous generations.

Planning for Unforeseen Expenditures

This growing dependence on credit cards is particularly concerning given the fixed incomes many seniors rely on.

Retirees are also more likely to face unexpected expenses related to health, home, or auto issue. Data from AARP shows that credit card debt remains the most common type of debt among adults over 50, with half of respondents citing medical expenses as a contributor to their monthly revolving debt.

The potential for unexpected expenditures underscores the importance of tools that help retirees monitor and manage their retirement funds effectively.

The post Bank of America Launches 401k Management Platform for Retirees appeared first on PaymentsJournal.

Fraud has surged as cybercriminals have developed new technologies and tactics. Wealth management clients have become prime targets—in large part because they have more to lose. Even though high-net-worth individuals may be at higher risk from fraud, they also have a powerful resource to help protect them: their financial advisor.  

As Tracy Goldberg, Director of Cybersecurity at Javelin Strategy & Research, detailed in The Understated Cyber Vulnerabilities of Wealth Management Clients report, wealth managers must consider particular variables when developing strategies to safeguard their clients. Creating these defenses is critical for financial advisors, not just to protect clients but also to build relationships that can span generations.

Considering the Whole Household

The fraud landscape has shifted dramatically in recent years amid the emergence of technologies like artificial intelligence. AI-powered tools have made it harder to discern fraud attempts from legitimate communications, and bad actors increasingly utilize phishing attacks that impersonate major companies like Amazon or PayPal.

Along with more convincing messages, cybercriminals can glean more data about their targets from the internet because individuals often post detailed information about themselves online. Armed with this knowledge, bad actors can send timely and crafted messages to potential victims, such as emails or texts purporting to be from a friend or relative.

What’s more, it is often not simply the wealth management client who is the target. Increasingly, cybercriminals are casting a net wide enough to include their families.

“One thing that stands out about wealth management clients from our survey that I think is surprising is that among the majority of wealth advisors that we surveyed, most of their clients have children under the age of 18 living in their house,” Goldberg said. “That raised a big flag for us, because we know from separate research that we do at Javelin that households that have children under the age of 18—by default—are at greater risk of being targeted by a social engineering attacks, such as a scam.”

Social engineering techniques, whereby bad actors manipulate their targets to goad them into compliance, have become a fixture of fraud attacks across the board. However, children can be especially vulnerable because they are typically more comfortable with interacting online and sharing personal data.

Children are also more likely to be present on social media platforms like YouTube or Instagram and be active in online gaming communities like Fortnite.

“It’s just simply that children are more likely to be targeted,” Goldberg said. “Children post a lot about themselves on social media. They’re more likely to interact with people they don’t know in real life. The prevalence and the use of online gaming platforms put them at risk. And if you have a child in the house who has been victimized, you’re more likely to have another adult or even child in the house victimized.”

In addition to children, wealth managers should consider that seniors are a top target for cybercriminals. Many elderly adults use social media and e-commerce platforms but may not be as equipped to identify threats or resist social engineering tactics as younger adults are.

Because more adults are caring for elderly parents or relatives, wealth managers must consider their clients’ whole households.

Protecting Identities and Accounts

Although wealth management clients may not face threats that are significantly different from those being deployed against consumers generally, they have an extra layer of protection in their financial advisor.

However, cybersecurity has sometimes been a blind spot for family offices. Many advisors may have developed robust strategies to protect their clients from medical or property emergencies without considering that a cyberattack can be just as damaging.

“This offers a unique opportunity for wealth advisors to build on the long-term relationships that they already have with their clients and to be there as a resource to provide their clients with guidance about cybersecurity best practices,” Goldberg said. “How can they protect themselves if they feel that they could be victimized by a scam? Most importantly, if they are victimized by a scam, knowing that they could turn to their wealth advisor for help.”

One of the most important steps wealth managers can take is to stay on top of fraud trends and educate their clients accordingly. Bad actors are constantly shifting their techniques to find vulnerabilities they can exploit. Additionally, financial advisors should detail the actions clients should take if they feel they have been compromised.

Beyond education, an ever-growing array of software tools can help wealth managers keep their clients’ data safe.

“One of the things that we highly recommend in the report is that wealth advisors offer white-labeled identity theft protection services to their clients,” Goldberg said. “This would be the wealth advisor partnering with a company that offers identity theft protection and then taking that identity theft protection and packaging it and white-labeling it.

“It’s putting your brand on it, but then selling it at a discounted rate or maybe even offering it free of charge to your high-wealth or high-value clients, because when their identities are protected, their accounts are protected. It just helps to reduce the risk of fraud.”

Building Relationships Through Cybersecurity

Like all consumers, wealth management customers are increasingly concerned about the rising fraud threat, and many are unsure about how to protect themselves.

Providing cybersecurity education and developing a prevention plan can substantially strengthen the relationships between advisors and clients. Once this trust is established, it can create relationships that can last for generations.

“As we’re looking at generational wealth, the more that wealth advisors can do to shore up and reinforce that relationship with the clients they have today, the more likely they’re going to get the children of their clients today and the grandchildren to stay on as wealth advisory clients,” Goldberg said. “It is just about relationship building and maintenance through cybersecurity.”

The post Uncovering the Cybersecurity Threats Wealth Management Clients Face appeared first on PaymentsJournal.

Since the 2007-08 financial crisis, all U.S. banks that have been categorized as systemically important have been required to undergo annual stress tests. These tests were detailed under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed after the recession, and have become colloquially known as the DFAST tests.

This objective of the DFAST assessments is to identify significant vulnerabilities in the U.S. financial system before they occur. As Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, detailed in the report DFAST: Tight Credit Card Risk Controls Ensure Bank Liquidity, top banks may not be in any imminent danger, but credit issuers must consider many factors as they forge ahead into next year.

A Catastrophic Cocktail

The DFAST tests measure how each financial institution would respond to a hypothetical economic downturn. In this worst-case scenario, unemployment rises to 10%—as it did during the COVID-19 pandemic—and housing prices fall by roughly a third. Taken with other factors like plummeting equity and real estate values, the DFAST tests create a catastrophic cocktail for financial institutions.

This year’s tests found that these factors would cause more than $500 billion in total credit losses for the top financial institutions. As with last year, consumer credit card losses would be the most impactful among all lending segments, totaling $157 billion. Excluding trading losses, credit cards would account for roughly a third of all projected losses for financial institutions.

Although these numbers were significant, the projected total losses and credit card losses were down from the year before. However, banks aren’t completely out of the woods.

“I think it showed how resilient banks are right now, which is good,” Riley said. “There are a lot of operational improvements, and the charge-offs have been under control, and that’s a good thing.

“The economy is always the risk. Right now, the trend is that it’s going to be better because some of the charge-offs are down, some of the delinquencies are down, but you still have consumer credit at an all-time high—it’s like $1.3 trillion. In the last 10 years, it’s gone up by over $300 billion, so that’s a lot of bananas. You have to be worried about where this is going to level off.”

A Proof Point

This substantial stress on consumers had direct effects on this year’s DFAST tests. Most notably, Ally Financial is no longer included in the index because the company sold its credit card portfolio last year. Ally Financial’s credit risk simulation was the weakest among all credit card issuers, running at a projected 40% loss rate. 

Ally built a loan portfolio that catered to borrowers with lower-range credit scores. As a result, Ally was at high risk of default and delinquencies as economic factors pressured consumers in these income brackets.

This was evidenced by last year’s DFAST tests, in which Ally Financial was the poorest performer. The assessment found that Ally would face severe losses under the stressed conditions of DFAST, far more than the 16% to 20% range other lenders experienced.

On the other end of the spectrum, American Express and Chase performed the best in last year’s DFAST tests, and they achieved similar success this year. This is largely because they have cultivated a different customer base from Ally’s.

“The big deal is that American Express and Chase, the two top leaders, are still at the best performance level,” Riley said. “It’s an example showing how American Express uses a lot of discretion when they underwrite. It’s typically FICO scores above 720, and that’s a proof point. Chase is diversified in a lot of ways—they were anchored to the consumer households, and they take advantage of that in their marketing. Those are two good signs of what’s going on.”

Balancing Credit Investments

According to Riley, financial institutions should take a page out of the top lenders’ playbooks and prioritize quality over quantity. One aspect of this model is tightening lending criteria to match borrowers’ FICO scores, but attracting and maintaining a quality customer base is more complex.

Financial institutions should also entice potential cardholders with attractive offers and work to build strong relationships with their customers. Banks also must scrutinize all new accounts and take a closer look at their underwriting processes. Another consideration for lenders is keeping their portfolios balanced to ensure they aren’t over-exposed to one client segment in the event of a downturn.

One of the most important lessons from the DFAST tests is that credit cards play a significant role in the operations of financial institutions and consumer households. Although all of the top-tier institutions passed this year’s assessments, significant risks are in play for smaller issuers.

Credit cards offer high returns for issuers, but they can quickly become a high risk if there is an economic mishap. This means that smaller issuers shouldn’t become overly dependent on their credit card portfolio.

The Party Isn’t Over

Concerns remain about the state of the economy, as inflation and interest rates are still high, and the impacts of tariffs loom. However, if this year’s DFAST tests are any indication, most financial institutions are prepared to weather the storm.

“I think we have to thank our lucky stars that many of the metrics did not deteriorate—that’s important,” Riley said. “There are mixed feelings on why it hasn’t. There’s a lot of talk on interest rates going down right now; they’re relatively high. In Canada, they’re significantly lower. Which one’s better? A lot of it depends on who you ask.

“The takeaway is that things are better, but everybody is walking on eggshells because debt is higher and prices are higher. Even though there are mixed levels of optimism, things do look better in a lot of ways. I wouldn’t say the party’s over because you have indicators like the rising amount of debt.”

The post DFAST Tests Indicate U.S. Financial Institutions Are Braced for an Economic Downturn appeared first on PaymentsJournal.

Financial institutions in Germany flagged millions of direct debits linked to fraudulent activity following a temporary interruption on PayPal’s platform.

In total, payments worth more than $11.7 billion were blocked by banks in an incident where the details have yet to be fully disclosed. PayPal acknowledged experiencing a service disruption that was later resolved. This issue “caused delays in transactions for a small number of accounts.”

According to Sueddeutsche Zeitung, PayPal’s scam-filtering systems were either completely or largely disrupted late last week, leading to a surge of unchecked direct debits reaching Germany’s banks.

Following the attacks, a German association that represents over 300 financial institutions noted that instances of unauthorized direct debits originating from PayPal had a substantial impact on transactions both within Germany and across Europe.

Beefing Up Defenses

This recent news underscores the immense pressure financial services companies face from cybercriminals. Bad actors can now leverage technology like artificial intelligence to carry out attacks on a wide scale if they detect any gap in an organization’s fraud defenses.

Payments companies are frequent targets for fraudulent activity, which is why they have invested in systems designed to filter out scams. In fact, PayPal recently incorporated AI to strengthen fraud defenses at both PayPal and its subsidiary Venmo.

Larger Ramifications

Even when fraud defenses deflect cybercriminals—as they appear to have done at German banks—larger ramifications can still emerge. In addition to the service disruptions that often occur, widescale impacts can damage both a company’s brand and its profits. PayPal stock, for example, dipped immediately on the news of the service disruption in Germany.

For PayPal, this incident comes at a time where the company has launched a slew of new platforms and projects to gain traction in the market. These include everything from a new cross-border payments platform, to crypto checkout payments, to an agentic commerce partnership with Perplexity.

PayPal also announced a major milestone: it is launching a digital wallet to capture more share of in-store payments. The wallet will launch in Germany initially, before being rolled out to the rest of the world.

The post PayPal Disruption Leads to Fraud Surge at German Banks appeared first on PaymentsJournal.

The European Union is working on the third iteration of its regulatory framework governing open banking. Meanwhile, across the Atlantic, open banking rules remain in legislative limbo and have faced pushback from many financial institutions, causing some to speculate whether the model will ever gain traction in the U.S.

At its core, open banking is about unlocking consumer financial data—once the sole domain of banks—for third-party service providers. Using application programming interfaces (APIs) as a bridge, these fintech companies can provide the array of financial services that consumers have come to expect, including everything from mobile banking to peer-to-peer payments.

The demand for these services means that the open banking model is moving forward regardless of whether nations take a regulatory-first or market-driven approach—and likely will for years to come.

Breaking Down Siloes

One of the initial reasons the EU issued its revised Payments Services Directive (PSD2) was to reduce the practice of screen scraping—where non-bank partners copy banking data for use in their own platforms. Because screen scraping is fraught with privacy and fraud concerns, PSD2 dictated the use of APIs as the secure method for connecting banks with third parties.

Another motivation behind the issuance of PSD2 was to enhance competitiveness, both within the region and in relation to foreign banks. In many European countries, a small number of dominant players have long controlled the financial services market—an issue regulators believed open banking could help address.

Leveling the playing field can drive innovation, but it also requires establishing uniform compliance and technology standards across the region. However, years after PSD2 went into effect, fragmentation persists.

France, for example, has implemented a nationwide API standard that consolidates its financial operations around the Systèmes technologiques d’échange et de traitement (STET) clearing house—a protocol developed by the country’s six major banks. In contrast, many other EU countries, such as Spain and the Netherlands, still lack a standardized API format.

To address the gaps in PSD2, EU regulators are already at work on PSD3, which could launch in 2027. Among its goals are breaking down the siloes that still exist across the region, enhancing consumer protections, and fostering innovation. PSD3 is also designed to support the development of a unified EU payments market, simplifying both cross-border and cross-currency transactions.

An Uphill Battle

Along with the EU, Britain has been at the forefront of the open banking movement, and according to a recent whitepaper, the UK government aims to keep it that way. The country’s National Payments Vision manifesto outlined the current issues and proposed solutions within the sector.

One key insight from the research is that open banking is critical to the future of the financial services industry in Britain. Additionally, for open banking to scale and foster competition in the UK, the country must establish a more robust regulatory framework.

Another innovation is real-time payments, a hallmark of the open banking model. UK regulators noted that account-to-account payments should become ubiquitous due to their substantial benefits. Beyond instant settlement, real-time payments offer minimal transaction fees and increased transparency.

For these reasons, real-time payments have rapidly caught on in countries like India and Brazil. However, despite the UK government’s goal to bring real-time payments widespread, it is facing an uphill battle. There were 31.4 billion purchases made by UK-issued debit and credit cards last year, a 4% year-over-year uptick.   

Challenges to the Use Case

The ubiquity of cards and the established financial infrastructure are two of the main reasons why U.S. consumers have been slow to adopt both real-time payments and open banking. After all, many consumers view paying by debit card and ACH as paying by bank, and these payment types are efficient enough that there has been little significant outcry for change.

Still, there has been movement toward real-time payments in recent years. The Clearing House, a consortium of major U.S. banks, launched the RTP Network in 2017. Two years ago, the Federal Reserve launched its FedNow service.

Both networks have made strides since then, as both services have drastically increased the transaction limits on their systems. Due to its longer tenure, RTP is dominating the U.S. real-time payments market, but businesses still account for 80% of the transactions on the RTP network.

There are several reasons why real-time payments haven’t caught on in the U.S consumer market. First, there is currently no way to dispute a real-time payment transaction that appears suspicious or erroneous—a capability most consumers expect.

“That functionality doesn’t exist on RTP and FedNow,” Don Apgar, Director of Merchant Payments at Javelin Strategy & Research told PaymentsJournal. “So, when we talk about use cases, it’s the sender knows the receiver, and the sender and the receiver agree on the amount. The sender agrees that there’s no dispute, and he’s got no claim to the money once it leaves his account. It’s done, and he has zero recourse.”

Another reason why RTP and FedNow are not yet ready for merchants’ use cases is they only allow users to send money.

“There’s no function where you can request money,” Apgar said. “If you walk into my store and tap your debit card, I’m sending a request and saying, ‘Take money out of his account and put it in my account.’ But there’s no way for me to do that. You have to initiate the payment.”

An Uncertain Framework

These limitations are part of the reason real-time payments haven’t flourished in the U.S. However, another major factor is the absence of a comprehensive regulatory framework to govern them.

Last year, the U.S. Consumer Financial Protection Bureau (CFPB) announced its much-anticipated rules to guide open banking. These regulations marked the implementation of Section 1033—a portion of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted after the 2007-2008 financial crisis. This rule had been shelved for over a decade before finally being activated.

The goal of the regulations was to give individuals the freedom to switch financial services companies with the ease of switching a streaming subscription. According to the CFPB, once consumers have the power to shop around for financial products, it will drive financial institutions to innovate and provide better customer service.

Much like PSD2, Section 1033 was designed to protect consumers’ data from bad actors, but it also contained provisions to eliminate junk fees— transactions fees that are sometimes charged by banks and fintechs.

However, a change in presidential administration has called the future of Section 1033 into question, as there is speculation that the CFPB could vacate the rule entirely. Still, it is possible that the CFPB could instead revise Section 1033 and move forward with the rule.

Taking a Step Back

One of the main reasons the future of Section 1033 has been uncertain is the substantial pushback from many leading financial institutions. A central concern among banks is that the rule could exacerbate the compliance burden on financial institutions that are already heavily regulated.

There are also ongoing concerns that unlocking customer banking data could do more harm than good.

Worries about third parties in the financial system intensified after the collapse of fintech Synapse, whose failure to properly document its money flows led to approximately $85 million in frozen customer funds. In the aftermath, many regulators called for stricter oversight of banks’ partnerships with third parties.

“We created these words like neobank, digital-only bank, and fintech bank, but they are really just pass-throughs for various banking aspects,” James Wester, Co-Head of Payments at Javelin Strategy & Research told PaymentsJournal. “We added an entire layer of technology and technologists, oftentimes without considering compliance.”

“However, a bank is a real thing,” he said. “It is a licensed institution that is regulated, and fundamentals like risk mitigation and ledger management should never fall by the wayside.”

The substantial risks banks face drove JPMorgan Chase to consider an action that could reshape the U.S. financial system. It announced plans to charge fintech companies a fee for accessing customer banking data.

Fintechs have thrived in recent years largely due to free access to such data. Imposing fees could cost the industry hundreds of millions of dollars and potentially threaten the viability of many fintech business models.

With or Without Blessing

If Chase moves forward with this plan, it could have significant implications for the open banking model in the U.S. One of the core principles of open banking is that third parties should have free access to consumer data in order to deliver better solutions and drive innovation.

Because of this, there has already been pushback against Chase’s strategy, and the bank could still revise its plans. Chase has stated that its proposed fee structure remains open to negotiation.

This is just one of many challenges that must be ironed out before open banking can become a global reality. However, the digitalization of banking and modernization of payments have raised consumer expectations to the point where most financial institutions can no longer meet demand without third-party support.

This dynamic alone is likely to keep open banking moving forward—with or without regulatory blessing.

The post Whether Market-Led or Directive-Driven, Open Banking Marches On appeared first on PaymentsJournal.

The UK’s most valuable fintech was granted a banking license a year ago, yet Revolut still hasn’t been given the green light to operate as a fully fledged financial institution.

Instead, Revolut remains in a holding pattern, limited to holding £50,000 in total customer deposits—billions of pounds lower than leading UK banks like Barclays, HSBC, or Santander.

In this mobilization phase, Revolut operates as an e-money unit rather than a bank. This means the fintech’s UK customers aren’t protected by the government’s Financial Services Compensation Scheme, which insures consumers up to £85,000 if their bank goes under.

One of the main reasons Revolut’s evolution has been delayed is the company’s size. Revolut has over 10 million customers in the UK alone and operates in over 40 countries. In contrast, no other organization has ever pursued the UK’s banking license process with more than 500,000 customers.

Getting the Transition Right

In addition to Revolut’s scope, UK regulators have had compliance concerns regarding the fintech. Last year, the company was found to have far more fraud complaints than traditional UK lenders like Barclays. The high incidence of fraud—mostly carried out through automated push payment fraud tactics—called Revolut’s fraud defenses into question.

The combined concerns about scale and compliance measures have made the fintech’s transition into a bank a daunting process for regulators, who are focused on getting the transition right. However, according to CNBC, Revolut still believes it is on track to become a fully regulated bank this year.

Buying Into the Market

The issues that have dogged Revolut’s banking transition have caused it to consider a different tack in the U.S. According to the Financial Times, Revolut could bypass the lengthy banking charter application process by buying its way into the U.S. market.

In this scenario, Revolut would target an inexpensive bank that already holds a U.S. banking license, unlocking a substantial new customer base for the fintech. This is a real possibility for Revolut: the company currently has a $45 billion valuation but is considering a deal that could both substantially increase its valuation and provide the funds needed for global expansion.

The post Revolut Faces Roadblocks on Its Journey from Fintech to Bank appeared first on PaymentsJournal.

As more crypto firms make inroads into mainstream finance, Ripple is applying for a banking license with the U.S. Office of the Comptroller of the Currency (OCC).

Although the company is best known for its XRP cryptocurrency and ledger, Ripple launched a stablecoin, RLUSD, last year. If the banking license is approved, the firm would be subject to federal and state oversight, and the New York Department of Financial Services would regulate RLUSD.

Ripple’s application comes just days after Circle submitted its own request for a bank charter. If approved, Circle would establish a new entity—the First National Digital Currency Bank, N.A. With charters in place, Circle and Ripple could potentially offer tailored services to institutional clients in the future, including tokenization of real-world assets.

Ripple’s leadership also confirmed the company has applied for a Master Account with the Federal Reserve. If granted, this would allow Ripple to hold RLUSD reserves directly with the Fed, providing its stablecoin with an added layer of security.

Moving to Capitalize

Both Circle and Ripple are moving quickly to capitalize on the recent passage of the GENIUS act, which establishes a regulatory framework for U.S. stablecoins.

The legislation has driven a surge in stablecoin interest in recent months. Major retailers like Walmart and Amazon, along with tech giant Meta, are among the many players considering the launch of their own brand-specific stablecoins.

Financial services provider Fiserv has also unveiled plans to launch a compliance-geared stablecoin designed for use by its network of financial institutions.

Between Checking and Crypto

As more traditional players explore stablecoins, crypto companies are expanding into mainstream financial services. For example, crypto exchange Kraken announced it is launching a P2P payments app that could potentially compete with fintechs like PayPal and Venmo.

Meanwhile, new platforms are emerging to bridge the gap between checking and crypto accounts. Ripple unveiled plans to develop a cross-border payments solution in Europe through a partnership with OpenPayd, which provides the infrastructure to move certain regional fiat currencies into RLUSD—and vice versa.

Similarly, Circle plans to roll out Circle Payment Network, a cross-border system designed to facilitate bank transfers between USDC and fiat.

These launches underscore the continued push of crypto companies into the heart of traditional financial services—a trend likely to accelerate as regulatory clarity improves in the U.S.

The post Ripple Seeks U.S. Bank Charter to Expand Footprint appeared first on PaymentsJournal.

Financial institutions are highly regulated to protect both customers and the organizations themselves, but this often hinders their ability to adopt new technologies like artificial intelligence.

To address this, Nvidia is building a platform for the UK’s Financial Conduct Authority (FCA) called the Supercharged Sandbox, which will allow UK banks to experiment with AI without jeopardizing financial data.

Rolling out this October, the Sandbox will allow firms to use Nvidia’s cloud and AI enterprise software. The chipmaker will also provide technical expertise, more robust datasets, and regulatory support. However, the FCA noted that any innovations developed through the project would be deployed via a separate platform.

Privacy and Fraud Questions

In addition to compliance concerns, many UK financial services companies have been reluctant to engage with leading AI models—such as those operated by Google and Open AI—because they are based in the U.S. This raises questions about how the privacy of UK consumers will be protected, as well as how data would be stored and processed.

Additionally, concerns about fraud are heightened whenever new technologies are introduced in a financial institution. Fraud is a growing issues as cybercriminals have been able to experiment and innovate with AI much faster than most financial services companies—largely because they aren’t constrained by any regulatory framework.

A Sorely Needed Infrastructure

A solution like Supercharged Sandbox could be a key factor in helping financial institutions catch up in the tough fight against fraud. This solution should also allay concerns about reliance on overseas companies. Even though Nvidia is a U.S.-based chipmaker, the infrastructure for the solution will be built from the ground up in the UK.

According to the company’s CEO, Jensen Huang, this type of infrastructure is sorely needed in the UK—one reason why UK Prime Minister Keir Starmer has unveiled plans to invest £1 billion ($1.36 billion) to increase the UK’s computing power twentyfold.

Huang said this is necessary because “the UK is the largest AI ecosystem in the world without its own infrastructure.” Once such an ecosystem is in place, it would ideally facilitate more startups, investment, and research in the country.

The post Nvidia Gives UK Banks a Sandbox for AI Innovation appeared first on PaymentsJournal.

As lenders increasingly turn their attention to the small and medium-sized business segment, Plaid is launching a solution designed to provide better access to data.

The company’s Transactions for Business platform builds on Plaid’s existing infrastructure, originally developed to parse consumer transaction data. By shifting this model for small business clients, the platform will allow financial institutions to get a holistic view of an enterprise’s financial profile—including revenue, payroll, loans, and expenses.

With these insights, banks may be better positioned to support their small business customers through more personalized financial tools, both for managing operations or obtaining capital.

A Difficult Situation

Securing financing has been a pain point for small businesses over the past few years. Federal Reserve data found that a little over a third of small businesses that applied for financing last year received either partial financing or nothing at all.

Because many larger financial institutions view smaller organizations as too small to be profitable, many small businesses have increasingly turned to fintechs or nontraditional lenders to make ends meet.

Many cash-starved small business owners have even turned to credit cards, with more than half reporting they have relied on personal credit cards to cover business expenses. This can often worsen an already difficult situation, as small business owners typically face less favorable credit card rates than the average consumer.

Taken as a Whole

Taken on its own, a small business may seem like too much effort for too little profit. However, when taken as a whole, there are roughly 34 million U.S. small businesses. This creates a $150 billion opportunity for financial institutions.

This opportunity can be even greater for community banks and credit unions that have struggled to grow their consumer banking base in a competitive environment. Not only are small businesses a new customer base for these institutions, but building relationships with local business owners gives them a way to make inroads in their community.

As more institutions eye the small business segment, Plaid is banking on its established network. The company noted that it supports business checking, savings, and credit accounts from nearly all U.S. banks that serve small businesses.

The post Plaid to Expand Data Coverage to Small Business Banking appeared first on PaymentsJournal.

Following significant tech breakthroughs in recent years, Wells Fargo is aiming to expand its presence in the sector by strengthening its team.

Last year, the financial institution increased headcount in its U.S. technology banking unit by 20%, with plans to bring on additional talent in the coming months. Wells Fargo’s tech banking unit supports clients across the fintech, software, and semiconductor industries.

The tech sector has become a key focus for Wells Fargo and other leading financial institutions, spurred by the rise of AI, which gave new life to a flagging tech sector. According to Reuters, a sharp uptick in venture capital interest in AI firms is one of the main reasons that Wells Fargo is stepping up its services.

Implementing Into Their Operations

Even as financial institutions look for ways to better serve the tech sector, they are also implementing innovations within their own operations. According to Nvidia, roughly 70% of financial leaders reported that AI contributed toa revenue increase of 5% or more for their organizations.

The semiconductor firm also noted a significant year-over-year increase in the number of respondents who said their organization experienced a 10% to 20% revenue boost due to AI. Nearly all banking leaders said they plan to increase spending on AI infrastructure this year.

“It’s clear that AI is having a big impact across the entire bank at these organizations,” Matthew Gaughan, Payments Analyst at Javelin Strategy & Research told PaymentsJournal. “It’s not just some buzzword that they’re putting in outbound marketing material to make it seem like they’re on trend. Given that, it is an all-bank—front, middle, and back office—initiative where functions across those areas will be increasingly supported by AI.”

Investing in People and Tech

As artificial intelligence and other innovations have been implemented across financial institutions, there have been concerns that tech will replace human jobs. However, while some functions may be eliminated, it’s clear that financial institutions are investing as much in their people as in their tech stacks.

For example, JPMorgan Chase CEO Jamie Dimon recently said that the bank employs a team of over 2,000 AI and machine learning experts, along with data scientists.

Due the complexity of these technologies, financial institutions will likely continue to look for talent that can manage evolving tech demands and facilitate relationships with API developers and other partners—ensuring the seamless online and mobile banking experiences customers have come to expect.

The post Wells Fargo Ramps Up Hiring to Capture Growing Tech Market appeared first on PaymentsJournal.

Although bad actors are constantly working to undermine financial institutions’ defenses, roughly 90% of U.S. banking customers report being satisfied or very satisfied with their primary bank.

According to a study sponsored by the American Bankers Association (ABA), many respondents also held favorable views of their financial institutions’ customer service and felt their bank was transparent about disclosing fees.

This positive sentiment may be driven by the highly competitive nature of the U.S. financial services market. Many respondents noted that multiple banks are actively competing for their business. In fact, roughly 83% said they had several options when choosing products like bank accounts, loans, or credit cards.

Keeping Customers in the Know

In addition to keeping customers informed about competing solutions, digital banking technologies have greatly enhanced the way financial institutions engage with their customers. Mobile apps and online banking serve as vital touchpoints, offering customers a direct lifeline to their bank. Features like push notifications and real-time alerts play a crucial role in keeping customers in the know about account changes, security updates, and new products.

These technological advances are also driving a shift to expand the onboarding process—extending it beyond the initial sign-up to span the entire customer lifecycle. This allows the bank to be the central hub of a consumer’s financial life, fostering long-term, advice-driven relationships built on trust and ongoing engagement.

Proactive Steps Against Fraud

However, the foundation of every banking relationship is security. As banks have improved their tech, criminals have also adopted increasingly sophisticated tools—now often supercharged by AI—to perpetrate more convincing and effective fraud attacks.

Scams have proliferated to the point where there is no consistent way for financial institutions to classify and report them effectively. This has forced many financial institutions to confront the issue and take action.

These fraud prevention efforts have not gone unnoticed. According to the ABA survey, roughly 86% of respondents said their bank takes proactive steps to protect them from fraud and scams. Additionally, nearly three-quarters of respondents believe their bank does more to protect them than businesses in other industries.

The post U.S. Consumers Are Confident in Their Bank, Even When It Comes to Fraud appeared first on PaymentsJournal.

Fintech Robinhood is introducing wealth management, private banking, and artificial intelligence (AI) solutions designed to bring luxury features to retail investment portfolios.

The company’s Gold members, who pay either $5 per month or $50 per year for their subscription, will gain access to the Robinhood Strategies platform. The service gives members with investments as little as $50 access to professionally managed portfolios of exchange-traded funds (ETFs) curated by Robinhood’s investment experts.

Gold members with at least $500 in assets can access individual stocks within the managed portfolios. The wealth management service comes with a 0.25% annual fee, capped at $250.

Luxury Touches for Younger Users

The company will also launch a private banking product for Gold subscribers later this year, featuring a high-yield savings account along with services like estate planning and tax advice.

Additionally, Robinhood members will enjoy perks like luxury travel services and access to exclusive events like the Met Gala and the Oscars. These experiences are highly sought after by Gen Z investors, many of whom are beginning their investment journey earlier than previous generations.

Younger investors are also highly tech-savvy and more inclined to use self-directed tools such as robo-advisors, which leverage AI to offer analysis in an industry traditionally driven by personalized service.

While robo-advisors may never fully replace wealth managers, AI has a growing role in wealth management. For this reason, Robinhood is launching its Cortex service later this year, designed to deliver AI-powered real-time market analysis.

Not Just for the Ultra Wealthy

One of the main trends continuing to transform the wealth management industry is the integration of new technologies, driving a hybrid approach that combines both AI and financial advisors.

However, another emerging trend that Robinhood hopes to capitalize on is the growing accessibility of wealth management services—not just for high-net-worth individuals anymore.

As Deepak Rao, General Manager and Vice President of Robinhood Money told Reuters: “We’re not going after someone who has $10 million. We’re after everybody else,”

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Onboarding has traditionally been viewed as the process of engaging and retaining a financial institution’s customers during the 60 to 90 days after they sign up for services. However, as technology—and competition—has reshaped the banking industry, it has become imperative for financial institutions to widen the scope of their onboarding approach.

In his latest report, Ongoing Onboarding: The Key to Deeper Customer Relationships, Gregory Magana, Digital Banking Analyst at Javelin Strategy & Research, detailed the four stages of the ongoing onboarding process and how financial institutions can leverage each of these steps to develop customer relationships that last.

Day Zero

Even the most robust onboarding systems can fall short if customers abandon the process before ever opening an account. For this reason, the ongoing onboarding process should begin at the account opening stage.

Many financial institutions already have powerful support tools at their disposal that could mitigate issues during the application stage. While they may offer these services to existing customers, these tools are often unavailable to prospective ones.

For example, a majority of the top 20 financial institutions offered click-to-call in their mobile app, per Javelin. However, significantly fewer provided this feature to potential customers during the application process.

“Just as bad, if not worse, you would think that live chat would be a no-brainer in the account opening process,” Magana said. “Somebody could help you and they don’t have to be on the phone, and they can help several customers at once. But only 15% of institutions support live chat in the onboarding process, versus 70% in mobile apps.”

The same issue applies to branch appointment scheduling. While banks offer digital account opening to save customers a trip to the branch, financial institutions with brick-and-mortar branches should offer ways for prospective customers to set appointments and get help if they are struggling with the onboarding process.

“A lot of what we talk about in the first stage is just getting people through that first application piece,” Magana said. “You don’t necessarily have to get them engaging with your most complex digital tools on day zero or day one. Just get them through the process and give them a lifeline if they need a little bit of help.”

Laying the Groundwork

Once customers have signed on, they enter the young account stage, which resembles the traditional onboarding process. The goal at this stage is to make sure that customers understand all the products and services available to them and to drive engagement with these tools.

A key way to lay the foundation for productive communication is by ensuring the user is comfortable with the mobile app. Alerts and push notifications are effective ways to connect with customers, but they can often be difficult for customers to find and customize.

“Education is big here,” Magana said. “Educational materials are rare within mobile, and even sometimes in online banking, but it seems like it should be a no-brainer. You have all these features—mobile banking isn’t where it was in 2010—but a lot of times customers are left to their own devices to figure out how these things work.”

Two of the main features that financial institutions should focus on during the young account stage are credit score monitoring and external account aggregation. These powerful features are already offered by many financial institutions and typically require only a one-time setup.

For instance, once a customer adds their financial data, banks can often set up a credit monitoring tool that keeps the user informed about their creditworthiness either on a constant basis or as-needed.

“Account aggregation is another big one if you want to be the center of your customers’ financial lives,” Magana said. “If you’re Chase or U.S. Bank, it’s saying, ‘We know you have this credit card account with Truist, or such and such home loan with PNC, give us your login and we’ll centralize it all here. Then you can login to our app and look at all that stuff within our space and we’re your top of mind.’”

The Linchpin of the Experience

Getting customers involved with digital features early is the key to success in the third stage of the ongoing onboarding process: digital engagement. This is the stage where financial institutions should use tool tips, pop-ups, insights, and gamification to suggest relevant digital features.

“If people have been customers for three months and they’re still not using something that you consider to be a linchpin of your digital experience, maybe it’s time to suggest things like budgeting tools or mobile deposit,” Magana said. “You don’t want people to have to hack through a bunch of pop ups like it’s some sort of virus-laden website, but just nudge people to use tools that you think are important to the digital experience.”

This experience should include ways for customers to improve their overall digital financial fitness. According to Javelin, many consumers strongly agree that their primary financial institution offers the tools they need for day-to-day banking. However, fewer agree that their primary financial institution helps them plan ahead.

This highlights the importance of offering a financial strategy built on digital engagement, which is essential for building both share of mind and share of wallet.

“Speaking of share of wallet, in this stage it could be about becoming the default card for online merchants and subscriptions,” Magana said. “For example, we’re going to offer you this link and it will take you to a sign-in page for Amazon. Once you sign in, it will offer to make our card your default card at that merchant, so that every time you make a purchase there, we’re the one making the interchange revenue.”

This is a similar strategy that credit card companies use with rewards, but credit card issuers can offer a much broader range of travel and cash back incentives. Debit card rewards tend to be more specific, such as 5% back at select retailers. While these rewards can drive strong engagement, the results will vary depending on how relevant the offering is to customers.

Driving Relevance

Staying relevant to customers is the primary goal of the final stage of the ongoing onboarding process: building advice-driven relationships. This stage brings the ongoing aspect of the ongoing onboarding theory into focus, as users are now well-established with the financial institution.

The goal is to provide consumers with tools that can improve their financial lives. This could include features they haven’t engaged with, such as mobile deposit, mobile wallets, paperless, bill pay, alerts, or aggregation.

Financial institutions should understand the areas of opportunity for their customers because they have a repository of data on customer preferences, which includes all interactions going back to the account opening stage.

Banks and credit unions can leverage this data to create personalized offers for new products and provide tailored suggestions for budgeting or changes in financial behavior.

“It’s the kind of stuff that takes a bank from being a tool for handling a customer’s money to a fiduciary partner that is in their corner,” Magana said. “They are offering insights that are relevant to customers that will help them move forward with their financial life. When a customer has a question, it’s making the institution the first place that they look and the mobile app the first way they interact.”

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As digital financial products continue to evolve, many credit unions have struggled to keep up. To help address this issue, Catalyst, in partnership with Neural Payments, has developed a peer-to-peer (P2P) solution that integrates with credit unions’ mobile apps.

This functionality may draw comparisons to Zelle, which allows customers of major financial institutions to send near-real-time P2P payments. Like Catalyst’s platform, Zelle operates solely within banks’ mobile apps, after the network discontinued its standalone app last year.

One common drawback of P2P apps is that recipients must have an account on the platform to receive funds. However, the Catalyst and Neural Payments solution is vendor-agnostic, allowing credit union members to send payments to anyone with a mobile number or email address. Funds will move directly from the sender’s credit union account to the recipient’s preferred account.

Though P2P payments are the central focus, the solution will also integrate instant payments and image deposits.

Maintaining the Personal Touch

Digital payment solutions have been part of everyday operations for larger financial institutions for years. However, many credit unions have struggled to provide the digital solutions their members increasingly expect while maintaining the personal touch they are known for.

The lack of digital solutions has hindered some credit unions—many of which have aging memberships—from making inroads with younger customers. Functionalities like P2P payments are a must for Gen Z users, who are heavily engaged with fintech companies. Only 25% of Gen Z consumers said they don’t use platforms like Venmo or Cash App, according to Javelin Strategy & Research.  

Doing Better with Small Businesses

While it may be challenging in many cases to draw younger consumers into the model, there is a strong opportunity for credit unions to expand their small business membership. Separate data from Javelin found that the percentage of businesses with any kind of relationship with a credit union increased from 6% to 9% last year.

That said, small business owners’ sentiment toward credit unions was positive, but one of their main concerns was the breadth of the institution’s digital banking services. This suggests that, regardless of the demographic credit unions target, they will likely need to leverage vendor platforms to deliver the digital solutions that are now expected by members.

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A malfunction in a critical system at the European Central Bank (ECB) left more than three trillion euros up in the air for hours.

The Target 2 (T2) system settles $3.12 trillion in payments from businesses and consumers, as well as investment trades. The ECB stated that a “hardware defect” in T2 caused a system-wide outage, clarifying that the incident was not the result of nefarious activities.

According to Reuters, the disruption lasted roughly seven hours, but a person familiar with the breakdown suggested the system could remain in disarray for days. In a statement, the ECB said T2 was functioning normally again, but all deadlines for settling the day’s payment flows had been postponed for several hours.

Uncertain Ramifications

Though the outage has been resolved, the ramifications of the event are still unclear. The ECB is one of the world’s leading central banks, and this disruption raises questions about the infrastructure supporting it.  

A spokesperson for Germany’s central bank, the Bundesbank, told Reuters that the outage meant paychecks, pension payments, and government assistance transfers were delayed and could take several more hours to arrive.

A similar scenario was reported by Deutsche Boerse’s Clearstream, which processes roughly 500,000 securities trades per day.

A Series of Outages

The issues at the ECB follow a series of service outages at major British financial institutions earlier this month that caused payment delays for hundreds of customers. In one incident, the Lloyds and Halifax banking apps were down for hours, preventing customers from transferring funds and accessing mobile and online banking.

There was a separate interruption at Barclays, where over 600 customers reported failed payments and incorrect account balances. While no reason was provided for the outages in any of these cases, no malicious activity was suspected either.

These incidents drew comparisons to the CrowdStrike outage, where a software glitch led to the largest internet outage in history. Though the ECB and UK bank outages are nowhere near that level, there’s been increased speculation that banks are struggling to keep up with the evolving technologies they depend on for critical functions.

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Peer-to-peer (P2P) platform Zelle processed over $1 trillion in total payment value last year, which the company stated was the highest amount ever sent on a P2P payments platform in a single year.

Overall, Zelle processed 3.6 billion transactions last year, marking a 25% year-over-year increase. The platform also added 16 million users, bringing the total number of consumer and small business accounts on Zelle to 151 million. The fintech’s growth rate exceeded that of its P2P rival, PayPal, last year. According to CNBC, PayPal’s total payment value surpassed more than $400 billion.

Zelle is owned by Early Warning Services, a consortium of seven of the largest U.S. financial institutions, including JPMorgan Chase, Bank of America, and Wells Fargo. The platform was launched eight years ago, largely in response to the rising popularity of P2P apps like Venmo, PayPal, and Cash App.

Key Differentiators

One of Zelle’s key differentiators is its backing by major banks. Unlike its P2P peers, most transactions on Zelle take place through banks’ apps as opposed to its own. For that reason, Zelle recently shut down its standalone app entirely.

Another key feature of Zelle is that transactions occur instantly, bypassing the traditional two-to-three business-day delay seen with many other transaction types. Additionally, Zelle users avoid many of the extra fees commonly associated with competing solutions.

Criticisms and Competition

Despite the platform’s success, Zelle is facing several obstacles. Zelle payments are irrevocable, which can create issues when users send payments in error or under fraudulent pretenses. As a result, government agencies like the Consumer Financial Protection Bureau have raised concerns about who is responsible for reimbursing consumers in such instances. With many P2P platforms, it falls on the customer to  verify the recipient before sending payments.

Beyond regulatory concerns, Zelle is also navigating a competitive landscape. The platform not only faces competition from other P2P services but also from the bevy of payments technologies that have emerged in recent years.

Digital wallets like Samsung Pay and Apple Pay have integrated P2P payments while also support various payment types, such as credit cards and BNPL services, which can be used across retail and e-commerce transactions.

Additionally, FedNow and RTP continue to gain momentum. It means that despite a record-setting year, Zelle could still encounter roadblocks ahead.

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With artificial intelligence being deployed at scale in many financial services firms, scrutiny has increased on the measurable impacts of the technology.

According to a recent survey by Nvidia, nearly 70% of financial leaders said that AI had driven a revenue increase of 5% or more for their organizations, and there was a marked year-over-year increase in the number of respondents who said their firm realized a 10% to 20% revenue boost.

In addition to the revenue gains, more than half of the respondents said AI has played a significant role in reducing annual costs by 5% or more. Nearly all of the leaders said they will increase their spending on AI infrastructure this year.

Efficiency Gains

In terms of return on investment, the respondents cited trading and portfolio management as the top use case for generative AI. The ability of artificial intelligence to aggregate investment data and apply the insights to portfolio management is one of the main reasons AI has disrupted the wealth management industry.

The industry has seen a surge in “robo-advisors” that can perform automated trades on their users’ behalf. Wealth managers have also used AI to help them manage customer calls, such as in the Morgan Stanley Debrief program.

“Debrief exemplifies the AI transformation,” Gregory O’Gara, Lead Digital Wealth Analyst at Javelin Strategy & Research, told PaymentsJournal. “The program is expected to save advisors approximately 30 minutes per meeting across one million annual client calls—a significant aggregate efficiency gain that allows advisors to focus on higher-value activities.”

Agentic Adoption

The efficiency improvements derived from introducing AI into the customer experience will likely drive more firms to adopt the technology. According to the Nvidia report, the use of generative AI in the customer experience, particularly through chatbots and virtual assistants, has more than doubled, up from 25% in 2023 to 60% last year.

Nvidia predicted accelerating adoption of agentic AI, which are systems that can analyze vast amounts of data from various sources and autonomously solve complex problems. The artificial intelligence firm suggested that banks and asset managers could use agentic AI systems to enhance their risk management protocols, automate compliance processes, optimize investment strategies, and personalize customer service.

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A series of service outages have impacted major British financial institutions in recent days, causing payment delays that have affected hundreds of customers.

The Lloyds and Halifax banking apps were down for hours, preventing  customers from transferring funds and accessing mobile and online banking. Lloyds advised its customers not to attempt duplicate payments and assured them it would work to ensure no one suffers financial loss due to the disruptions.

The incident follows a weekend in which over 600 Barclays customers reported failed payments and incorrect account balances. Because the issues happened on a Friday, many workers were left without access to their paychecks for several days.

Hard to Keep Up

While no official reasons have been provided for the banking outages, one industry expert speculated that these issues have arisen because banks are finding it “too hard to keep up” with evolving technologies.

Financial technology expert Chris Skinner told the PA News Agency that the substantial arsenal of tech systems now essential for modern banking solutions means banks might have too much on their plate.

To compensate, many banks have turned to fintech partners for digital solutions, but this comes with its own challenges. Many tech partners prioritize innovation over reliability and have not been held to the same regulatory standards as financial institutions.

Concerns about the lack of a framework governing fintech partners came to a head after the recent failure of fintech Synapse, which resulted in million of frozen consumer funds.

A House of Cards

Skinner compared the issues at Lloyds and Barclays to the CrowdStrike outage last year. Though both Synapse and CrowdStrike are third-party firms, the CrowdStrike outage had global ramifications because the cybersecurity firm services a wide array of industries.

The UK banking outages might not have the same worldwide impact, but the rash of similar issues at disparate financial institutions is cause for concern—especially since many of the same fintech providers serve multiple banks.

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Fintechs worldwide are launching apps that leverage artificial intelligence to provide wealth management services to high-net-worth individuals.

Singapore has a significant concentration of high and ultra-high-net-worth individuals, with investible assets exceeding $1 million and $50 million, respectively. To cater to this niche, firms like U.S.-based fintech Arta Finance have entered the market. In October, Arta launched a platform in Singapore that is touted to be faster and more cost-effective than traditional wealth management avenues.

Another emerging platform, Moomoo, has already established a presence in the region with its mobile trading app, built around lower commissions. Moomoo Private Wealth markets its platform as offering a wide range of financial assets.

“Asian firms like Arta are aggressively targeting ultra-high-net-worth clients through fee reduction and access,” said Greg O’Gara, Lead Digital Wealth Analyst at Javelin Strategy & Research. “While these have been dominant themes for the U.S. wealth-tech transformation, U.S. fintechs are going further to focus on comprehensive platform integration.”

“This suggests that Asian providers may need to pivot toward a more sophisticated technological infrastructure to achieve sustainable scale in the $21.7 trillion APAC market,” he said.

Disruptive Technology

The emergence of disruptive technology like AI and self-directed investing platforms has had a significant impact on the wealth management industry, which was traditionally known for offering exclusive, personalized solutions.

To remain competitive, many of the world’s most established wealth management firms are embracing new technologies. As CNBC noted, Singapore’s DBS Private Bank has invested heavily in AI and digitalization to enhance client meetings and improve portfolio monitoring.

This “phygital” solution—which includes both an advisor and digital tools—may be adequate for many use cases, but it will likely not be enough to satisfy clients’ surging expectations.

“While DBS’s “phygital” strategy represents a strong incumbent response in Asia, the U.S. market’s emphasis on API-first architectures and modular service packages indicates that Asian wealth managers might be underinvesting in the technological foundation needed to support generational wealth transfer and comprehensive service delivery,” O’Gara said.

Emerging Investors

The demand for digital solutions has been accelerated by the emergence of Gen Z investors, who, in general, have started investing earlier than previous generations. To engage a more digital-first audience, both Arta and Moomoo have opted to promote their platforms on social media rather than hosting exclusive events.

However, concerns persist that a fully digital wealth management solution could jettison the human touch that has long been a hallmark of the industry.

“The U.S. wealth management industry’s focus on transforming advisor capabilities and talent development contrasts sharply with Asian fintechs’ technology-first approach,” O’Gara said. “It suggests that successful firms in Asia will need to balance their digital innovation with human advisory capabilities to capture the growing complexity of wealth management needs in the region.”

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Q4 spending by American Express’ more affluent customer base rose by 8% year-over-year, driven particularly by strong shopping activity among millennial and Gen Z consumers.

Spending picked up after a 6% growth rate in both Q2 and Q3 2024, according to CNBC. Among Gen Z users, transaction volumes surged 16% in Q4 2024, while millennials saw a 12% increase compared to the previous year.

This spending zeal was largely relegated to younger adults. American Express reported that Gen X spending grew by 7%, while baby boomer billings increased by just 4% in Q4. Despite sluggish spending growth in these groups, Christophe Le Caillec, Chief Financial Officer at American Express told CNBC that the increase in shopping among Gen Z and millennial customers “gives us a lot of optimism for 2025.”

A Concerted Effort

American Express has made a concerted effort to appeal to younger age cohorts, a strategy that seems to be paying off. Many of Amex’s young consumers are diving straight in with premium cards, like the $695 annual fee Platinum card, rather than starting with no-fee options.

Gen Z and millennial users exhibit a higher comfort level with membership and subscription fees, recognizing the value American Express provides beyond the cost. For example, the Gold card offers 100,000 membership rewards points after spending $6,000 on eligible purchases within the first six months and 20% back in statement credits made at restaurants during the initial period.

These promotions are attractive to younger adults who are often in search of experiences, as opposed to physical products. According to Le Caillac, Amex’s restaurant and travel rewards are making an impact—travel and entertainment billings rose 11% in Q4 24, compared with 8% for good and services. Much of the Q4 2024 boost in the travel segment came from airline spending.

Highly Sought After

The Gen Z and millennial customer base is highly sought after because they typically have higher incomes and credit scores than older cohorts. Many Gen Z consumers have also started investing at an earlier age than previous generations. Gen Z is highly tech-savvy, and their investment habits have been influenced by social media and gaming.

Though Amex has already shifted its strategy to reach this cohort, the wealth management industry has struggled to accommodate the preferences of the new generation of investors. Younger adults are looking for digital-first solutions that are tailored to their unique demands, and financial firms in all industries must acknowledge these preferences and adjust their strategies accordingly.

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The number of high-net worth individuals, who have over $1 million in investible assets, has steadily increased in recent years. While the wealth management industry is booming as a result, the sector is also in a state of flux due to emerging technologies and the unique preferences of young investors.

In 2025 Wealth Management Trends, a report from Greg O’Gara, Lead Wealth Management Analyst, and Disha Bheda, Wealth Management Analyst, at Javelin Strategy & Research, delved into the trends that have brought the wealth management industry to a crossroads—and the paths it can take to move forward.

The AI Transformation

The implementation of artificial intelligence has been on the agendas of businesses across all sectors, and the wealth management industry is no exception. Many of the world’s largest financial firms have deployed sophisticated AI systems that are revolutionizing everything from client communication to investment analysis and back-office operations.

The Morgan Stanley Debrief platform, for example, is a significant step beyond the institution’s previous AI-powered efforts, which were mainly designed to reduce an advisors’ research lift. Instead, Debrief puts AI front and center in customer communications.

“Debrief exemplifies the AI transformation,” O’Gara said. “The program is expected to save advisors approximately 30 minutes per meeting across one million annual client calls—a significant aggregate efficiency gain that allows advisors to focus on higher-value activities.”

One of the most impactful aspects of the Debrief platform is its ability to monitor advisor-client Zoom meetings and take notes—a function previously handled by other employees or the advisors themselves. Debrief creates detailed logs of advisors’ meetings and automatically generates emails and summaries of the discussions.

Morgan Stanley rolled out its program to the firm’s roughly 15,000 advisors last summer, in one of the most significant implementations of generative AI at a major bank.

“However, this technological advancement comes with its own challenges,” O’Gara said. “As firms rush to implement AI solutions, a technological divide is emerging between industry leaders and laggards, particularly affecting smaller Registered Investment Advisors (RIAs) who may struggle to keep pace with the rapid evolution of technology.”

The Self-Directed Surge

Technology has also played a key role in the dramatic shift toward self-directed investing over the past few decades. According to Javelin, one-third of advised clients with over $100,000 in liquid assets already maintain self-directed accounts alongside their advisory relationships, and Javelin expects that number to easily exceed 50% in the coming years.

This hybrid self-directed/advisor-managed approach is forcing traditional advisory firms to rethink their value propositions. Adding to the complexity of self-directed investing is the emergence of automated advisors, or “robo-advisors” such as PortfolioPilot. The platform gained 22,000 users and $20 billion in assets under management in its automated portfolio through just the first two years of operation.

The number of hybrid, self-directed, and automated platforms that have emerged has given investors more options than ever, which also creates some challenges.

“Modern self-directed platforms are leveraging natural language processing and predictive analytics to serve as sophisticated trading companions, providing capabilities that were once exclusive to institutional investors,” O’Gara said. “This diaspora of investment tools is blurring the traditional boundaries between self-directed and advised accounts, creating new regulatory challenges and risk management concerns—and opportunities.”

A Digital-First Generation

The technological metamorphosis of the wealth management industry is being accelerated by a new generation of investors. Unlike previous generations, Gen Z investors are starting their investment journey earlier and largely have a natural affinity for AI tools and self-directed platforms.

Gen Z’s investment behaviors are heavily influenced by social media and gaming mechanics. These preferences are creating new patterns of market engagement that traditional firms must acknowledge, especially when taking a holistic approach to portfolio risk management.

Younger adults are also more focused on environmental issues, which has created unexpected synergies with their technological preferences. O’Gara noted that the “’E’ in ESG will increasingly stand for ‘Energy,'” because of Gen Z’s continued interest in the high energy demands of AI and the resulting environmental impact.

The industry is already shifting to accommodate Gen Z’s preferences. Robinhood’s recent acquisition of Trade PMR signaled a strategic push to create a bridge between self-directed trading and wealth management services, using a RIA referral approach that is similar to what exists today at Fidelity and Schwab.

“Robinhood faces unique challenges in monetizing this opportunity without the proprietary asset management solutions that its larger competitors possess,” O’Gara said. “Without asset management products in the RIA channel, it will be difficult to capitalize on assets that flow outside the firm. They’ll have to come up with a solution for that.”

A Dynamic Cycle

As these trends accelerate and converge, wealth managers will have to develop strategies that blend AI capabilities, self-directed tools, and human expertise, while keeping younger generations’ preferences in mind. A key challenge will be maintaining the human element amid these technological and cultural shifts.

Though there have been concerns that tech could eventually replace wealth managers, it’s more likely that the advisor’s role will simply evolve. Financial advisors will focus more on behavioral coaching and holistic financial wellness across multiple accounts. They will also have to help clients navigate the increasing complexity of investment options, while explaining the benefits and drawbacks that accompany each vehicle.

In addition, firms will have to navigate these changes while addressing regulation, risk management, and client expectation challenges. There are many obstacles to overcome, and these challenges are only exacerbated by the industry’s rapid shift. The transformation of wealth management is not a future event—it is happening now, at a pace that will only accelerate.

“We’re witnessing a dynamic cycle of innovation and adaptation,” O’Gara said. “AI is enabling more sophisticated self-directed trading platforms, which particularly appeal to Gen Z investors, while Gen Z’s digital-first mindset is pushing the industry to accelerate AI adoption and reimagine traditional advisory relationships.”

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In the budget it passed for next year, Greece will implement caps on certain banking fees to help mitigate the cost-of-living pressures faced by consumers.

Although Greek financial institutions had already moved to reduce some of the fees they charge customers, the country’s Prime Minister, Kyriakos Mitsotakis, said these measures didn’t go far enough. As part of the new policy, money transfer fees will be capped at €0.50 ($0.52) on transactions up to €5,000.

After years of financial struggles that required billions in government aid, Greece’s banks have now become profitable to they point where they have begun distributing dividends to shareholders. This renewed profitability is one of the reasons Mitsotakis felt it was time for banks to diminish their fees.

There are a multitude of additional initiatives underway to ease the burden on consumers, including a plan to eliminate fees on transactions with state agencies and utility companies. Banks will also contribute €100 million toward the construction or refurbishment of schools, and financial institutions will be required to pay double property taxes on homes they own but are not in use—an effort aimed at increasing the housing supply.

Spoonful of Soup

It’s estimated that Greek financial institutions generate annual revenue of €200 million from fees charged to consumers, and capping these fees could significantly hit the banks’ bottom lines. Still, Mitsotakis believes that relieving the strain on consumers is more important than protecting bank profits.

This sentiment is reflected in recent actions by the U.S. Consumer Financial Protection Bureau, which announced new rules to limit the overdraft fees banks and credit unions can charge to $5 in an initiative it believes will save consumers billions. However, there has been pushback from U.S banks, who believe that the rules may lead them to eliminate the overdraft protection so many consumers rely on.

In Greece, the new measures were criticized by some groups who felt the efforts didn’t go far enough to impact consumers. One opposition group likened the efforts to “giving pensioners a spoonful of the soup of super profits.”

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The Consumer Financial Protection Bureau has released the final iteration of its rule that will cap the overdraft fees banks and credit unions can charge, a measure expected to save U.S. consumers $5 billion annually.

Under the new regulations, banks could either charge a $5 overdraft fee or limit the fee to an amount that covers the lender’s costs. In most cases, this represents a dramatic reduction from the $35 average overdraft fee. The rule would also treat overdraft loans similarly to credit cards, requiring lenders to disclose all associated interest rates and fees.

“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” noted CFPB Director Rohit Chopra, in a statement. “The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans.”

Substantial Pushback

The rule, set to take effect in October 2025, will apply to banks and credit unions with assets of at least $10 billion in assets. While many of these institutions have already moved to reduce the frequency or amount of overdraft fees—or have eliminated them entirely—there has been substantial pushback to the CFPB’s regulations since they were proposed earlier this year.

Earlier this year, Rob Nichols, President and CEO of the American Bankers Association noted that “the proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it.”

A Safety Net

Without the safety net of overdraft protection, many in the banking industry argue that consumers facing medical emergencies or unexpected expenses may have to turn to less desirable alternatives like payday loans.

There have also been concerns among smaller banks and credit unions that, even though the rule only applies the largest institutions, they may face pressure to adopt similar standards to stay competitive.

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At the end of last year, service members in the U.S. military were financially better off than they were before the pandemic.

Despite inflationary pressure and high interest rates, service members managed to grow their savings and maintain higher balances in their checking accounts over the past five years, according to the first-ever Military Financial Wellbeing Index released by USAA Federal Savings Bank.

During this period, service members increased their savings account balances by 19% and their checking account balances by nearly a quarter. In contrast, the average checking and savings balances among civilians have decreased by 12% and 10%, respectively, over the past two years.

A Stark Contrast

There is a stark contrast between military members and the average consumer regarding credit card debt. U.S. consumer credit card debt hit a record-high of $1.17 trillion in Q3, a 8.1% increase from the previous quarter.

Over the past five years, the average daily credit card balance among U. S. military members has declined by nearly a quarter. Roughly half of service members paid their credit card bills in full and on time last year, compared to 40% the year before. Additionally, the number of military members carrying a revolving balance has declined.

The USAA report also examined the differences in financial stability among younger populations. Gen Z service members have grown their savings and checking account balances by double digits over the past five years, while millennials have experienced more modest increases. However, millennial service members had credit card balances that were roughly a quarter lower than pre-pandemic, while Gen Z had balances that were only 11% lower over the same time.

One potential reason for the generational differences could be housing costs. Millennials are older and are more likely to be homebuyers, while Gen Z service members who are just beginning their military careers are more likely to live on base.

Eclipsing Counterparts

While there may be generational variations, younger service members have fared much better than their civilian counterparts. Gen Z service members had a 21% higher average checking account balance and 8% higher savings account balance than the average Gen Z consumer. This trend was similar with millennial service members, who eclipsed their civilian counterparts by double digits when it came to the average checking and savings account balances.

There are multiple reasons why the military community has improved its financial wellbeing, including steady employment throughout the pandemic, as well as pay and benefit increases.

Within the military, there is also more financial education, something that isn’t always available to Gen Z consumers, and a growing emphasis on financial readiness. Younger service members, especially those that are officers, are generally earning more than their civilian peers who are at the same point in their careers.

“This Index goes beyond sentiment to put a real number behind the optimism and the challenges that our military members share with us on a daily basis,” says Michael Moran, President (Interim), USAA Federal Savings Bank. “While it’s great to see service members in a better place than they were pre-pandemic, we can’t ignore the reversal in trends. With inflation continuing to pressure military households, we encourage service members to be vigilant with their personal finances and preserve some of these hard-earned gains.”

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A year after the U.S. Consumer Financial Protection Bureau said it wanted to strengthen regulations governing the growing number of non-bank companies offering financial services, it has now made its framework official.

One big change from the initial proposal is that the CFPB’s rules will only apply to fintech firms that process over 50 million transactions, whereas the bureau had initially considered including any company processing over five million payments.

This narrowed scope means only the largest payments companies, such as digital wallet  providers Google, Amazon, and Apple, and peer-to-peer platforms like PayPal, Venmo, Zelle, and Block’s Cash App, will fall under the rules’ purview. The regulation will not apply to payments platforms operating at a single retailer, such as Starbucks’ digital app.

Novelty to Necessity

The new regulations allow the CFPB the same oversight over tech firms as it has over banks and credit unions. The bureau will be able to conduct examinations of these companies, obtaining records and interviewing employees to ensure the fintechs are compliant.

“Digital payments have gone from novelty to necessity and our oversight must reflect this reality,” said CFPB Director Rohit Chopra in a prepared statement. “The rule will help to protect consumer privacy, guard against fraud, and prevent illegal account closures.”

A First Step

Digital payments are the centerpiece of the emerging worldwide payments infrastructure. According to CNBC, the apps that would fall under the CFPB’s new framework process over 13 billion consumer payments each year. These apps have increasingly been used like bank accounts, and the CFPB said digital payments platforms have gained “particularly strong adoption” with consumers in the low- to middle-income brackets.

As these platforms gained significant traction, there have been increasing calls for a stronger regulatory framework from both lawmakers and traditional banking players. Those calls have accelerated since the costly collapse of Synapse, a fintech company that failed to maintain compliance for its client institutions.

Even though Synapse would not have fallen under the CFPB’s oversight by the new rules, the framework is likely just the first step in regulating the surging industry. The rules will take effect 30 days after their publication in the Federal Register.

The post CFPB Finalizes Rules Holding Fintechs Accountable to Banking Regulations appeared first on PaymentsJournal.

Some of the largest banks in the UK may have to pay billions of pounds to consumers over contentious lending practices at car dealers.

In response to an October judgement by the UK’s Court of Appeal, many British banks are considering halting auto lending entirely. The court ruled it was unlawful for car dealerships to receive bonuses from auto lenders without getting the customer’s informed consent.

UK financial institutions were not expecting the ruling and are now petitioning for clarity from the country’s regulators. These banks argue that they were following the guidelines that were in place at the time and maintain that they did not engage in deceptive practices.

“Auto financing has operated like this in the U.S. for years, where banks pay commissions to dealers for originating auto loans on their behalf,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “The Finance and Insurance function at a car dealer is where you go to sign the docs and get the sales pitch on the extended warranty, upholstery Scotchgard, and all of the other stuff that dealers make money on.”

“In fact, most dealers make more on F&I than they do on the actual vehicles,” he said. “If Bank A pays the dealer a higher commission on loans than Bank B, the dealer may steer customers into loans from Bank A, even if the rates and terms to consumers are not as favorable as Bank B. This is not illegal in the U.S., if the rates and terms are clearly disclosed to the consumer, but dealers aren’t required to disclose their commission arrangements with banks.”

Injecting Uncertainty

UK auto dealers and banks had been operating under a similar model until the October ruling introduced uncertainty into the industry. According to CNBC, the UK’s Financial Conduct Authority said it would work to expedite a decision from Britain’s Supreme Court on whether lenders could appeal the decision.

The FCA, a consumer watchdog group similar to the U.S. Consumer Financial Protection Bureau, has indicated it might get involved if the appeal is approved. However, the FCA still advised UK auto lenders to set aside funds for potential consumer reimbursement. If the ruling stands, not only will the FCA need to revise its consumer disclosure rules, but banks could also face legal action.

Widespread Ramifications

The potential impact on UK financial institutions has been estimated at up to £28 billion, and it could prompt many lenders to exit the market entirely. There are also concerns that the precedent set by the ruling could have widespread ramifications for other forms of consumer lending in the country.

“Banks are saying they followed the FCA rules, which are not aligned with the court’s ruling,” Apgar said. “Courts can certainly overturn rules and force changes, but it doesn’t seem likely that banks will be held responsible to consumers for following the FCA rules that were in effect at the time the loans were originated.”

The post UK Auto Loan Controversy Could Cost Banks Billions appeared first on PaymentsJournal.

Over two-thirds of U.S. retirees had outstanding credit card debt this year, marking a substantial increase from previous years, according to data from the Employee Benefit Research Institute (EBRI).

This increased dependence on credit cards is an alarming trend given the fixed budgets many seniors live on. According to the survey, roughly 83% of retirees were collecting Social Security, which, on average, accounted for about half of their income.

After pandemic-fueled inflation, costs have not cooled significantly this year. Many retirees are still struggling with higher rent payments and the rising cost of everyday essentials. While Social Security payments have included cost-of-living increases, in many cases these adjustments haven’t been enough to keep up rising expenses.

To bridge the gap between their Social Security income and living costs, retirees have increasingly relied on credit cards. Just a few years ago, only 40% of retirees carried credit card debt, according to EBRI.

Covering Budget Shortfalls

The increased reliance on credit cards to cover budget shortfalls isn’t limited to retirees. Separate research from the Federal Reserve found that consumer credit card debt skyrocketed above $1 trillion, with delinquencies also on the rise.

As consumers age, many carry this debt into retirement. According to CNBC, U.S. retirees that are just reaching retirement are more likely to have debt—and at higher levels—compared to past generations.

A Pressing Concern

In addition to inflation, consumers of all ages are facing high interest rates. As rates have risen, so have credit card annual percentage rates, making credit cards an expensive way to borrow.

The combination of inflation and high interest rates has put immense pressure on consumers and could have repercussions for financial institutions. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, major financial institutions are required to undergo stress tests to assess how they would respond in the event of an economic catastrophe like the financial crisis.

This year’s stress tests revealed that consumer credit card losses would amount to $175 billion, the highest among all lending segments. Since there is still uncertainty about the trajectory of the U.S. economy, this continued reliance on credit cards among consumers should be a pressing concern for banks.

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Jamie Dimon, CEO of JPMorgan Chase, contends that several recent rules designed to regulate the U.S. banking sector have been misguided or inadequate. He said there may be no recourse other than legal action.

Speaking at an American Bankers Association conference, Dimon took issue with last year’s proposal to raise capital requirements on systemically important banks. The Basel III endgame reforms are designed to strengthen the financial industry against economic downturns, and lawmakers originally proposed a 19% capital requirement for the biggest banks.

Though the requirement was lowered to 9% after lobbying from Wall Street, Dimon said that threshold still isn’t low enough. The executive said the heightened capital requirement would place too much strain on big banks and that the Basel rules were based on faulty operational risk calculations and inconsistent liquidity coverage ratios.

Taking Aim

The CEO also said it is “grossly unfair” that credit card companies like Capital One and American Express are able to charge higher fees on debit card transactions than card-issuing banks.

In addition, Dimon took aim at the Consumer Financial Protection Bureau’s proposed framework to spur U.S. open banking. The goal of the CFPB’s rules is to give consumers control of their financial data and allow them to shop around for the financial institution that has the best rates and products.

Open banking has been much more prevalent overseas, and Dimon said he was not against the model itself. He said the CFPB’s rules would do more to compromise consumer data than safeguard it, perhaps leading to a spike in fraud.

‘Unfair and Unjust’

There is some uncertainty about the outcome of the Basel III reforms and the CFPB’s open-banking rules that will likely be clarified only after the U.S. presidential election. Still, many financial institutions might be hesitant to criticize and sue regulators because of concerns about retaliation.

However, the executive said JPMorgan Chase has been compelled to act because of the “unfair and unjust” regulatory environment.

“It is time to fight back,” Dimon said. “We don’t want to get involved in litigation just to make a point, but if you’re in a knife fight, you better bring a knife, and that’s where we are.”

The post JPMorgan Chase CEO Criticizes U.S. Banking Regulations appeared first on PaymentsJournal.

Financial institutions have customer bases that span multiple generations. While baby boomers are financially well-established and open to adopting new technologies, it might be tempting for banks and credit unions to focus on making digital banking inroads with older generations.

However, as Gregory Magana, Digital Banking Analyst at Javelin Strategy & Research, highlighted in his latest report, The Boomers Are OK— and Shouldn’t Be Your Digital Banking Priority, boomers shouldn’t be the central focus if most institutions’ digital strategies. That said, there are specific strategies that banks with an older customer base can employ to optimize their services for baby boomers.

A Lifetime of Financial Needs

One of the main reasons why financial institutions should not base their digital strategy around baby boomers is that they are not as much of a churn risk as younger generations. In Javelin’s survey of boomer preferences, most baby boomers said they are either extremely unlikely or very unlikely to switch banks in the coming year.

“They are much rosier about their financial situation than younger generations,” Magana said. “When boomers were asked how they feel about their primary financial institution on a 10-point scale, most of them responded with a nine or a 10,” Magana said. “They are the happiest and stickiest customers a financial institution could have, so why would a bank mix anything up?”

Third-party rivals like Venmo, Credit Karma, and PayPal are a concern with younger generations because they have moved beyond peer-to-peer payments and credit score monitoring to offer competitive banking accounts. This concern is less pressing with boomers, as most baby boomers said they haven’t used any third-party services in the past 12 months.

Another concern with younger customers is the potential fragmentation of their primary banking relationship when new financial needs arises. They may move into a new house, require an auto loan, or open a credit card with another institution.

“When it comes to baby boomers, that fragmentation is already baked in,” Magana said. “They have had a lifetime of financial needs. They probably already have an auto loan, and they have multiple credit cards. They are not as likely to seek out products at another institution and potentially switch banks if they like the experience there more.”

Legacy Affinity

Another reason boomers shouldn’t be a digital banking priority is they still have a strong affinity for legacy channels, which they prefer over mobile and online banking platforms.

“When boomers were asked about the factors that motivate them to stay at their primary financial institution, the most important aspect for them is if a bank has convenient branches,” Magana said. “Mobile banking is much lower down on their list of priorities, coming in after convenient ATMs, low fees, and good customer service. All their needs are grounded in real-world channels.”

Boomers have seen significant technology innovations throughout their lives and aren’t averse to using digital channels. However, when it comes to more complex banking tasks, they tend to prefer traditional, legacy channels.

For instance, if a baby boomer is opening or closing an account, they are more likely to visit a bank branch. For actions like reporting a suspicious transaction, challenging an overdraft fee, or reporting a lost debit card, boomers prefer contacting a call center.

Basic Behaviors

Boomers have adopted online banking, but most only perform four online banking behaviors on a monthly basis: checking balances, reviewing transactions, paying bills, and transferring funds within the bank.

When it comes to mobile banking, there are only two activities they typically perform: monitoring balances and reviewing transactions. For more complex banking behaviors like checking credit scores, activating and deactivating debit cards, sending money using Zelle, or financial planning, they are more likely to visit a branch, contact a call center, or avoid performing the activity alltogether.

“Boomers aren’t the fount of digital engagement that many younger generations are,” Magana said. “When baby boomers were asked which channel they use to perform certain high-complexity banking activities, they mostly said they don’t perform those activities at all.”

Improving the Boomer Experience

Though financial institutions shouldn’t base their digital and mobile banking strategies around baby boomers, there are still ways banks can optimize their platforms for this generation.

Financial institutions should focus on streamlining the online banking experience to make it more intuitive and functional while offering education resources geared towards encouraging boomers to move beyond basic online banking. Additionally, banks and credit unions should work to increase boomers’ confidence in digital customer service, reducing their reliance on call center support.

“The initial concept for this report was to explore digital banking strategies for baby boomers,” Magana said. “Upon research, the data indicated that financial institutions should mostly focus their digital banking efforts elsewhere. However, many of the tactical solutions that streamline the boomer experience could also improve the overall experience for younger generations in the long run.”

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Social media has become the primary source of financial advice for digitally native young adults—roughly 40% of Gen Z and 36% of millennials say they learn about financial topics from these platforms.

According to a recent study by FIS, less than a quarter of younger adults receive financial advice from their financial institution. Despite being aware of its drawbacks, younger generations still rely heavily on social media for financial guidance. In fact, roughly half of Gen Z respondents acknowledged that social media isn’t a reliable source for financial advice. These platforms often feature financial messages that are distorted, unrealistic, and fragmented.

“As our Pulse survey reveals, younger generations are increasingly turning to social media for financial advice, which poses a challenge for traditional banks,” Hashim Toussaint, GM of Digital and Open Banking at FIS, noted in an email to PaymentsJournal. “But while this may initially cause concerns, banks should actually see this as another medium through which they can connect to their existing customers and attract new customers to their brand.”

The Financial Picture

Younger generations are less likely to invest in traditional investment products. The report found that most young adults keep their money in checking accounts and digital wallets. While digital wallets can be a useful tool for managing and digitizing finances, they are not always the safest place to hold funds, as they often lack FDIC insurance, unlike bank accounts.

Although most Gen Z consumers may not have the most optimized financial outlook, they are actively engaged. The FIS survey revealed that Gen Z opened more financial accounts in the past year than any other generation surveyed.

Embracing Dialogue

Gen Z is especially in play with financial institutions as they age into adulthood and branch out on their own. While most Americans are loyal to their financial institution, 66% of Gen Z and millennial respondents said they would switch banks if a better offer came along.

Young adults are also tech-savvy and actively engaged with their finances, but often unsure of the proper financial steps to take. They are hungry for guidance, but oftentimes the only place they find it is online.

“Banks are uniquely positioned to empower their customers with personalized and data-driven advice, deepening those relationships while bringing them the guidance they are desperately seeking to ensure their financial well-being,” Toussaint said. “Consumers still place their highest levels of trust with their financial institutions, so it is now up to those institutions to embrace social media as a new way to dialogue with them.”

The post More Young Adults Get Financial Advice from Social Media Than Their Bank appeared first on PaymentsJournal.

Customers have various ways to reach out to banks, but alerts are one of the few ways that financial institutions can initiate and direct conversations with their customers. However, many banks’ alert systems aren’t optimized to make those interactions count.

In her latest report, Six Alert Flaws That Banks Can Fix Today, Lea Nonninger, Digital Banking Analyst at Javelin Strategy & Research, discusses the common flaws in institutions’ alert systems and details the steps banks can take to maximize the impact of their alerts.

A Lack of Visibility

Nonninger analyzed some of the top U.S. banks to evaluate the types of alerts they offer and how they are presented to customers. While all the banks offered some iteration of alerts, the analysis found there was room for improvement across the board.

“One of the first things we examined is the visibility of alerts, and we found that they weren’t very prominent in the online banking experience,” Nonninger said. “It often takes a few clicks to locate them, which means customers are forced to actively search for the alert dashboard.”

Since alerts are a key way for banks to communicate with their customers, they should ideally be advertised front-and-center on an institution’s homepage. However, that is rarely the case.

In addition to the lack of prominence on online banking homepages, locating alerts during the customer journey can be complicated. The lack of direct routes to the alert center in some online banking expeirences means customers must click through multiple screens to access it.

Customer Convolution

Many financial institutions don’t display alert options outside of the main alerts dashboard. While a central alerts dashboard serves as a great hub to showcase all alerts, it limits the opportunity for customers to access alert preferences during their online banking journey.

“As a customer is making a payment, it would be much more beneficial if they could view the payment alerts that are available while they’re there, or they could see the card control alerts while exploring card settings,” Nonninger said. “There is a missed opportunity to advertise alerts where they matter most to customers.”

Oftentimes, even the alert dashboards can be convoluted for customers. Banks might offer a vague overview of the types of alerts they offer, organized into categories. A financial institution might group alerts by accounts or cards, which might be clear to the bank but confusing for the average customer. This added complication creates another missed opportunity, as most customers are unlikely to take the time to review all the alerts in the dashboard and make their selections.

Proactive Alerts

Another flaw in many banks’ alert systems is that they are retrospective. While they may consider a customer’s history, they do not proactively alert users to potential issues on the horizon.

“If a customer might soon have difficulty making their next payment, or if they are about to dip into overdraft, they are not notified until it is too late,” Nonninger said. “It is a missed opportunity to take care of your customer before they get into those undesirable situations. Giving customers guidance and advice proactively though alerts can strengthen the customer relationship.”

Although online banking and mobile banking experiences are often  equated, the Javelin analysis found that there were often differences in the alerts settings offered in each case. For example, most financial institutions don’t offer customers the ability to create push notifications through the online banking experience, while this option is available on mobile.

“Consumers have varying preferences, but they are increasingly mobile-first,” Nonninger said. “Users are much less likely to manage their alerts if they have to search through both the mobile banking and online banking alert dashboards to find what they’re looking for.”

Step One

Alerts should be at the forefront of the digital banking experience, as they can effectively keep customers informed and engaged. Outside of high-priority alerts like security, most alert preferences are selected and managed by customers.

There is significant opportunity for banks to build stronger relationships with their customers by making users aware of alerts and educating them on the benefits these alerts provide. However, fixing the immediate flaws in a banks’ alert system is only the first step toward an optimized program.

“Once the categories are more defined and alerts are better advertised, that will be step one in fixing the flaws in alerts,” Nonninger said. “Then banks can take their alerts to the next level by ensuring the content they are sharing is personalized, and they’re approaching their customers in the right way.”

The post Financial Institutions Have a Missed Opportunity with Alerts appeared first on PaymentsJournal.

UniCredit’s recent purchase of a significant stake in Germany’s Commerzbank ignited its share of controversy, but the Chief Supervisor of the European Central Bank has called for more cross-border bank mergers.

Though she did not specifically mention UniCredit or Commerzbank, the ECB’s Claudia Buch told attendees at a conference in Lithuania that “cross-border activities and mergers can provide opportunities to generate economies of scale and scope.”

Italy’s UniCredit initially acquired a 9% stake in Germany’s second-largest financial institution last month through an overnight transaction. The institution then leveraged derivatives to increase its stake to 21%. UniCredit has since petitioned the ECB for approval to acquire a 29.9% controlling stake in the company.

Drawing Criticism

The move drew criticism from observers who likened UniCredit’s purchase to a hostile takeover. Both the German government and rival Deutsche Bank have raised concerns, calling the move an unfriendly attack. Detractors of Unicredit’s purchase expressed concerns that a foreign bank might limit the credit available to German businesses and that UniCredit might falter if the Italian economy struggles.

Though the Italian economy has faced challenges, UniCredit has successfully amassed billions of euros for acquisitions. If the bank can pull of a merger with Commerzbank, it would be the largest cross-border bank merger in the EU since the financial crisis. The only real stumbling block in the lender’s plan could be securing approval from the ECB.

Consolidating Positions

Given the ECB’s stance on cross-border bank mergers and Buch’s recent comments, it seems unlikely that the central bank will reject UniCredit’s appeal. The ECB has stated that it applies the same criteria to evaluate cross-border mergers as it does for domestic transactions, primarily focusing on ensuring that the banks are on solid footing.

The ECB has long called for European banks to strengthen their positions through consolidation. The central bank has expressed concern that EU financial institutions have been so focused on their own countries that they have fallen behind  their counterparts in the U.S. and China. However, cross-border bank mergers can be difficult due to country-specific regulations.

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Meta is enhancing its Fraud Intelligence Reciprocal Exchange (FIRE) to directly share data with two UK banks in an effort to prevent scams originating from Facebook, Instagram, and WhatsApp.

NatWest and Metro Bank are the initial financial institutions on FIRE, but a statement from Meta noted that more banks are expected to join soon. The tech giant also noted that it had piloted FIRE with several UK banks and, in one instance, successfully identified 20,000 accounts linked to a concert ticket fraud ring targeting consumers in both the UK and the U.S.

“This is fascinating, and I’d be interested to see just how much financial institutions are willing to share,” said Tracy Kitten, Director of Fraud and Security at Javelin Strategy & Research. “It looks like the beta testing has been successful so far. We know that social media platforms are cybercriminals’ favorite launching pads for scams, so cutting criminals off at the social platform source makes sense.”

Crafting Attacks

Meta has faced criticism for the misuse of its platforms in the past. As consumers share more personal information on social media, criminals can exploit this data to create targeted fraud schemes.

One of the most common scams on platforms like Facebook is authorized push payment (APP) fraud, where cybercriminals impersonate individuals or companies to trick consumers into sending payments.

Protecting Privacy

Meta has instituted rules to ban APP fraud and other scams, but critics argue  the company hasn’t done enough. In a recent statement, Meta’s leadership said that social media platforms and banks will have to work together and share relevant information to combat fraud, but that can present concerns for banks.

“The challenge for financial institutions is ensuring they don’t violate consumer privacy laws and share only what is necessary,” Kitten said. “They also run the risk of being vulnerable to shortcomings on Meta’s side, where disclosure to law enforcement is concerned, should an individual be tied to a specific account of interest. Still, it’s a promising first step and one that will be interesting to watch for similar actions in the U.S.”

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Bank of America will open over 165 new U.S. branches by the end of next year, with the new model will de-emphasizing teller transactions.

While the increase in brick-and-mortar locations may seem at odds with the continued shift to digital banking, Bank of America’s leadership told Reuters that physical branches account for 80% of its new checking account openings.

This news comes after rival JPMorgan Chase announced its ambitious strategy to expand its footprint by 500 branches over the next three years. JPMorgan currently has the largest network of bank branches in the U.S., with more than 1,000 more branches than Bank of America.

Company Storefront

As more customers complete routine transactions online and at ATMs, banks have redesigned their branches to spotlight offerings like mortgages, investments, and other loan products. At JPMorgan Chase’s new branches, a consultative area for customers will be the primary focal point.

“Our branch network is one of the key reasons that customers open accounts with us and it has helped us attract deposits,” Jennifer Roberts, CEO of Consumer Banking at Chase, told Reuters. “We really view our branches as a storefront for the entire company and it is an anchor for us to expand our relationship with customers as we aim to be their primary financial partner.”

Critical Inroads

Bank of America’s move comes as many consumers, especially younger generations, have shifted away from larger banks. While Gen Z wants a sleek, digital-first experience for most of their banking needs, they also look for guidance when making significant financial decisions.

Gen Z is reaching the age where most adults choose their primary financial institution, making it critical for banks to establish relationships now. This is likely one reason why Bank of America is accelerating its branch expansion, adding roughly 40 new locations this year.

However, Bank of America still has around 1,000 less branches than it did 10 years ago, and most of that period was spent redesigning existing branches. It was not until the past two years that the bank renewed its expansion efforts.

The post Bank of America to Shift Gears with New Branch Expansion appeared first on PaymentsJournal.

Youth banking accounts have grown in popularity, and many financial institutions have conducted extensive research to understand kids’ opinions on banking. However, these studies are frequently inaccurate because they overlook the most important factor in kid’s lives: their parents.

In his latest report, Youth Banking That’s Built for Parents, Dylan Lerner, Senior Digital Banking Analyst at Javelin Strategy & Research, analyzes the way financial institutions approach youth banking products and delivers insights on how banks can build youth products that are designed with parents in mind.

Parental Differences

Every year, Javelin conducts a survey of trends in youth banking, but this year there was spotlight on parents’ financial philosophies.

“Javelin surveyed over 3,000 parents and legal guardians about kids’ financial services and had an overwhelming response,” Lerner said. “With so much going on in their lives and so many financial offerings, parents are turning to their banks for help. They want to rely on their financial institution to make relevant recommendations and give them control to introduce each product or service to their child.”

When parents were asked about the appropriate age to introduce various financial services to their children, responses varied widely. The key takeaway is that every parent and child is different. For this reason, banks and financial institutions should be careful when categorizing youth products solely on age.

“There is a major financial institution that offers a savings account for kids under 16 that is themed to Sesame Street,” Lerner said. “Could you imagine a 14- or 15-year-old who is excited to get their first bank account, then they log in and see Sesame Street? It’s completely missing the mark.”

Crawl, Walk, Run

Many youth offerings include features like chore tracking, allowances, and financial literacy lessons. While parents value these aspects, their highest priority is a platform that allows them to send and receive funds easily. Their next priority is having controls in place to prevent their children from making financial mistakes or falling victim to scams.

Along with security and simplicity, parents want a program that helps ease their child into financial responsibility one step at a time, under supervision, before granting full independent access. For that reason, a graduation model like Javelin’s “crawl, walk, run” program is a better solution.

In this model, a parent might start their child with a savings account and teach them how to manage cash. Next, they could move to a prepaid card, followed by a checking account. Eventually, parents can introduce a secured credit card to their child, which reduces the need for parental supervision. Finally, parents can guide their child in building credit with traditional credit cards.

“The ‘crawl, walk, run’ model is about creating a more relevant framework for parents that recommends age-appropriate products for their children through digital functionality,” Lerner said. “It’s about creating a program where parents can guide their children’s financial lives and futures.”

Owning the Strategy

In addition to offering a “crawl, walk, run” model, banks who intend to build lifetime loyalty through youth banking products will have to adjust their strategy. This is partly because of the increased competition in the youth banking space, which includes traditional banks, neobanks, and fintechs like Greenlight and GoHenry.

Greenlight recently made headlines with its deal with U.S. Bank. While the partnership checks the youth banking segment for the bank, the fintech ultimately holds the deposits and manages engagement. Therefore, U.S. Bank does not own these youth banking relationships.

“It’s well integrated and very convenient as far as parents are concerned,” Lerner said. “But it prompts a question as youths reach adulthood: Will they stick with the financial institution or rely instead on the outsourced youth banking player?”

The Power of Starting Early

Another issue with kids’ banking accounts is that they are often free—so long as the child is under 18. Once the child transitions into adulthood, they typically continue using the same account and access, but with a monthly fee.

“Many financial institutions congratulate youths in reaching adulthood by reinstating monthly fees,” Lerner said. “This widespread strategy feels more like punishment than graduation, and it invites young adults to consider other banks, credit unions, and fintechs.”

However, because of the amount of data that young consumers are inundated with, it can be hard for them to figure out their best financial moves. They want guidance, and banks who want to establish loyalty should position themselves as trusted financial advisors.

“That strategy gives banks the best chance of retaining youth customers as they age into adulthood,” Lerner said. “Then as one thing leads to another, a bank can be there in a few years when that customer is looking for their first auto loan, shopping for a mortgage, and all the way into retirement. That’s the power of starting early.”

The post Youth Banking Accounts Should Cater to the Voice of the Parent appeared first on PaymentsJournal.

Italy’s UniCredit has acquired a 9% stake in Germany’s Commerzbank and indicated its intention to seek a merger between the two financial institutions.

UniCredit purchased its shares from the German government, which had been a stakeholder in Commerzbank since the financial crisis. There has been some pushback against the unexpected move by observers who deemed the overnight purchase a clandestine move.

On the other hand, many analysts have applauded UniCredit, believing it could lead to more cross-border bank mergers in the European Union.

“European countries might be partners, but they are still competing sometimes,” said Arnaud Journois, Senior Vice President of European Financial Institution Ratings at Morningstar DBRS, in an interview with CNBC. “I know that from an EU standpoint—policymaker standpoint—there is appetite for more consolidation to happen. However, we think that there are a few hurdles that make that difficult, especially on the regulatory side.”

Facing Resistance

In addition to the standard challenges of moving assets across borders, UniCredit could face resistance from local government officials. Deutsche Bank, the largest financial institution in Germany, might also work to prevent the cross-border merger. Deutsche Bank was previously considered a top contender to acquire Commerzbank, but currently lacks the resources to pursue it.

UniCredit hopes to get approval from the European Central Bank to acquire up to a 30% stake in Commerzbank. The ECB is unlikely to object, as it has been calling for EU institutions to consolidate for some time. EU leaders want to strengthen the region’s financial institutions, which have struggled to keep up with banks in the U.S. and China.

An Ambitious Growth Strategy

There have also been calls among financial leaders for the EU to strengthen its relationship with the UK. Since Brexit, EU merchants, payments processors, and financial institutions have struggled with the regulations and fees associated with doing business in the UK. These appeals followed a meeting between Britain’s prime minister met and Germany’s chancellor to develop an economic growth strategy.

UniCredit’s growth strategy has been ambitious; a merger with Commerzbank would be the largest cross-border merger in the EU since the financial crisis. The move is also strategic for UniCredit, as it acquired its shares in Commerzbank after the German bank struggled and its valuation dipped.

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The Federal Deposit Insurance Corporation has proposed a rule that would require financial institutions to hold their fintech partners accountable for managing consumer banking data.

The FDIC was prompted to take action after the failure of fintech company Synapse, which cost banking customers millions. At the crux of Synapse’s collapse was its inability to keep accurate records of which funds belonged to which customers.

”The rule is necessary given the way the fintech landscape has evolved,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research. “This is not designed to be overly restrictive, punitive, or harmful to fintech innovation. Rather, it calls out something that should have been done and wasn’t.”

Commingling Funds

Third-party providers have become a popular means for banks to accelerate their digital transformation. Financial institutions have increasingly leaned on fintechs to do everything from onboarding customers to maintaining account ledgers.

The new FDIC rule would require banks to closely monitor accounts opened through their fintech partners, including tracking account ownership and maintaining accurate daily balances.

However, the issue with Synapse was not just that the company didn’t keep accurate records, it was that the fintech commingled customer funds.

“Synapse told its customers that their account was FDIC-insured because it was held at Evolve, an FDIC-insured bank,” Apgar said. “In reality, those funds were commingled with all the other Synapse customers in a common “For benefit of” or FBO account. Synapse kept subledgers on how much of the FBO account belonged to each customer. However, after Synapse went out of business, the subledgers disappeared. Evolve was supposed to audit the subledger reconcilement, but they left that up to Synapse.”

Resetting the Model

The FDIC would normally insure consumer deposits, but in the case of Synapse, they don’t know who to reimburse or how much. Even when the FDIC can’t directly reimburse customers, clear records of ownership and account balances allow bankruptcy courts to determine which funds should be returned to whom.

Synapse’s failure incensed regulators, who said the incident exposed a glaring weakness in the banking-as-a-service model. There has been widespread speculation that regulators would be forced into action, and the resulting rules could force a reset of the BaaS model. The FDIC’s newly proposed regulations appear to be the first step in that direction.

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Inflation, high interest rates, and rising unemployment have put considerable pressure on consumers, which has created challenges for Ally Financial.

At a New York financial conference, the bank’s Chief Financial Officer Russell Hutchinson told investors that the economic picture has forced consumers to hold off on taking out loans. Borrowers are also more likely to default, especially on car loans—delinquencies and net charge-offs rose over the past two months in Ally’s auto-loan business.

Hutchinson said Ally will continue to underperform based on the number of borrowers that are now delinquent beyond 60 days. The company expects that number to expand given the state of the U.S. economy.

Shoring Up Lending

Despite its auto-loan issues, Hutchinson said Ally’s credit card portfolio was in good shape and performing as expected, but that was only after the bank noticed elevated net charge-off rates last year and made moves to shore up its credit card lending.

Earlier this year, the company sold its point-of-sale financing portfolio to Synchrony, which includes installment loans similar to buy now, pay later. That deal included loan receivables worth $2.2 billion.

Stress Tests

Ally’s struggles were presaged by this year’s Dodd-Frank Stress Tests, also called DFAST assessments. Every year, the largest banks undergo evaluations to determine how they would respond to a significant economic event, like the pandemic, the 2008 Financial Crisis, or skyrocketing unemployment.

Ally Bank passed this year’s evaluation, but the company’s consumer-centric lending portfolio put it in jeopardy—the bank was the lowest performer in the assessment. In the event of a severe economic downturn, Ally could lose over 40% of its portfolio. Unfortunately, declining economic conditions have made the DFAST scenarios less hypothetical.

“All the economic indicators point to a tough year next year,” said Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, in a previous conversation with PaymentsJournal. “Inflation is still high, and even though interest rates are likely to decrease somewhat, they won’t drop back to where they were a few years ago. Salaries haven’t gone up as quickly as prices have, and all those factors are weighing on consumers. The takeaway is all the banks passed the stress tests this year, but next year it could get ugly.”

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The median age of Gen Z is now 20 years old, and many of the young consumers are aging out of their first bank account. This group is at a stage where most adults choose a bank that will serve them for years to come—or even the rest of their lives.

In his latest report, Gen Z: Building Mobile Banking for a Generation in Transition, Gregory Magana, Digital Banking Analyst at Javelin Strategy & Research, examined Gen Z’s preferences and the actions that financial institutions can take to make inroads with young consumers.

More in Play

In a Javelin digital banking report from 2022, more than 68% of Gen Z consumers said they banked with the five largest consumer-facing banks: Bank of America, Chase, PNC, Wells Fargo and Capital One. In Magana’s latest report, that percentage had dropped to 61%.

It is not immediately clear why Gen Z has shifted away from big banks. It’s possible they initially opened their accounts with the banks their parents used. As Gen Z consumers have entered adulthood, many have gone to college or forged out on their own, leading them to seek out banks with branches that are more conveniently located.

Another factor could be the pandemic lockdowns, which transformed digital banking from a modern convenience to an absolute necessity. Many younger consumers chose to open accounts with larger banks because they offered better digital experiences at the time. Now, Gen Z is branching out.

“You would expect that if Gen Z users started off with banks that have a ton of tech firepower and mobile resources, as the big banks do, there wouldn’t be any reason for them to leave,” Magana said. “Regardless of the reason, Gen Z is even more in play than they were two years ago. They’re at the point where they are the most receptive to any overtures that banks might make, such as low rates and innovative mobile tools.”

However, that window won’t last forever—every year consumers aged 35 and older become less likely to switch banks.

The Iron is Hot

Though Gen Z may not have settled on a primary bank account, they are firmly established with fintechs. In fact, only 25% of Gen Z adults say they don’t use financial services providers. The most popular applications are peer-to-peer payments platforms like Venmo and Cash App, but young consumers are also entrenched with third-party lenders and credit score monitoring companies.

“Another strike-while-the-iron-is-hot point for financial institutions is that many of these platforms, most notably Credit Karma and Venmo, are continually ramping up their services,” Magana said. “P2P payments or credit score monitoring might be the initial product, but these platforms now offer banking products like checking accounts and loans. Venmo particularly wants to be a super-app that includes savings accounts, credit cards, and more.”

Gen Z is well-versed in apps and mobile banking, which is why it is increasingly likely that they will turn to a fintech company for some or all of their banking needs. Mobile banking is essential for Gen Z, and since the 2022 report, their use of mobile banking adoption has jumped 17%.

“Gen Z wants to use their mobile device to handle all their banking behaviors, from checking balances to financial planning,” Magana said. “The mobile banking platform is the number one reason why Gen Z consumers stick with their primary bank. Improving the mobile banking experience is likely to have an outsized impact on those customers’ satisfaction.”

The Search for Guidance

In addition to a robust mobile experience, Gen Z is seeking financial guidance. Their outlook on their finances has trended negative since the 2022 report. Many expressed that if they were out of a job for more than two paychecks, they would struggle to manage. The Javelin report also found that most Gen Z consumers say their financial situation doesn’t allow them to afford the things that make them happy.

Financial institutions can make significant inroads with Gen Z consumers by creating financial fitness tools that are intuitive and integrated into their apps. These solutions should be available from the very beginning of the customer journey. While banks often offer robust customer service options within their mobile banking apps, they frequently fail to extend these resources to the account opening flow.

“We’ve been beating the drum that onboarding is one area where customer service can have an incredibly measurable effect on a bank’s bottom line,” Magana said. “If people get frustrated, especially Gen Z consumers, they know there are other experiences out there, and they’re not afraid to abandon the account opening process and move to another institution.”

Finance 101

Other ways to make an impact with Gen Z include offering a mobile app that provides aggregated oversight, allowing customers to view their entire financial lives within a single app. Gen Z is also likely to respond to gamified lessons with customized challenges. Additionally, financial institutions should offer targeted products that are tailored to their stage of life and provide more personalized communications.

“Gen Z consumers often have to rely on free financial education and advisors because they don’t have any alternative,” Magana said. “Older generations, which are more financially established, have an easier time getting in-person help. There could be a significant return on investment from offering Gen Z consumers Finance 101, so they can boost their financial confidence. “

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Every year, the top U.S. banks undergo thorough stress tests of their lending portfolios to identify potential risks under stressful economic conditions. These DFAST evaluations are required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed to mitigate financial crises like the Great Recession.

The stress tests measure how each financial institution would respond to a hypothetical set of economic events. Although all the banks passed this year’s evaluation, the results highlighted that rising credit debt is becoming an alarming risk for banks, especially given that economic conditions are expected to worsen before they improve.

In his report, DFAST in Credit Cards: No Stress Now; Next Year Maybe, Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research, analyzed the results of the DFAST assessments and detailed the actions banks can take to prepare for the challenges to come.

The Risk Item

Under the adverse conditions of the DFAST tests, banks would face total credit losses of roughly $684 billion. Consumer credit card losses would amount to $175 billion, the highest among all lending segments. Excluding trading losses, credit cards would account for almost a third of all losses in the simulated economic downturn.

Some of the stressed conditions impacting consumers include housing prices and gross domestic product (GDP). For instance, the stress tests simulated a scenario where housing prices fell over 30%, similar to the decline experienced during the 2008 financial crisis. While GDP also effects consumers, it’s not the central factor in this context.

“In the world of consumer credit, unemployment is the big driver,” Riley said. “When unemployment goes above 10%, as it did in the pandemic and the financial crisis, credit card charge-offs skyrocket. During COVID, some of the best-run banks lost $1 billion per month, and there was nothing they could do. That’s why the stress tests used 10% unemployment as a yardstick, because it represents a realistic worst-case scenario.”

The Top Performer

Not every bank faced the same outcome in the simulation. American Express emerged as the top performer in the credit card industry, exhibiting the lowest charge-off rate under the stressed conditions of the DFAST assessments.

In the simulation, American Express experienced a 10.1% loss of its portfolio, compared to a median loss of 18.6% among its competitors. At the other end of the spectrum was Ally Bank, which would incur a loss of over 40% of its portfolio.

“Credit card charge-offs are the most significant factor in Dodd-Frank stress tests,” Riley said. “Financial institutions must understand the effects of an economic downturn, tighten lending standards, and prepare their operations for delinquency volume before trouble surfaces. It’s essential for banks to spend substantial time in this area operationally. You must have highly trained staff that can negotiate with your customers before charge-offs occur.”

Lending Into a Storm

The DFAST stress tests are built to identify weaknesses in a bank’s lending portfolio and assess their impact on the bank’s liquidity. As last year’s failure of Silicon Valley bank showed, these factors should be top of mind for financial institutions. From operations staff to credit card strategists, every team member should understand three key areas: underwriting, portfolio management, and account controls.

“Credit quality begins at the front end, so the key is underwriting,” Riley said. “This is not the time in the history of the world to start being aggressive with your lending. It must taper down as the economy starts getting worse. You don’t want to lend into a storm unless you can do it strategically, because these issues are lasting longer and going deeper.”

Focusing on underwriting means prioritizing quality over quantity, which includes engaging cardholders with attractive offers while tightening lending criteria to match FICO scores more closely.

Consumers are going to feel stress from economic conditions, which is why it’s critical for banks to build strong customer relationships. However, financial institutions must manage their portfolios more actively in light of rising delinquency volume, which means they must scrutinize new accounts and keep tabs on both active and inactive accounts.

If issues are uncovered, the financial institution should accelerate the collection process to flush out losses sooner.

Getting Ugly

While all the financial institutions passed the DFAST tests this year, the worsening economic environment suggests that the simulated conditions of the stress tests could soon become a reality.

“All the economic indicators point to a tough year next year,” Riley said. “Inflation is still high, and even though interest rates are likely to decrease somewhat, they won’t drop back to where they were a few years ago. Salaries haven’t gone up as quickly as prices have, and all those factors are weighing on consumers. The takeaway is all the banks passed the stress tests this year, but next year it could get ugly.”

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Gen Alpha is expected to top two billion people, making the children born between 2010 and 2025 the largest generation ever. They are also projected to have significant spending power, with Gen Alpha already earning $5,200 annually and having $45 per week in disposable income. Their earning potential will continue to grow as they mature. With this money in hand, Gen Alpha has a use for card products.

While debit products designed for children might make some parents uncomfortable, they can be an effective tool for instilling healthy spending habits at a young age. As Sophia Gonzalez, Debit Payments Analyst at Javelin Strategy & Research, found in her new report, Cultivating Financial Savvy and Customer Loyalty: Debit Products for Kids and Teens, debit cards can also be a way for banks to forge lifetime ties with young customers.

Learning Spending Habits

Gen Alpha will be the most tech-savvy generation, with more resources at their disposal than ever. However, children of all ages still strongly prefer to learn about financial topics through one-on-one sessions with their parents.

“While many parents might want to delay those discussions, there is value in having those conversations early,” Gonzalez said. “As children reach their teenage years, they are more influenced by social media platforms like TikTok and Instagram. While there may be good financial advice on those platforms, many parents would likely prefer to teach life lessons to their children themselves.”

This means the most successful debit products will create an interactive experience that includes parents. Since every family is different, debit accounts should also offer varying degrees of parental involvement in their children’s finances.

Some apps simply notify parents when their child makes a purchase, while others go further by launching interactive lessons for families after a child makes a purchase. This creates opportunities for parents to discuss best spending practices with their children.

Depending on the account, a variety of parental controls are available, like spending limits and real-time notifications. In some instances, parents can restrict a child’s purchases to certain stores or online retailers, or even limit spending to  certain days of the week.

In many of these products, parental controls loosen at age 13 to the give the child more independence and privacy. However, even with high school checking accounts, parents will still receive purchase notifications and a monthly bank statement detailing their child’s transactions.

There are three main types of organizations who offer debit cards for kids. The first are traditional banks like Bank of America, Wells Fargo, and Chase. Next, there are fintech companies like GoHenry, Greenlight, and Jassby that offer kid-specific options. Finally, peer-to-peer platforms like Venmo, CashApp, and Apple Pay also have debit accounts for children.

Traditional Strategies

Traditional banks each have their own strategy when it comes to youth debit accounts, which are typically designed for children under 18 and generally split into two age groups. Some accounts are tailored for tweens and teens ages 12 to 13 and up, while others offer debit products to children as young as six years old.

“While most traditional banks don’t charge fees for youth debit accounts, parents should be aware of any minimum balances, fees, or other restrictions,” Gonzalez said. “Some banks require the parent to have their own account, while others don’t, like Capital One. That type of account could be a compelling option for a parent who banks at a small bank or credit union that doesn’t offer a product for children.”

Fintech Features

Fintechs aren’t traditional banks, but most of the major apps are FDIC-insured and their debit cards are issued by financial institutions. Unlike traditional banks, which transition kids to a standard checking account once they turn 18, fintechs like Greenlight and GoHenry are solely intended for children. Once the debit card expires, the account is terminated.

Since these apps are designed with kids in mind, their debit products offer substantially more features than traditional banks. For example, they allow kids to customize their debit card, a feature that is highly favored by children.

Parents can also enable an investment platform on apps like Greenlight, which creates an opportunity to teach children about stocks and ETFs. Kids can also donate to charity directly from the apps.

“The biggest differentiator for fintechs is they include financial education tools like quick videos or in-app lessons, which children can complete independently or with their parents,” Gonzalez said. “However, with those features comes fees. Each of the fintechs charge a monthly subscription, so it’s up to parents to decide if the features are worth it.”

Navigating Digital Payments

Unlike fintechs, major P2P apps don’t charge fees for their youth debit products. The trade-off is that apps like Venmo and PayPal lack the financial education tools provided by some fintech platforms.

However, these apps do offer investment platforms. Kids receive a physical, customizable debit card, and all P2P debit cards are compatible with mobile wallets.

“One of the compelling reasons to choose P2P platforms is that children learn how to navigate the digital payments world,” Gonzalez said. “If a parent Venmos a child their allowance, the kid learns how to send money to their peers and becomes comfortable on the platform. When they turn 18, they aren’t likely to use PayPal or Apple Pay as their primary bank account, but they will still use it like adults do.”

Deepening Relationships

Youth debit accounts present a compelling opportunity for financial institutions to expand their customer base to the next generation. Additionally, they can strengthen the relationship between a bank and the entire family—as parents are less likely to switch banks if their child also has an account there.

“It’s a way for institutions to become fully enmeshed with families and provide a product that helps to develop a generation of more informed consumers,” Gonzalez said. “If a bank delivers a successful debit product early on, there would be no reason for the young customer to switch to another bank in the future.”

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Like many other industries, the wealth management sector has integrated artificial intelligence where applicable, including in chatbots and financial modeling. However, fully automated AI-powered financial advisors, known as robo-advisors, are beginning to make such an impact that there is speculation they could eventually displace traditional wealth managers.

One example is the platform PortfolioPilot, which manages $20 billion in assets through its automated portfolio and has gained 22,000 users in its two years of operation. In an interview with CNBC, Alexander Harmsen, Co-Founder of PortfolioPilot’s parent company Global Predictions, said the AI platform offers more personalized service than many human wealth managers.

“AI clearly has a critical role in the wealth management industry,” said Greg O’Gara, Lead Wealth Management Analyst at Javelin Strategy & Research. “However, the deployment and adoption of AI tools and business models will reach an equilibrium, falling into two main segments: self-directed investors and hybrid AI-advisory relationships. PortfolioPilot falls into the former (with the caveat that many self-directed investors also use a financial advisor).”

A Holistic Approach

Hybrid AI advisory combines AI tools, like generative AI, with human expertise. It empowers investors with advanced tools and provides advisors with resources like predictive AI for scenario analysis, reporting, financial planning, and client workflow management.

“While PortfolioPilot is demonstrating solid growth, it will face increasing competition from advisory models that create a human backstop (i.e., the advisor) for autonomous technologies,” O’Gara said. “Moreover, investment portfolios are only a piece of a larger financial strata which demands long-term financial planning. The interconnection of these advisory pieces, including estate planning, is complex.”

The increasing number of accounts, investment types, and revenue streams can complicate a portfolio quickly. This complexity is one of the main reasons high net-worth individuals turn to wealth managers.

Additionally, wealth management services encompass more than portfolio management. Many wealth managers now take a holistic approach to their clients’ finances, considering the entire family’s financial situation.

A Booming Industry

The wealth management industry is booming and remains dominated by big names like Morgan Stanley and Bank of America. Morgan Stanley alone has $4.4 trillion in assets under management in its traditional wealth management services, dwarfing the $1.2 trillion managed by the company’s self-directed advisory tool, which operates like PortfolioPilot. PortfolioPilot targets users with $100,000 to $5 million in investable assets, with the median PorfolioPilot user having a net worth of $450,000.

Unlike many traditional wealth management firms, automated financial advisors don’t take custody of their customers’ funds. Instead, these platforms provide users with advice on optimizing their portfolios. However, this model could change soon. PortfolioPilot’s Harmsen indicated that within the next few years, the platform might be enhanced to take custody of funds and execute trades for its customers.

“We will give you very specific financial advice, we will tell you to buy this stock, or ‘Here’s a mutual fund that you’re paying too much in fees for, replace it with this,’” Harmsen told CNBC. “Or it could be much more complicated advice, like, ‘You’re overexposed to changing inflation conditions, maybe you should consider adding some commodities exposure.”

Incumbent AI Challengers

There are still some regulatory hurdles that automated financial advisor platforms will need to overcome. PortfolioPilot recently drew a $175,000 fine from the U.S. Securities and Exchange Commission for billing itself as the first regulated AI financial advisor.

The company has since retracted that billing, but it hasn’t stopped investors from pouring in—PortfolioPilot raised $2 million in funding in the past month alone. Because automated financial advisors continue to gain users, some believe the wealth management sector is due for a shake-up.

“Ultimately, AI as a self-directed investment tool will challenge the advisory model, but the challenge may only serve to create greater client engagement,” O’Gara said. “And it will force advisors to demonstrate their value. Advisors who fail to adopt will be hard-pressed to stay in business as incumbent AI challengers rise.”

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Looking for a single ATM that will accept deposits for multiple banks? Thanks to the British banking nonprofit Cash Access UK, it’s becoming a reality.

An initiative by which people can use a “super ATM” to make deposits with multiple banks is being tried out in Atherstone, a small town in the north of England. The plan is to roll out the super ATMs in 16 more communities. Bank of Scotland, Barclays, Halifax, Lloyds, NatWest, Royal Bank of Scotland, and Ulster Bank have already signed up to accept deposits through the ATMs.

Cash Access UK, funded by nine leading British banks, is spearheading the effort. The machines are connected to LINK, a nonprofit organization that serves as the UK’s main ATM network. That system has long allowed consumers to withdraw cash from ATMs that are not a part of their bank’s network, but deposits have been a different story. ATM providers NCR Atleos and NoteMachine also worked with LINK on the new generation of ATMs.

A Boon to Small Businesses

The idea driving the super ATMs is that small businesses can take advantage of them to deposit their earnings for the day. With the gradual disappearance of local bank branches, small-business owners have had to travel long distances to deposit their daily cash. According to the UK newspaper The Sun, banks have shut down 5,908 branches since 2015, leaving around half the number of branches that existed a decade ago.

“The decline of the bank branch network has left many without vital services, in particular the ability for small-business owners to deposit takings for the day safely without shutting the small business early or travelling for miles,” Martin McTague, National Chairman of the Federation of Small Businesses, said in a prepared statement. “The ability to deposit in a super ATM that works for multiple banks is an important innovation and could make a real difference alongside the accelerated rollout of banking hubs and maintenance of Post Office counters.”

Brits Are Spending Cash

One reason the super ATMs are coming online now is that cash has experienced a bit of a resurgence in usage in the UK in recent years. According to a UK Finance report cited by the BBC, the number of payments made with cash increased by 7% in 2023.

That was the first time in 10 years that cash as a payment method had made an uptick in the UK. Physical money came out as the second most popular form of payment, making up 14% of total payments.

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In an era where digital privacy concerns are at the forefront, traditional marketing strategies reliant only on third-party cookies are falling behind. This shift has massive implications for companies long accustomed to running their business on data acquired through partner channels.

Even though Google recently pushed back its plan to sunset third-party cookies—again—the latest delay serves as a timely reminder that companies must prepare for a cookie-less future.

For banks and financial institutions, first-party data is a valuable source of intel. Leaders are partnering with new platforms to operationalize data for their customer acquisition strategy, discover how they can use data to deliver relevant messages, and boost engagement with their credit products. In this highly regulated industry, privacy and consumer trust are critical.

Embracing Privacy-Centric Strategies and Regulatory Compliance

Banks understand the sensitivity surrounding consumer data and are committed to safeguarding privacy while driving business growth. Privacy-safe approaches empower financial institutions to prioritize transparency while promoting a customer-centric experience. By harnessing the power of first-party data, including spending patterns and demographic insights, banks can tailor offerings with precision while complying with regulatory frameworks like the federal fair lending laws and without compromising individual privacy.

The fair lending laws—including the Equal Credit Opportunity Act and the Fair Housing Act—lay out guardrails that mitigate the risk of discriminatory practices in banking and uphold the principles of responsible lending. By adhering to ethical data practices and ensuring fairness and transparency in their operations, banks who leverage first-party data responsibly not only protect consumer interests but also strengthen their reputation and credibility.

What exactly do privacy-safe strategies look like? Banks have millions of customers who have checking accounts, many of whom don’t have a credit card with that institution. Leading banks are working with next-gen data platforms who have the insights to help them create contextually relevant offers that meaningfully speak to the consumer in the transaction moment. For example, deploying a credit card offer on an online retailer’s checkout page or confirmation page could be attractive to a consumer who already has a checking account with the issuer—especially if the bank makes sign-up painlessly quick and easy via a streamlined onboarding page that uses their existing relationship with the customer.

Contextual Relevance in Credit Card Utilization

One of the key challenges banks encounter is ensuring that customers use their credit cards in relevant contexts. By analyzing first-party data, banks can identify strategic moments to encourage credit card usage, such as during specific purchasing behaviors or life events. This targeted approach not only enhances customer experience but also increases the likelihood of card retention and usage, ultimately driving engagement and loyalty. For example, a consumer shopping for a new surround sound system might appreciate a reminder that their credit card offers cash-back rewards on electronics purchases.

Retargeting and Acquiring New Customers

First-party data is a goldmine for banks who want to retarget current customers and attract new ones. By leveraging insights derived from consumer behavior and attributes, banks can craft personalized marketing campaigns that resonate with individual preferences and needs. Whether through tailored promotions, exclusive offers, or personalized recommendations, banks can use first-party data to effectively nurture leads, driving acquisition and fostering long-term relationships.

Maximizing Customer Lifetime Value

For banks, the ultimate goal is to maximize customer lifetime value by deepening relationships and driving sustainable growth. Through targeted upselling and cross-selling initiatives, banks can capitalize on existing customer relationships to promote additional products and services in contextually relevant moments across the internet, expanding what most already do within the bank’s owned and operated properties. By delivering value at every touchpoint and fostering a seamless customer experience, banks can cultivate loyalty and drive long-term profitability.

First-party data gives banks valuable clues about which consumers exhibit the most attractive behaviors. Instead of pursuing every customer who goes to live music concerts, for example, it’s better to target only those consumers who demonstrate an ability to pay for premium concert experiences, like VIP access, preferred or valet parking, and similar pricey perks. This approach saves costs when banks avoid spending to acquire lower-value customers.

In the evolving landscape of digital marketing, banks must adapt their strategies to align with regulatory requirements in the post-cookie era. By harnessing the power of first-party data in a privacy-safe manner, banks can unlock new opportunities for customer acquisition, relevance, and stronger engagement with their products. Through ethical data practices, targeted marketing efforts, next-gen data partnerships, and a commitment to consumer trust, banks can navigate the cookie-less world with confidence, driving sustainable growth and delivering value to customers.

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The Federal Reserve Bank of Kansas City examined the capability of U.S. depository institutions (DIs), including banks and credit unions, to send and receive instant payments. It found that many banks, particularly smaller ones, will have to modernize their systems or outsource functions to remain competitive.

The main challenge for many banks, according to the report, is that they were not initially structured to accommodate the 24/7 connectivity that instant payments demand. Wire transfers and ACH transactions typically adhere to specific processing hours, and the receiving bank can adjust the timing of transactions throughout the day.

While larger banks can automate the sending and receiving of funds, smaller DIs often rely on manual intervention by personnel during processing payments. While this approach may suffice for banks with lower volumes of wire and ACH payments, it may not be feasible as instant payments gain traction.

The Global Transformation

Though the trend has been slow to catch on in the U.S., instant payments are inevitable. Smaller banks, which likely can’t afford to build the infrastructure to support it, will have to reach out to third-party companies to outsource their instant payments process.

Fintech companies create payment hubs for banks with connectivity to instant payments rails like Real-Time Processing (RTP) and FedNow. However, many banks will also need to outsource customer-facing operations like mobile banking apps, online banking, and B2B payments.

The adoption of front-end solutions has been slow. Though 1,000 DIs had connectivity with FedNow or RTP as of April 2024, many of those institutions only had the ability to receive instant payments. They could not send payments because they did not have appropriate customer-facing solutions.

Losing Market Share

The Kansas City Fed sees core banking providers, or financial technology companies, as an integral player in the shift to open banking and instant payments. But even though fintechs might be the solution for many banks, they could also be the competition.

“As a result of these developments, DIs may collectively lose market share to fintechs; however, the effects on individual DIs may vary,” the Kansas City Fed wrote. “Proactive DIs may sustain or even increase market share by modernizing their core systems, implementing instant payments capabilities, adopting open banking, and sponsoring fintechs and nonbank businesses through BaaS services.”

The post Small Banks Could Lose Market Share to Fintechs Over Instant Payments appeared first on PaymentsJournal.

There’s been a surge of issues with banking apps over the past year. Even customers of major banks are reportedly facing unprecedented incidents, including delays, errors, and downtime. Last year, Zelle experienced its second outage in only six months, leaving thousands of its users stranded in financial darkness.

As banks continue to encounter similar issues, customers may wonder who to switch to. More importantly, the question arises: why is this happening now? Banking apps have been around for years without such issues, so what’s changed? And what can banks do about it?

Times Have Changed

It’s important to set the stage first and examine how our surroundings have evolved. We live in an increasingly digital world, where the traditional practices of cashing checks and using ATMs for balancing inquiries are fading fast. Nearly everything now happens within mobile apps. We demand seamless access to our personal finances—from conducting transactions to transfers, checking balances, investing, and more.

It’s all accessible on our phones.

However, this new landscape also introduces fresh challenges. When it comes to app  crashes, the primary culprit seems to be timing. These downtimes and outages tend to coincide with payday, suggesting that the servers become overloaded with a surge of traffic with a short period of time, leading to crashed.

Any interruption in service for such a vital tool can prove disastrous for both banks and their customers.

Problems on Payday

Some banks might underestimate the significance of a few days offline in an otherwise online month. After all, occasional app downtime due to issues or maintenance is not uncommon. However, for banking apps, these few days of downtime coincide with massive spikes in traffic, precisely when people need access to their money the most.

As a result, banks suffer from a loss of customer confidence, declining brand ratings, and face reputational risks. According to a Ponemon Institute study, even a single minute of downtime can cost a business an average of $9,000, bringing the cost per hour to more than half a million dollars. Such losses prompt longstanding customers to terminate their contracts and transfer their accounts to competitors. The damage to the bank’s overall standing can be devastating, especially given the challenge of establishing and maintaining a customer-first image and reputation.

It’s not just banks and apps facing these challenges. According to PCR, 57% of digitally native millennials immediately form a negative impression of a company’s brand due to website downtime. What’s more, one in three consumers switches to a competitor’s website within 30 seconds if their preferred brand is experiencing downtime.

If the standard is that low for e-commerce, imagine what it’s like for personal finance.

What Banks Can Do to Reduce Downtime

The solution to the issue of downtime occurring due to payday spikes lies in the cloud.

Cloud infrastructure offers capabilities for proactive, on-demand scalability without having to maintain large volumes of idle resources. This lets banks adjust their resources based on what they need, proactively scaling up when it gets busy and down when things are quiet.

Of course, this doesn’t mean banks should choose a cloud solution randomly. Each bank will have needs and IT necessities requiring a specific cloud solution, so it’s essential to have a comprehensive understanding of the options before beginning the process. Hybrid and private cloud solutions can provide the security and control of a single tenant environment, with the scalability and flexibility of cloud technology. Additionally, it’s important to understand that while the cloud can mitigate outages significantly, it cannot eliminate them.

Still, the choice between mitigating downtime and ignoring the problem is no choice at all. The digitalization of our society has barely begun and banks that want to keep up must adopt a dynamic cloud solution to handle the relentless advance of technology and transactions.

Conclusion

Banking app downtime equals a significant loss of customer confidence. For banks, trust is everything. It’s not an exaggeration to say that mitigating app downtime—especially around payday—should be among the top priorities for any bank in the 21st century. Those who ignore it will fall behind, while those who take it seriously will gain an edge over their competitors.

That said, switching cloud solutions will mean a significant investment in IT, either by growing an internal team or partnering with a managed cloud provider. But, that investment is still a small price to pay, considering the alternative.

The post Navigating the Challenges of Banking Apps in a Digital Society appeared first on PaymentsJournal.

In the dynamic landscape of consumer engagement, the expectations placed upon companies are in a state of perpetual flux. Two discernible trends that have crystalized in recent years are consumers’ increasing desire for offerings that align with their beliefs and way of life, as well as their fervent demand for hyper-personalization, shifting decisively away from the outdated notion of a universal solution. This article delves deeper into these trends and examines their implications within the realm of payments. 

The Essence of Premiumization 

To distill it to its core, premiumization addresses consumers’ willingness to pay a premium for products and services for a perception of extra quality or status. While the notion of premiumization may conjure images of exorbitant spending on opulent items, it encompasses a spectrum of preferences. These preferences include: 

• Lifestyle Compatibility: Consumers, irrespective of their affluence, seek products harmonious with their beliefs and way of life. 
• Signaling and Image Projection: Products serve as status symbols, reflecting the identity, aspirations and affiliations of their users. 
• Emotional Gratification: Premium products fulfill emotional needs, with the goal of eliciting a profound sense of satisfaction. 

Hyper-Personalization Unveiled 

Hyper-personalization centers on delivering products and services tailored to individual preferences, a stark departure from the standardized offerings for mass consumer segments. This transformation stems partly from the influence of BigTechs like Amazon and Meta, which have raised the bar for user interaction standards. Today’s consumers, particularly Gen Z and Millennials, anticipate personalized interactions in all facets of their lives, driven by their desire for uniqueness and their inclination to share these unique experiences on social media. 

Helping Shape a Memorable Payment Experience

Matt Turner, Head of Digital at HSBC UK, sheds light on the manifestation of these trends in the banking sector, stating, “Getting to a one-to-one level of personalization is definitely a focus for us.” In the quest for hyper-personalization, banks stand apart from other industries, as they possess an unparalleled understanding of their customers’ (financial) preferences, which they can leverage to create unique (one-to-one) real-time offerings. 

Payment interactions are the most frequent touchpoints between banks and their customers, and consequently, banks around the world are harnessing credit and debit cards as a means to meet the burgeoning demand for premium and personalized experiences. The accelerating growth of banks issuing metal cards reflects this dynamic evolution. These cards exude distinctiveness, both in their tangible weight and their audible presence (the “clang” sound) when dropped on a surface. Some metal cards are further personalized by engraving the cardholder’s signature directly onto the metal. Payments have evolved to spark memorable experiences for the consumer; the payment card has indeed gone from being functional to becoming a fashion statement.

In an era of premiumization and hyper-personalization, the prevailing formula for success in banking appears to be succinctly captured by the adage: “Save your customers money, and they’ll remain loyal today. Make your customers feel unique, and they’ll remain devoted to you indefinitely.” 

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Banking executives are increasingly placing their bets on technology to enhance their operations. According to a recent survey, more than half of those polled expressed intentions to increase their tech spending this year, with only 8% expecting a decrease.

The survey from Dragonfly Financial Technologies, which gathered insights from more than 100 bank executives, aimed to identify their biggest challenges, spending priorities, and tech preferences for 2024. Although many are focused on ramping up tech capabilities this year, many remain apprehensive about the limitations posed by legacy systems. In fact, 53% of respondents said they were concerned about their current reliance on legacy technology and the accompanying rise in tech debt. Nearly as many cited legacy technology and tech debt as hindrances to their bank’s success.

Key Banking Concerns for 2024

The study unveiled a myriad of concerns keeping banking executives up at night. Nearly two-thirds (65%) highlighted worries about safeguarding and growing deposits, while 59% anticipated fraud to be a significant concern in 2024.

Slightly fewer noted that the biggest challenges to digital business banking success are staffing resources, while 46% believe feature function, competitive gaps, and budget constraints are causes for concern.

Opportunities This Year

Despite navigating a complex landscape fraught with economic uncertainty, the adoption of  modernized tools presents a promising avenue for banks to pursue. Many are keen on investing in new technologies to enhance customer experiences and alleviate technology debt.

Real-time payments, in particular, have emerged as a focal point, with 63% of bank executives expressing interest in integrating FedNow services into their payments portfolio.

What’s more, 67% of respondents indicated openness to incorporating fintech applications like NetSuite and QuickBooks for their customers. API banking adoption is also gaining traction, with 57% of bank executives recognizing its potential to facilitate impactful applications and connections this year.

Finally, as part of their ongoing tech efforts, banks are transitioning their operations to the cloud. A significant majority (84%) of banking executives reported that their banks are already leveraging cloud infrastructure. Among those not yet operating in the cloud, 44% said they plan to make the transition.

The post Banking Execs Prioritize Tech Investments for Operational Boost appeared first on PaymentsJournal.

Vast Bank, the first United States banking institution to let customers buy, sell, and hold cryptocurrencies, has left the crypto market. The Tulsa-based bank posted a notice on its website saying, “we will be disabling and removing the Vast Crypto Mobile Banking application from Google and Apple.”

Vast Bank said any remaining digital assets “will be liquidated and closed.”It does not support transferring the crypto assets to another exchange or platform.

The decision seems to result from regulatory concerns rather than a market failure, despite the fact that Vast claimed the move was intended to “strategically align our operations.” Vast received a cease-and-desist letter from the U.S. Office of the Comptroller of the Currency in October. The letter stated that Vast Bank “engaged in unsafe or unsound practices, including those related to capital; capital and strategic planning; liquidity risk management; project management; books and records; interest rate risk management; IT controls; risk management for new products; and its custody account controls.”

The letter also emphasized that Vast needed to achieve and maintain a total capital ratio of at least 13% and a leverage ratio of at least 10% within 60 days after the order was issued. On December 31, Vast Bank had a total capital ratio of 4.75% and a leverage ratio of 2.46%.

Vast said its crypto accounts amounted to less than 1% of holdings. As of November, Vast held about $2 million in crypto assets, with none of them being the bank’s own assets.

“Vast’s exit from the crypto space, as well as the overall lack of other banks following Vast’s early entry into offering a crypto product, is as much about lack of traction as it is any regulatory pressure,” said James Wester, Director of Digital Assets and Crypto at Javelin Strategy & Research. “The lack of clarity around holding cryptocurrencies is an issue banks simply don’t want to deal with.

“The retail adoption of crypto via a traditional demand deposit account with no capabilities beyond basic buying, selling, and holding of cryptocurrencies has limited appeal,” Wester added. “Had there been a wave of consumers demanding the service from their banks, there might have been more pressure on regulators to work with institutions on a workable regulatory solution. But most consumers are using exchanges like Coinbase, or even companies like PayPal, who provide more utility in their crypto products.”

High Hopes for Crypto

Vast Bank began its crypto offering in the summer of 2021. The first step was partnering with software firm SAP to ensure that it was compatible with the Payment Service Providers Directive, a European regulation for electronic payment services intended to boost innovation in digital assets. The bank also partnered with Coinbase and allowed its customers to buy and sell Bitcoin, Bitcoin Cash, Cardano, Ethereum, Litecoin, Orchid, and Algorand. 

Vast Bank CEO Brad Scrivener said in October 2021 that the bank had already opened crypto accounts for customers from all 50 states. “With our initial announcement, we had significant ‘whales,’ meaning very high-net-worth crypto players, contacting us, because right now they have self-custody, where they have the equivalent of hundreds of millions of dollars buried in their backyard,” he said at the time. “Because we are regulated, this is a place where customers can feel more comfortable being able to get involved and have clarity.”

The post Vast Bank Exits the Crypto Deposit Business After Regulatory Concerns appeared first on PaymentsJournal.

On Wednesday, the Consumer Financial Protection Bureau (CFPB) proposed a rule to curb excessive overdraft fees charged by the nation’s largest financial institutions.

The Overdraft Notice of Proposed Rulemaking (ONPR) “would close an outdated loophole that exempts overdraft lending services from longstanding provisions of the Truth in Lending Act and other consumer financial protection laws.”

Under the proposed rule, overdraft services offered by banks and credit unions with more than $10 billion in assets would be subject to the same regulations as other types of consumer loans, including disclosing any applicable interest rates. The CFPB found that customers are “typically charged $35 for an overdraft loan, even though the majority of consumers’ debit card over drafts are for less than $26.”

Excessive Fees

In the CFPB’s 2023 Making Ends Meet survey, more than a quarter of consumers said that someone in their household was charged an overdraft fee or NSF fee within the past year, and 43% were surprised by their most recent account overdraft. Many consumers who were charged overdraft fees had access to a cheaper alternative, such as available credit on a credit card.

Banks and credit unions usually charge an overdraft fee to cover a deposit account holder’s debit transaction even though the customer does not have enough money in their account. The CFPB asserts that overdraft coverage is a loan to the customer, similar to credit cards, and should therefore be subject to the Truth in Lending Act, which requires disclosure of all applicable costs.

“In the 1990s and early 2000s, with the rise of debit cards, institutions began raising fees and using the exemption to churn high volumes of overdraft loans on debit card transactions. Annual overdraft fee revenue in 2019 was an estimated $12.6 billion,” according to the CFPB. Some large banks have lowered or gotten rid of overdraft fees in recent years. For example, Bank of America reduced overdraft fees from $35 to $10 in 2022, and Ally Bank eliminated such fees in 2021. Despite the modifications in overdraft practices that reduced overdraft revenue to roughly $9 billion a year, the CFPB contends the changes are not enough.

The ONPR would require applicable financial institutions to treat overdraft loans like credit cards and other loans. Alternatively, banks could offer overdraft services as a “convenience” to customers, and charge a fee in line with their costs, which can be as low as $3. In a statement, President Biden called exorbitant overdraft fees “exploitation,” and said the new proposed rule is “just one part of my Administration’s broader plan to lower costs for hardworking families.”

Banks Warn of the Rule’s Potential Harm to Consumers

Financial institutions, large and small, are reacting to the CFPB’s proposed rule. American Bankers Association president and CEO Rob Nichols warned in a statement that: “The proposal would make it significantly harder for banks to offer overdraft protection to customers, including those who have few, if any, other means to access needed liquidity. The CFPB is effectively proposing to take away overdraft protection from consumers who want and need it.”

In a separate statement, Consumer Bankers Association president and CEO Lindsey Johnson said, “If enacted, this proposal could deprive millions of Americans of a deeply valued emergency safety net while simultaneously pushing more consumers out of the banking system.”

Credit union leaders argue the CFPB’s proposal would put all credit union overdraft programs at risk. Virginia Credit Union League President/CEO Carrie Hunt also released a statement noting: “While the rule targets institutions with more than $10 billion in assets, the realities of the marketplace mean that overdraft programs at all credit unions are endangered. We know that credit unions have responsible programs that provide members a valued service at a reasonable cost. CFPB again misses the point that not all fees are abusive. They are the cost of doing business and can be a deterrent.”

The post CFPB Proposes Rule to Curb Overdraft Fees, Banks Cite Potential Consumer Impact   appeared first on PaymentsJournal.

SoFi’s departure from the cryptocurrency business, effective within a couple of weeks, may seem abrupt, but it has been a long time coming. The digital personal finance company first offered crypto trading in 2019, but that was under a two-year conditional approval granted by the Federal Reserve—and it was never certain that SoFi’s crypto business would extend beyond that.

This announcement has perhaps been inevitable since SoFi received a bank charter in January 2022. That move was part of an aggressive growth stance that has fueled the rapid expansion of SoFi, which is still barely a decade old.

According to the conditions of the charter approval, SoFi either had to receive necessary regulatory approvals for its crypto business or it would exit the sector. “[T]he Bank Holding Company Act permits us to continue our current digital assets related offering for a two-year conformance period from the date we became a bank holding company,” the filing said.

More Catalysts for the Exit

For a while, SoFi was a high-profile player in crypto, hosting an event at Bitcoin Miami as recently as last year. Although the company let users buy and sell more than 20 crypto currencies— including bitcoin, dogecoin and Ethereum, crypto never became a significant part of its business. Its brokerage-related fees, including all crypto-related fees, totaled $6 million in Q3, according to SoFi’s financial statements.

Regulatory pressures have kept the business on thin ice for a while. The immediate catalyst for this move is the Federal Reserve’s novel activities program, which was introduced over the summer. Given the new strictures, SoFi began to suspect its crypto business would never be fully approved by the Fed. The fintech also expected the Fed’s crypto requirements to grow stricter over time.

Then in August, SoFi warned that it had grown increasingly cautious of the Security and Exchange Commission’s scrutiny of digital assets. Among the restrictions floated by the SEC was a requirement that firms maintain in-house custody of digital assets owned by their customers. SoFi went so far as to mention the possibility of being “forced to cease trading in certain types of assets.”

That warning came to fruition this week. SoFi customers have until December 19 to transfer their funds to Blockchain.com.

The post SoFi’s Exit from Crypto Has Been a Long Time Coming appeared first on PaymentsJournal.

Banks in Australia have banded together to launch the Scam-Safe Accord, which outlines a comprehensive set of anti-fraud measures that aim to tackle the growing number of scams affecting customers.

As part of the effort, there’s been a $100 million investment by Australia’s banking industry that will go into launching a new “confirmation of payee system,” which is essentially a name-checking method that ensures the sender is transferring money to the right person. The system is expected to be built and rolled within the next two years.

Consumer Advocates Declare More Must Be Done

Consumer advocate organizations, including Melbourne-based Consumer Action Law Centre, having been pushing Australian banks for stronger consumer protection, particularly as it relates to fraud scams. These organizations have asked that banks emulate the UK’s efforts to reimburse victims of fraud.

The Centre’s CEO, Stephanie Tonkin, argued earlier this year that “the big four banks are tipped to make record-breaking profits this financial year, with some analysts suggesting they will collectively rake in more than $33 billion, up from $28.5 billion last year.” But meanwhile, she stressed, thousands of Australians are coming under financial distress, due to the nation’s scam epidemic.

According to the Australian Competition and Consumer Commission, consumers have lost an estimated $4 billion to fraud, with little chance of recovering those funds. Instead of blaming customers, Tonkin says, banks should reimburse them. She also advocates for more investment in technology that can ensure customers a safer platform to protect customers.

Steady Changes

As we’ve recently witnessed, more is being done to promote consumer advocacy in the face of unprecedented fraudulent attacks. Britain’s Payment Systems Regulator (PSR), for example, has made it mandatory for both banks and payment firms to reimburse consumers who have been impacted by online bank fraud within five days.

Britain is certainly leading the way to protect its citizens from this devastating fraud attack, removing the sole responsibility of the scam from the customer, and placing it back on the financial players on the sending and receiving end. As banks in Australia make their own moves to combat fraud, such as the Scam-Safe Accord, they can look to Britain to learn how to best tackle this issue.  

The post Australian Banks Launch Scam-Safe Accord to Address Rise in Scams appeared first on PaymentsJournal.

The American Bankers Association (ABA) continues to kick back against the Federal Reserve’s proposed rules that would lower the cap on debit interchange fees. The ABA has now asked the Fed to extend the public comment period for its notice of proposed rulemaking. Nine financial sector associations also signed the joint letter making the request.

The current deadline for public comments on the proposed rule is February 12, 2024. In their letter, the associations asked that the deadline be pushed back at least 90 days given the significant changes the Fed will potentially pursue.

In October, the Fed proposed revising Regulation II to lower the cap from its current rate of 21 cents and .05% of the transaction, plus a one-cent fraud adjustment, to 14.4 cents and .04% per transaction and a 1.3 cent fraud prevention adjustment. The rule would take effect June 30, 2025, then be revisited every two years.

The benefits and potential drawbacks are not immediately clear. “Issuers say the interchange fees help keep debit card transactions safe from fraud,” Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, wrote in an October article for PaymentsJournal. “However, changes could lead to less fraud prevention, decreased access to credit, and other negative consequences.”

The ABA’s Stance

In the group’s initial statement, ABA President and CEO Rob Nichols said the Fed was using flawed data and an incomplete process. The Fed’s plan “has the potential to make checking accounts, debit cards and a range of financial products more expensive for American consumers, while delivering an unprecedented gift to big-box retailers that have shown no inclination to pass any savings along to customers,” Nichols said. “Far from holding community banks harmless as the Fed claims, smaller institutions will be sharply impacted by this change, as revenue they use to pay for a range of financial products and services is reduced.”

The latest letter noted that given the number of proposed banking regulations currently under consideration, the ABA needed more time to analyze the potential cumulative effects on consumers and the financial sector. “The data presented to support the board’s proposal is complex, dated and incomplete,” the letter said, “requiring the private sector to invest significant time to digest and supplement it.” The Federal Reserve has yet to respond.

The post ABA Continues Pushback on Debit Fee Proposal appeared first on PaymentsJournal.

U.S. banks are finding themselves at a crossroads, balancing the advantages of relying on dominant service providers with the pressing need to maintain operational autonomy.

From core banking systems to payment processing, service providers offer banks the ability to scale their operations, increase efficiency, and reduce costs. But too much reliance on third-party service providers has pitfalls.

During a recent PaymentsJournal podcast, Oscar Munoz, Vice President of Sales, Ren Americas at Euronet, and James Wester, Director of Cryptocurrency and Co-Head of Payments at Javelin Strategy & Research, discussed the double-edged nature of relying on large service providers and the imperative for banks to have the flexibility to innovate.

A More Autonomous Outlook

Banks face a potential erosion of operational autonomy when they delegate to external providers. They also risk losing control over data security, customer experience, and regulatory compliance.

“Many financial institutions are taking back control of their issuing and acquiring offering from the full outsourced model that we have seen become so popular in the U.S.,” Munoz said. “A lot of the sponsor banks in the U.S. are looking to own their own tech stacks instead of continuing to refer that forward to another company, which many times puts them at risk.”

Munoz emphasized the need for banks to control the final mile of customer interaction, highlighting its increasing importance. When banks take back control, they regain influence over how they communicate with their customers, something that’s especially critical for mid-tier and smaller financial institutions that place a high value on their customer relationships.

Striking the Right Balance

In the search for operational efficiency, banks must strike a balance between in-house capabilities and external services, all while staying compliant with evolving regulations. However, excessive reliance on third-party service providers—as mentioned before—can lead to generic, one-size-fits-all solutions that may not align with the value propositions every bank offers.

Wester pointed out that adaptation is not just a choice but a necessity. Banks must reevaluate their legacy systems and technologies in this fast-evolving landscape, even if they have been reliable and effective.

“For the longest time, that was acceptable,” Wester said. “But fast-forward to now, and suddenly fintechs are coming in, offering things that maybe weren’t seen as important. Or there were things that a financial institution might look at and say we don’t even really need to worry about that, nobody’s asking for—I didn’t know they could get it. Now that I know they can get it, they’re going to start asking for it.”

However, Munoz cautioned that modernization isn’t as simple as flipping a switch and moving from traditional systems to the cloud overnight. Banks must carefully consider the pace of their transformation and ensure they adapt to new technologies while meeting regulatory requirements.

Combatting Fraud in Real-Time

The rise of real-time payments has brought an increase in the speed at which fraud occurs. Traditional fraud prevention methods employed for credit cards—which allow chargebacks and reversals—are not applicable to instant payments. Munoz emphasized how important it is to recognize the differences and deploy fraud prevention strategies accordingly.

“If you’re managing different worlds, they’re going to need different tools because the way you can fix the problem after the fact is very different depending on what kind of transactions you’re working with requires unique expertise and tools and modern technology,” Munoz said.

“Compliance and fraud require that unique expertise, tools, and modern technology to manage both. We’re handling those concerns every day because we’re having these discussions with clients every day, and it’s one of the first things they bring up.”

Wester added that he’s had similar discussions with financial institutions.

“Compliance is something they’re absolutely paying attention to because, as we all know, compliance is baked into the DNA of financial institutions,” Wester said. “They have to be paying attention to all sorts of things across different lines of businesses and across different types of payments.

“And the other thing is, nobody believes that compliance is going to get easier anytime soon.”

Solutions in the Market

Euronet’s Ren Payments platform aims to help banks modernize their legacy systems and maintain the autonomy to adapt at their own pace.

Ren Payments offers banks connectivity to various real-time payment networks and card processing platforms—and bridges the gap between multiple payment channels, including wires, ACH, instant payments, card issuing and acquiring—all under one unified platform.

As financial institutions grapple with compliance and fraud prevention challenges, solutions like Ren Payments offer a lifeline. Compliance will only become more complex with regulatory changes, and banks need to be prepared to handle these changes swiftly.

“Our solution leverages over 12 years of experience in instant payments to deliver fraud prevention solutions tailored to the specific characteristics of each payment type,” Munoz said.

Conclusion

Navigating operational efficiency for U.S. banks is a balancing act. While third-party service providers present enticing solutions to streamline operations and enhance capabilities, banks retain their autonomy, particularly when it comes to the pivotal area of customer experience.

This autonomy becomes even more crucial when viewed through the lens of technology. With Fintechs reshaping the financial landscape, banks, especially mid-tier and smaller institutions, must be agile and responsive. It’s not just about the present efficiencies but ensuring that these institutions are resilient and adaptable for the challenges and opportunities of tomorrow.

But operational efficiency goes beyond the mere act of balancing. It’s a strategic move to future-proof the bank. By modernizing and adapting, banks equip themselves to cater to evolving customer demands, traverse the intricate maze of regulations, and safeguard against real-time fraud threats. In this ever-changing financial ecosystem, the success mantra for banks lies in harmonizing in-house strengths with external services. This synergy will determine which institutions merely survive and which thrive.

Interested in learning more about integrating and adopting the newest solutions in technology? Speak to Euronet at this year’s Money20/20. It will be at booth 44117.

The post How Banks Can Navigate the Path to Operational Efficiency appeared first on PaymentsJournal.

Marked by an accelerated rate of change and evolving consumer needs, the financial sector has undergone a digital transformation unlike anything seen before.

From small businesses reimagining their operations in response to the pandemic to the challenges larger corporations face in today’s uncertain economic climate, the financial sector is in the midst of a fundamental evolution. PaymentsJournal recently sat down with Chris Giamo, Head of Commercial Banking at TD, who spoke about the notable changes and challenges brought about by this digital transformation and shed light on the key strategies and technologies that are shaping the industry.

You spoke at Finovate Fall, and a lot of conversations that came out of that conference centered on the digital transformation the financial industry has experienced recently. What noticeable changes have you seen on your end?

The pandemic set the stage on how businesses behave and how they’re looking at their organizations. For the first time in a long time, businesses—particularly small businesses—had to reinvent themselves. If you recall, restaurants were doing DoorDash and were finding ways to have outdoor seating. Retailers were looking at ways to get products and services to clients without in-person interactions.

Small businesses are mainly entrepreneurially led, and those founders wear so many hats in the company. They can’t be an expert in every realm and have to rely on their banks, their accountants, their attorneys, and other third parties to guide them. And so I think the businesses that came out of the pandemic came out stronger and came out recognizing that they have to be present in not only delivering their products and services, but they also have to be forward-thinking. Large publicly traded companies have a lot of infrastructure and employees, and they have the ability to think ahead and plan in a way that sometimes smaller businesses don’t.

Now fast forward to today. The macro economy is challenging, and there’s a lot of uncertainty out there. Businesses are going back to the muscle memory that they had to get through during the pandemic. The pandemic accelerated the need for automated, digitized ways of consuming products and services. For us, it’s important to balance and prioritize investments. You have that innovative cutting-edge technology so businesses can self-serve themselves and they can have an automated way of doing their banking. But how do you balance that with subject matter experts and trusted advisors who are able to guide that business as well? That’s how we’re seeing it and how we’re looking at serving our customers.

It’s certainly a delicate balance. Leveraging technology, such as automation, has been a learning curve for many financial institutions. How do you make sure—especially in the commercial space—that you’re meeting customer needs?

Clients want customization; they can’t have a one-size-fits-all (approach). And it doesn’t mean every part of the functionality is customized. But we have seen the ability for businesses to customize, whether it be invoicing or payments capabilities, with some of these digitized and automated platforms.

We’ve spent a lot of time and money building embedded banking into clients, so when they’re conducting other non-banking services, they can click a link and get to their banking as well, with a single sign-on. We’re definitely spending some time there. And we found that’s resonating with clients, because they’re bookkeepers, treasurers, and CFOs who want the ability to do everything in one place if they can.

You mentioned customization. How has technology like AI changed the way financial institutions run their organizations? Does it help with personalization and creating more of that seamless end-to-end experience?

Banks have a tremendous amount of data, and we’re in the early stages of figuring out how do we leverage that available data. Outside of the specific application that the data is supporting, it may not always be usable. So we’ve worked on how do we get that data in usable formats, and then use third-party data to build models where we have a better idea of what solution a client may need. Because from there, we can predict, for example, that this cohort of clients may need this type of product or solution. And then we can personalize and arm our relationship managers with those lists that they can prioritize for their outreach with the client.

There was some recent survey data that TD collected at Finovate Fall, which found that outdated legacy systems in a fast-paced technology-focused landscape are the banking sector’s greatest technological challenges. Roughly 44% of respondents agreed. Can you speak to those findings?

Safety, soundness, and cybersecurity are critical. Making the necessary investments to keep systems current and updated—and develop functionality that can automate the process—is critical. It’s not just about the customer applications; it’s the back-office operations, too, and we have to look at things from an end-to-end perspective. So we can shorten the timelines, right? A client’s waiting for an answer and we want to make it easier for them to interface with us—whether that’s the ability to upload documentation, or it’s a tax return, or an e-signature is needed. You want to have that go straight through. That way, you improve both your customer experience and your client experience.

There’s a lot of work and focus on that, in addition to finding the new shiny object, whether it’s a new app or a new product capability.

Speaking of shiny objects, we’ve seen tech including AI, machine learning, and embedded banking really take off this year. Do you anticipate any new shiny object making waves soon?

I don’t think there’s anything specific other than further advancements and iterations of the tech you mentioned. With the advancements in AI, that’s moving at a very rapid pace depending on how you apply and use that. There’s a lot of white space out there.

As we head into 2024, what are you most excited about?

I’m excited to continue on our journey of improving our product offerings for our clients. The macro environment continues to throw unprecedented challenges at us, and the resiliency of the globe—but particularly U.S. businesses—really showcases their resilience.

(Most) businesses in the U.S. are small businesses, and that really drives our Main Street economies in the communities that we live in. We still have inflation, there’s still a tight job market, but I’m really excited and proud to serve as that trusted advisor to the customers.

The post Q&A: An Insider’s Perspective on the Shifting Trends in Banking appeared first on PaymentsJournal.

The choice of where to bank is one of the most important decisions in any consumer’s life. The right choice can lead to sound economic decisions and services, and the wrong choice can result in inconvenience, high fees, poor service, and dissatisfaction.

There remains a fierce competition to attract and retain banking customers.

To remain competitive, community financial institutions must continually balance service offerings and profits with the needs of consumers. At the same time, the industry has seen a radical transformation. The pandemic lockdowns spurred an already-in-motion move away from traditional branch services to online and mobile services. This means that everyday services on debit, credit cards, and new and evolving payments systems are the biggest areas of competition.

The Opportunity to Innovate

The rise of digital services is creating opportunities for credit unions. Studies have shown that many generations, especially Millennials and Gen Z, are more budget-focused and want better customer service. Credit unions typically have lower fees and pride themselves on their customer service.

During this period of change, credit unions can take advantage of the opportunity to attract and keep new customers—and win in the current evolving marketplace. While there are various paths credit unions can take in their journey, below are a few things they can consider.

For one, credit unions can develop robust card services for credit and debit cards. Payments and card services have evolved over the past decade and their presence in most consumer lives is ubiquitous. This means that options to boost card programs, rewards, and services are now available to most, if not all, credit unions.

Credit unions are also embracing the movement to mobile and online banking by leaning on the heritage of customer service. Chatbots and elaborate phone trees aren’t going away, and credit unions can use them when necessary, but it’s vital that customers are able to connect with a live person. This option can be potentially expensive—especially when compared to a chatbot—but banks’ reliance on bots and automated service provides has resulted in customer frustration. Therefore, it would be wise for credit unions to stay personal and remove as much friction as possible from the customer experience.

Another factor to consider is personalizing credit card reward programs. For example, one reward option could be to let cardholders donate to local non-profits. Credit unions can work with local businesses to offer discounts on a rotating basis, and this would not only help them support local businesses, but those same businesses might jump at the chance to offer credit union cardholders a discount.

Finally, it’s important to always offer both online and in-branch educational programs which speak to the benefits and potential drawbacks of having and using a credit card. Knowledge—particularly financial education that teaches consumers on the many ways they can live a financially responsible lifestyle—is a great way for credit unions to separate themselves from competitors.

Evolving with the Times

The retail banking world is changing. Consolidation at the national level, creating larger and larger banks, opens a door for credit unions to gain market share. By taking advantage of their position as a local neighborhood resource—one where bank employees know their customers and their customers’ habits and needs—credit unions will grow.

There’s no doubt that the changing landscape could signal the start of a golden age of credit unions. They can use their partnerships with local businesses and other stakeholders as a way to go above and beyond and build relationships with their members. 

As credit unions are mainly praised for their ability to provide exceptional customer service, they also offer lower fees, better interest rates, and services that provide education on financial literacy. And credit unions continue to be successful as they lean further into what credit unions do best: member service.  

The post How Credit Unions Can Shape the Banking Industry  appeared first on PaymentsJournal.

U.S. consumers are happy with their current banks and have confidence in their ability to cater to the ever-changing financial landscape, according to new data conducted by Morning Consult on behalf of the American Bankers Association.

Roughly 84% of account holders polled said they’re “very satisfied” or “satisfied” with their current bank. What’s more, a majority (94%) of respondents regarded their bank’s customer service highly, classifying it as “excellent,” “very good,” and “good.”

Bank Innovations

The banking sector has evolved over the past few years, with banks working to meet consumers where they are—and this hasn’t gone unnoticed.

According to the study, 79% of respondents at least somewhat agree that innovation and technology improvements by banks are making it easier for account holders to have access to financial services.

Many respondents also feel that they have a variety of financial product options at their disposal, ranging from bank accounts to loans to credit cards. Indeed, 40% said they strongly agree, while just slightly fewer (39%) somewhat agreed.

Reasonable Expectations

For the most part, consumers believe that the financial services industry is highly competitive. And one of the reasons they’re satisfied with their primary bank is the fact that the institution is transparent about disclosing fees and letting consumers know why they’re being charged. Trust was high among those surveyed, with 43% of account holders saying they believe their bank is being “very transparent.” In fact, only 3% of respondents felt that wasn’t the case, saying their primary institution was “not at all transparent.”

When it came to their thoughts on being charged for fees such as overdrafts, many respondents felt that it was fair—with nearly two-thirds of account holders saying it was at least “somewhat reasonable.”

“This new survey shows that Americans remain happy with their bank and its ability to meet their evolving financial needs,” said Rob Nichols, ABA president and CEO in a prepared statement. “The results also speak to the highly competitive financial services marketplace, which ensures that consumers can pick and choose the banking products and services they want from a wide array of providers.”

The post New Survey Finds Most Consumers Are Content with Their Bank appeared first on PaymentsJournal.

There are two universal truths when it comes to banking and customer loyalty. First, banks want their credit card to be the preferred payment tender at the time of purchase, and second, they want to retain customers.

Back in 1984, Diners Club created the industry’s first card-based rewards program. The company sought to incentivize card usage by assigning points to different purchases, making it even more appealing to be a Clubmember. It worked—the trend caught on, demand for Diners Club cards grew, and eventually, card-based rewards became standard practice.

Ever since then, card issuers have continued to invest in the consumer relationship, adjusting their loyalty programs to align with the way people shop. The Diners Club card was “version one” of customer incentives, providing a baseline for rewarding purchase behavior. 

Striving for Customer Loyalty

As consumer shopping transitioned online, so did credit card rewards. First movers in this space, including Chase Dining and Cardlytics, made it easier for banks to promote card-linked offers and experiences. These exclusive offers served up on a bank’s website or mobile app were “version two” of customer incentives, meeting consumers at a time and place when they are thinking about their buying habits—and giving them more reasons to use their card.

These types of rewards programs help banks meet their strategic priorities by cultivating customer loyalty and increasing average revenue per user (ARPU). On the loyalty side, we know that saving money is a big incentive for consumers. Serving up a discount can influence behavior and also increase the likelihood that consumers will keep making purchases with their credit card. Another benefit of rewards and cash back programs is that they increase customer retention – which is incredibly important to banks – and can help lower the cost of acquiring new customers.

But the rewards program space has become more crowded as new players enter the field, and with it, consumers now have set a higher bar for which programs are worth their time and attention. Banks need a way to differentiate the value they offer to their customers, and to do so, they need to participate in e-commerce in a more meaningful way. Owning the customer relationship higher up in the funnel—such as the point of discovery—provides the opportunity to direct customer eyeballs and stay top-of-wallet regardless of payment tender. Since there’s no “sticker on the door” in e-commerce, banks need ways to remind consumers to use their card when shopping online. At the same time, banks need to expand their average revenue per user, and they are exploring innovative ways to do so.

Building on Loyalty

The next evolution of credit card loyalty is delivering offers that are built for the way people actually shop online. Rather than opting into an offer before the customer is ready to make a purchase, or navigating through a multi-step conversion path, discounts and deals should be made available right in the browser, surfacing a relevant discount for a site where they’re primed to spend. The next generation of shopping rewards is just part of the shopping journey—no detours, enrollment, or extra steps.

White-labeled, embedded rewards platforms are “version three” in the evolution of customer incentives. Embedded rewards providers such as Honey, Capital One Shopping, and Wildfire have tapped into this format, offering discounts to shoppers wherever they are, at the moment they need them: as they are shopping at an online merchant’s site. These solutions connect a bank’s brand with offers like cash back rewards that incentivize shopping—enabling banks to cultivate consumer loyalty by seamlessly integrating themselves into the natural purchase path to surface a relevant offer, all while keeping their card brand top-of-mind. It also allows banks to tap into new revenue and profit pools through merchant-funded rewards. Through this implementation, banks can achieve their goals of brand awareness, expanded revenue per user, and reduced customer churn. 

As we look ahead, I anticipate that we’ll continue to see more innovation in this arena. While the ways we shop and earn rewards have evolved since the 1980s, banks’ desire to cultivate customer loyalty and stay top-of-wallet has remained consistent—and that’s something that won’t change.

The post Investing in the Next Evolution of Banking and Customer Loyalty appeared first on PaymentsJournal.

The first wave of Banking-as-a-Service (BaaS) interrupted the financial services supply chain by disrupting the last-mile delivery of financial products. Where banks used to have complete ownership and control, fintech and retail brands started using BaaS to offer new products and services to a variety of customer segments—taking over the distribution to win customers and upgrading the efficiency of the financial system.

This expansion is known as last-mile delivery, where the bank does not own the last mile of the customer experience but is providing the content. BaaS created an opportunity for banks to collaborate with fintech partners who can better market, promote, onboard, and expand financial products to offer to customers. However, the first wave went too far by abstracting crucial aspects from banks’ regulatory practices and required customer due diligence, such as Know Your Customer (KYC) and fraud monitoring, leaving regulators concerned.

As embedded finance (EF) becomes more available, the Global Embedded Finance Market continues to grow and is expected to be worth around $384 billion by 2029; greater moderation will be essential to protecting banks, businesses and consumers. Let’s explore this next stage in banking’s evolution and what might be coming next. 

Initial Disruptions

In the past, HBO, Showtime, or Disney created original content and distributed it through their own network channels. Yet there was rapid evolution through last-mile disruption as agile partners delivered content more quickly and at lower costs. Roku, Netflix, and Amazon Prime became the last-mile delivery platforms, aggregating content from various providers into a niche offering that gained rapid customer adoption.

The banking industry is experiencing this last-mile disruption from fintech companies, retail brand apps, and enterprise applications providing the customer-facing experience. These fintech apps embed bank content and financial features and often bundle them with original content. With EF, banks will own some delivery mechanisms and also partner with fintechs for last-mile distribution. Simply put, EF will become a standard distribution channel that banks will accommodate—much like their online, mobile or physical channels they support today—allowing them to take back control of last-mile delivery.

Similar to the success of entertainment streaming services, the banking industry and consumers will see the benefits of banks providing their own products that can now be distributed across multiple channels.

The Start

One of the predominant use cases that fueled the BaaS movement was private branding of a deposit account with a debit or prepaid card. The non-bank program that owned the last mile of delivery would offer unique features that would attract customers to sign up. For example, a department store offers a debit card with its own branding, allowing customers who signed up to earn extra loyalty points when purchasing this specific card. The objective was to attract customers, increase deposits, and benefit from the debit card usage on the account due to the interchange fee sharing.

Currently, this setup remains a common use case as financial institutions seek additional avenues for growing their deposit base that go beyond basic deposit accounts and debit cards. But, as in all supply chain strategies, the more functions a company can take on within the supply chain, the greater its share of the economics.

Such is the case for interchange revenue in BaaS. Banks that own their own BaaS platform can directly power their deposit growth partners in a multi-tenant environment, utilizing technology to enforce compliance controls and create products and services tailored to their customers. With ownership over their digital ecosystems, banks gain more significant influence over the economics of the BaaS supply chain. As interchange potentially deteriorates going forward, the bank also mitigates risk by owning the customer relationship and ensuring their programs do not dissolve if the BaaS provider middleman disappears.

Moving Forward

With new opportunities also comes the need to review regulations. On June 6, 2023, the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB), and the Office of the Comptroller of the Currency (OCC) collectively released their Interagency Guidance. This contains their final counsel on third-party risk management within the banking industry and notes that banking organizations are ultimately responsible for any activities they undertake with external parties.

The current state of BaaS highlights the need for banks to control their delivery programs and not to outsource these to BaaS providers, as it facilitates too large a risk relating to data protection and compliance. The swing of Fed regulators requiring the bank to have greater control over BaaS/EF is a good thing—because ultimately, this protects the safety and soundness of the financial system.

The bank uses technology to provide automated and programmatic oversight, ensuring transparency in customer information, accounts, and transactions. The trend leverages the bank’s technology platform, allowing them greater control over their programs, risks, and outcomes.

Initial indicators, such as consent orders, show that regulators are requiring banks to perform their own KYC and manage their own third-party risk management. Banks in control of their own technology can manage these items digitally, while also providing tools for their EF partners to self-serve their own programs, such as managing fraud, Customer Identification Program (CIP), and money movement exception management.

The FDIC is also evolving when it comes to products like digital currencies and the delivery channels used to provide banking services. The FDIC recently announced it is seeking comment on proposed amendments to its regulations, creating a notable opportunity for banks that are leading the BaaS/EF market to advance forward.

The market will continue to evolve and is already going beyond basic deposit accounts and cards. Banks that extend their distribution channels and become proficient in bundling EF products and services together will be the banks that will be in the best position to deliver across any last-mile provider. Those are the banks that will have the greatest opportunity to advance and ultimately add the most value for customers.

The post Disrupting the Disruption: Where Banking Is Heading Next appeared first on PaymentsJournal.

UK bank branches are shutting down at an alarming rate. Banks have taken these actions in response to the surge in adoption of mobile and online banking services.

Which?, a UK-based consumer advocacy organization, has kept tabs on the number of bank closures since 2015. Its data indicates that 5,600 branches have been shuttered since January 2015, an average of 54 bank branches monthly.

The bank that has had the most closures of all the banking groups, Barclays, came in at 1,077 closed branches.

According to Which?, 427 branches have been closed so far in 2023, with another 220 planned for later this year. For 2024, there are already plans to shut down 42 more.  

Will a Cashless Society Foster Financial Inclusion?

The acceleration toward a more cashless society is well underway. During the height of the pandemic and afterward, the digital payment landscape took a dramatic turn toward contactless payments. Fintech companies also delivered on rising consumer demand for cashless payment methods, including digital wallets, mobile payment apps, online banking, and cryptocurrency.

A cashless society certainly has its benefits, such as protection against theft. It’s more convenient to buy and sell without needing cash, and the cost of handling cash is mitigated. It also promotes financial inclusion as the underbanked and unbanked can still have access to financial services, even if they do not have a bank account or have a local bank branch nearby.

Although digital payment methods have gained significant popularity and traction worldwide, what will happen to those who are not inclined to get on board with these methods and prefer to use cash?

When it comes to digital banking, the elderly populations are facing the most setbacks. Many still prefer to speak to someone at their local branch. Furthermore, a significant barrier to digital adoption resides with many elderly people, who are not prepared or equipped to take on these new digital payment methods and banking. Many people aren’t ready to say goodbye to cash just yet.

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In the midst of Goldman Sachs’ reevaluation of its consumer banking ventures—which have faced substantial criticism under the leadership of CEO David Solomon—the company is in discussions to transfer its Apple credit card and high-yield savings account products to American Express, according to CNBC.

If the move happens, it would signify a sudden and unexpected reversal for both Goldman Sachs and Apple. In fact, in October, the WSJ reported that the two companies had renewed their partnership, extending it through 2029.

Entry into Consumer Banking

Goldman Sachs’ foray into the consumer market represented a break with its past for several reasons. Goldman had long been known as a leading investment bank and financial services firm catering primarily to institutional clients and high-net-worth individuals. The firm’s core business revolved around investment banking, securities trading, and wealth management. By venturing into the consumer market, the company departed from its traditional business model and entered unfamiliar territory. Consumer banking requires a different set of capabilities, infrastructure, and risk management compared to its established institutional-focused operations. This move represented a strategic shift for the firm, as it aimed to diversify its revenue streams, tap into a broader customer base, and establish a foothold in the growing digital banking sector.

Additionally, Goldman’s entry into the consumer market signaled a departure from its and brand identity. The firm had cultivated an image of exclusivity and sophistication, catering to elite clients and maintaining a certain mystique in the financial industry. The move into consumer banking necessitated a more mainstream approach, engaging with a wider range of customers and offering retail-oriented products and services. This shift challenged the perception of Goldman Sachs as an exclusive institution, potentially diluting its brand.

Key Takeaways from a Possible Exit

Goldman Sachs’ rumored decision to exit its partnership with Apple would not only sever ties with the tech giant, but also signify the end of the firm’s ambitious plans to transform into a comprehensive consumer bank. Goldman Sachs introduced its Marcus high-yield savings account in 2016, expanded its consumer offerings by entering the credit card market through its high-profile partnership with Apple, and bought a fintech lending company named GreenSky.

While the company has had ambition plans, its CEO has faced internal criticism for presiding over the costly consumer-focused expansion, with Goldman Sachs revealing a loss of roughly $3 billion since 2020 due to its consumer lending push. The potential exit from the credit card business and the sale of GreenSky would leave Goldman Sachs with only its original product, the Marcus savings account, in its consumer business portfolio.

According to Brian Riley, Co-Head of Payments at Javelin Strategy & Research, there are three main lessons from Goldman Sachs’ foray into consumer finance.

“First, if you are going to get into retail credit, you must manage the lending risk factors,” Riley said. “Even though someone owns a $1,200 iPhone, that does not necessarily mean they qualify for credit. Second, when you make claims on re-inventing the credit card, be cautious—it takes more than a daily rewards payout and a flashy titanium card. Finally, if you want to start a credit card business from scratch, start off small, so you can understand the nuances of risk management and consumer credit. Ramping up as fast as Goldman Sachs did was key to the product’s failure.”

While no sudden moves have been made so far, it’s still early days to see what may come of a potential Goldman Sachs and American Express partnership.

“There will be some interesting conversion issues, including if Amex will age out the cards which are now issued under the Mastercard brand, or would they convert quickly to Amex? And what will Amex do with the daily rewards payout, will they keep the costly titanium cards?” Riley said.

As the fate of Goldman Sachs’ partnership with Apple hangs in the balance, the potential implications reach beyond the immediate deal. It serves as a cautionary tale for financial institutions seeking to expand into the consumer market and highlights the challenges they may encounter along the way.

“If the Amex deal goes through, this will be the third cobrand partner in less than ten years,” Riley said. “Apple might need to learn a little about partnership management.”

The post Goldman Sachs’ Foray into Consumer Finance May Be Coming to an End appeared first on PaymentsJournal.

ISO 20022 is the definitive global standard for financial messaging, which aims to regulate the electronic data exchange between financial institutions. As more countries look to adopt this standard to enable faster payments, improve the customer experience, and facilitate automation, news of the UK’s central bank revealed that its payments system had successfully been upgraded to the ISO 20022 standard. 

Known as The Clearing House Automated Payment System (CHAPS), it is considered one of the largest high-value payment systems in the world, providing settlement risk-free, streamlined, and irrevocable payments. The Bank of England assumed responsibility for the CHAPS system in November 2017. It was also used to settle an average of £395 billion daily in 2022.  

Some of the main functions of CHAPS include facilitating the settlement of money market and foreign exchange transactions for some of the UK’s largest financial institutions and businesses. Corporations also use CHAPS in order to issue time-sensitive and high value payments to suppliers and to pay taxes. Consumers can even use CHAPS to purchase high ticket items, such as a car.   

The Bank of England’s successful migration to ISO 20022 reveals a significant achievement within its multi-year scheme to renew its Real Time Gross Settlement Service (RTGS). The objectives of the scheme include improving resilience, innovation, as well as competition within the current payment landscape.  

In a prepared statement, Victoria Cleland, Executive Director of Payments at the Bank of England noted:  

“The introduction of the ISO 20022 financial messaging standard marks a major milestone in our mission to enhance our RTGS and CHAPS services: critical infrastructure at the heart of the financial system. In an increasingly globalised payments world, harmonisation of messaging through ISO 20022 will enable more systems to speak the same language and ultimately enhance cross border payments. The move to ISO 20022 is a key element in the Bank’s RTGS Renewal Programme and meets one of our commitments to the Financial Stability Board’s Roadmap to Enhance Cross Border Payments.” 

Race Before the Deadline 

While many organizations and financial institutions would agree that there are plenty of benefits to adopting ISO 20022, data reveals that they’re actually behind as the deadline of November 2025 draws near.  

Recent data found that of the 11,000 global banks belonging to the SWIFT network, only 72% will be ready to fully migrate by the deadline.  

One of the biggest hurdles that most banks and organizations must overcome is to upgrade their current payments systems. This is especially true if they are still operating under outdated legacy systems.  

The post The Bank of England Successfully Migrates CHAPS to ISO 20022  appeared first on PaymentsJournal.

There’s significant financial services disparity in the southern region of the U.S., particularly in regards to branch presence, bank account access, and capital availability for mortgage and small business lending, according to data from the Consumer Financial Protection Bureau (CFPB).

The study examined several states, including Alabama, Arkansas, North Carolina and Tennessee, and found that the lack of bank or credit unions has created “banking deserts,” in these local communities. Essentially, areas that are restricting individuals from conveniently opening bank accounts, and overall, hampering the opportunities for lending and investment in these areas. According to the report, the south has 3.6 branches per 10,000 people compared to 5 branches per 10,000 people nationally.

Uneven access to financial services perpetuates socioeconomic disparities and reinforces existing inequalities. Rural communities and communities of color, in particular, bear the brunt of this limited financial access. Low income, rural, and minority communities receive less lending than similar communities elsewhere in the U.S.

Indeed, CFPB noted that:

Initial analysis shows credit scores alone do not explain these lower levels of lending. Even among high-credit score borrowers (680 or above) in both rural and non-rural areas, applicants of color experience higher denial rates than white applicants. For example, high-credit score Black applicants in rural areas experience a 17 percent denial rate, compared to 14 percent for those in non-rural areas. For high-credit score white borrowers, the denial rates are 9 percent in rural areas, compared to 7 percent in non-rural areas. For both low- and high-credit score borrowers, rural southerners overall are denied at higher rates. For example, low-credit score borrowers in rural areas experience a 29 percent denial rate, compared to 27 percent in non-rural areas.

The increase in online banking could partly explain the dearth of bank locations highlighted in the report. In fact, during the pandemic, more consumers banked at home without stepping foot into a physical branch location—and this shift was felt nationwide.

However, online banking doesn’t explain the lack of approval for lending, compared with other areas.

Despite rural southerners applying for home loans at a similar rate to consumers nationwide, their applications are more likely to be denied compared to other rural areas and the rest of the country. Physical branches that still remain are at an advantage—and can charge higher rates—due to the lack of competition for rural loans. That said, the primary cause of these discrepancies remain unclear.

The post There’s a Struggle for Financial Access in the Southern Region of the U.S. appeared first on PaymentsJournal.

Smart banking has become a catch-all term in recent years, but what does it really mean? 

For some, the answer is obvious, it means tech. And this is, to a large extent, is true. Technology has revolutionized every sector of the economy in recent decades—since the advent of smartphones—and finance is no exception. 

Banking once required customers to make an appointment and go to a physical bank to discuss their needs, but now mobile interfaces allow customers to browse and apply for products anytime and from anywhere, all with the click of a button. Likewise, AI (artificial intelligence) bots triage customer inquiries to the correct department in minutes, and machine learning can track customer spending habits and make recommendations off the back of it. The list goes on and as technology continues to advance in leaps and bounds—see the rapid rise and iteration of ChatGPT for example—so will the service that financial institutions can offer their customers. 

As a result of these technological innovations, fintech has become its own category of financial services, and a rival to traditional banks. It has also become big business, with worldwide investment into the sector growing from $61.1 billion in 2015 to $238.9 billion in 2021. 

This has led to a digital arms race not just between fintechs looking for the next breakthrough, but also between traditional banks and big tech. The future of financial services is going to be defined by ever more sophisticated technology, and with such sums of money involved, it’s crucial that banks get it right. This is where smart banking needs to become smarter banking, and leverage more than just tech. 

Beyond Tech

For financial institutions, building the right tech infrastructure, as well as employing the right strategy when it comes to competing digitally, is equally as important as offering customers the best technological solutions. 

When it comes to competing with digital-first fintechs, banks can adopt one of two approaches: developing tech in-house or onboarding it from a dedicated supplier. Getting this right is key and will determine the future of the financial services landscape, particularly as businesses are met with increasingly mobile customers who are used to the great digital experience provided by tech companies—and are willing to move to find it. 

Building the tech in-house is expensive and time consuming. More importantly, the culture of mainstreet banking is not always adapted for the kind of fleet footed development and process iteration that tech development requires. Beyond technologies like AI, smart banking requires an entire toolkit of solutions and processes and an ability to move at pace. Mainstreet banks here face a challenge in that resistance to change is often in the DNA of their systems. 

Waterfall methodologies continue to shape their processes and developer tools are often dated. Fintechs are often the opposite, using agile frameworks in short ‘sprint’ efforts to get progress fast. It’s important that banks recognise this reality and take action. 

This might, at first glance, look like a disadvantage. But the very traits which make it difficult for banks to imitate a tech company are also the strengths they have when it comes to competing with fintechs. This is reliability, stability and robust, tried and tested business practices. 

Fintech business lending grew from $121 million to $2 billion between 2013 and 2018, but with customer satisfaction with digital-first lenders still lagging behind mainstreet banks, there is an opportunity for mainstreet banks to start tipping the scales in the opposite direction. 

Oftentimes the best solution for banks is to partner with the fintechs that can give them the tools they need to move at pace and truly harness their data. This partnership means the technology can be integrated quickly, giving banks the space to focus on the advantage they have over the fintechs, which is brand recognition and the sense of security, stability and trust that comes with that.

Established banks must also step beyond just current accounts and lending, and onboard customer payment capabilities. Banks which can facilitate small business payments can offer a great customer experience to SME customers, powered by user-friendly terminals and e-commerce tools. For the bank however, integrating payment technology means capturing hugely valuable data about the lifecycle of SME customers, the challenges and opportunities they face, and the products they need to help them succeed. Whether or not they’re aware of it, banks are sitting on enormous volumes of rich and highly valuable customer data. Applying machine learning to this data can fundamentally change a bank’s relationship with its SME customers.

Key Takeaways

When discussing smart banking, the term smart is often applied narrowly, as a synonym for tech. Tech is a huge part of smart banking and makes customer journeys easier by harnessing data to provide a personalized service, and by offering great banking interfaces and UX. What’s clear however is that smart banking requires more than just tech, it requires expertise, stability and a brand that customers can be confident in. 

Mainstreet banks then have a unique opportunity to capitalize on the natural advantages they have in these areas, while also teaming up with tech partners who can move fast while meeting the banks robust security, risk and compliance needs. For banking customers, this means the tech and UX they need, plus the trust and security of a well-established bank. 

This would be smart banking in the full sense, and a smart move for mainstreet.

The post Smart(er) Banking Requires More Than Just Tech appeared first on PaymentsJournal.

Traditional banks are struggling to make the pivots necessary to keep up with the latest technological trends while still delivering on customers’ needs. With many depending on legacy systems to conduct daily operations, it has been difficult for these long-established players to be nimble, and they often lose out to competitors that can launch the newest technology.

During the PaymentsJournal podcast, Tom Kleinsorge, Vice President of Global Software Sales at Euronet Worldwide, and Brian Riley, Director of Credit/Co-Head of Payments at Javelin Strategy & Research, explored the delicate balance traditional banks must strike to attract the new generation of banking consumers while keeping longtime loyal customers happy.

Neobanks Continue to Scoop Up Traditional Bank Profit Margins

Neobanks have been disrupting the traditional banking system for some time. Without the time and costs allocated to staffing and maintaining physical branch offices, these new online banks are freed up to be agile and pour their efforts into delivering top-notch customer service, using the latest in innovation to enhance the overall consumer experience.

Where are traditional banks missing the mark?

“Banks are challenged with understanding who their customers are and how they can serve this wide variety of customers that they have to deal with,” Kleinsorge said. “Traditional financial institutions are in business to make money, and they need to provide the services that their customers are going to use.”

He added: “What FIs around the world are grappling with: How do they provide this, maintain the stability, and offer the services their clients need? The next challenge is: How do they expand for the next generation of customers coming in? They’re challenged with this in a lot of different ways. They need to be able to adapt quickly.”

A banking customer’s lifecycle, Riley said, is the key to unlocking what a customer needs.

“People go through cycles,” Riley said. “You have different needs as you go through financing. That’s why it’s important to capture this segment because it’s like your first date. You always remember it. And you remember that first relationship you have with a bank. And people go through this lifecycle, they start coming out with college loans, which was not something that was prevalent a few decades ago to the extent that it is now.”

The cycle continues after that, Riley said.

“They start getting their first job, finding a partner or a spouse or whatever that means. And then moving into a spending mode,” he said. “Then they start maturing and it’s time to shift from spending to saving and investing. They’re going to ultimately get into financial service products, like shelter products, mortgages, and so forth.

“So it’s so important to address this universe of people that are aging through the process.”

Adopting new technology is not without associated issues. Traditional banks can still rely on being the stalwarts of stability.

“New innovation brings its own challenges with compliance, regulation, and security,” Kleinsorge said. “The traditional FI has always been the bank. It was a trusting place to do financial transactions of financial activity.

“New entrants and new emerging technologies are coming out with PSPs (payment service providers), wallets, and alternative channels and new providers. The fintechs are coming out with all kinds of really cool technologies that challenge the banks and the traditional way they do the business. They (banks) are trying to find the balance of how they can support the new emerging customer requirements and needs that are coming out so fast, as well as providing the stability and the legacy capabilities that they’re known for and the world depends on.”

Critics continue to focus on the reasons traditional banks should modernize their legacy systems. Not doing so will pose a significant hindrance to their ability to compete with more nimble competitors, they say.

“The legacy technology is real because it’s reliable, it’s stable, it does what it does,” Kleinsorge said. “It’s been around for a long, long time. But there’s also emerging technologies that are coming out that these legacy applications just have a hard time adapting to.

“Euronet has been working in international and emerging markets for the last 30 years. And we keep seeing this leapfrog where you’re seeing the smaller economies, the smaller banks, some of the new entrants like the new digital banks, they’re leapfrogging some of the established providers and players in the market because they don’t have that legacy infrastructure.

“So they’re able to use some of the newer (technologies) that are coming out quicker. We have some customers that are jumping right into contactless and cardless technologies.”

Although new technology is always welcome, the two features that should be table stakes involve security and the user experience. Younger consumers want speed and convenience. The older folks don’t mind waiting but also certainly like to have the “wow factor.”

“There’s a different expectation, but that security theme goes throughout, and that’s where the process can blow up,” Riley said. “The nimbleness of these systems is important. A lot of this stuff has to be real time, and that’s how you keep a competitive edge.”

Why Stay with a Traditional Bank?

Even with all the innovations in the fintech industry, something about the bank as an institution gives off an air of stability. Kleinsorge agrees that banks still have robust stabilizers in place to protect them, by harnessing consumer trust.

“I think you still have the stability of what the financial institutions do and the regulation, the insurance and the FDIC in the U.S. and just the stability of the economy,” he said. “The economy relies on the banking and the financial services industry to maintain that level of requirements compliance (and) structure that that’s out there.”

With innovative new products coming to market, consumers will still have to face potential risk. As a result, financial institutions will always have a key role to play in the financial space.

“There will always be a requirement for the financial institutions to do the money management, the regulation, the compliance, and everything that the stability that is still out there,” Kleinsorge said. “But there will be new entrants that are going to offer new services that are going to be different. So, some of this is going to come down to an individual decision about what level of risk they want to take and what they want to tolerate and see where that goes.”

How Banks and Credit Unions Can Be More Competitive, Convenient, and Streamlined

Amid all the rapid changes, technological innovation, and new entrants disrupting the financial industry with new solutions, what can traditional FIs do to stay relevant and competitive? Kleinsorge said it’s about knowing customers and their needs and delivering those things fast. It’s also about making an abrupt change from current legacy systems, especially if those systems are in-house.

“It’s important that FI’s and the banks know that they can move forward with new technologies without destroying what they’ve already done, because a rip-and-replace technology is terrifying, it’s scary, it’s expensive, it’s risky,” he said. “So being able to move forward with some of the newer capabilities and work with companies that can provide those new services (is the answer).”.

This may go against what is typically advised in the financial space, but it provides FIs with a middle-of-the-road solution that can be more cost-effective and less risky.

The post How Traditional Banks Can Modernize Without Risk appeared first on PaymentsJournal.

There’s a lot of hype around generative AI right now, particularly with ChatGPT. But while the technology can transform many sectors, including banking, changes aren’t going to happen overnight.

“Generative AI is indeed a real technological advance,” said Christopher Miller, Lead Analyst  of Emerging Payments at Javelin Strategy & Research. “But it’s not going to happen this year or next year if you are a payments company. You have plenty of time to plan.”

In his recent report, Generative AI: It’s Here, and It Defies Static Definition,Miller delves into how banks and fintechs should maneuver to take advantage of generative AI. He also provides some reassurance that indeed, the world of payments isn’t ending, but rather is becoming more efficient.

Exploring Generative AI

Generative AI, exemplified by ChatGPT, is different from a search engine.

“Artificial intelligence has the capability of generating unique and novel content based on the data that is trained on as opposed to surfacing information that already exists,” Miller said. “The generative component is what makes it different.”

Short-term, AI may help automate repetitive work, helping employees do their jobs faster. But more fundamental changes are far off.

“The core of how payments are delivered isn’t going to change this year or next,” Miller said. “Some start-ups will have some ideas about applying it, but they won’t have any MVPs. One of my big points is that, while this is a big deal, you have some time to figure out how your company will adapt.”

While generative AI has the potential to revolutionize the payments landscape, its adoption is expected to be slower compared to other industries, particularly because of concerns related to data privacy and security. These concerns are especially important in the financial industry, where the stakes are high and the consequences of a security breach can be severe. As a result, it’s essential to work out all the details before deploying generative AI in the payments industry.

In addition to privacy and security concerns, there are other factors that may slow the adoption of generative AI in payments. For example, the regulatory landscape is complex, and there may be legal hurdles that need to be addressed. Furthermore, there may be challenges related to integrating generative AI with existing payment systems and infrastructure.

Learn more about how financial institutions and fintechs can position themselves wisely to take advantage of Generative AI, without being whisked away by the skepticism and hype.

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Just four days after the launch of the Goldman-Sachs-backed Apple Savings account, users collectively deposited nearly $1 billion, according to two sources familiar with the subject.  

On launch day, the savings account received close to $400 million in deposits. With banks currently offering an annual interest rate of less than half of a percent, the biggest drivers that facilitated the surge of account openings can be attributed to its 4.25% annual interest rate and the virtual ubiquity of the iPhone. 

Banks Are Falling Short on Savings Accounts 

With the Fed preparing to increase interest rates once again, banks have taken a more reactionary approach: 

Richard Crone, CEO and founder of payments firm Crone Consulting, told Forbes:  

“Banks have quickly responded to the Fed’s interest rate hikes with higher mortgage and car loan rates, but savers have seen little to no increase in traditional bank deposits or savings accounts. There’s an outflow to CDs, money market funds, and fintechs like Apple.” 

With consumer confidence in banks beginning to slip and deposits making a dramatic exodus, bank failures may continue as was recently seen with First Republic Bank and Silicon Valley Bank in March. First Republic Bank was the second-largest bank failure in U.S. history, and it was admitted by the Fed that they had failed to offer supervision and regulation.  

What Sets Apple Apart 

We recently covered how Apple is tapping into savings amid tight competition among financial institutions. But Apple brings more to the table than the traditional FIs in the market. For example, Apple Card has no annual or late fees, but users must own an iPhone that uses iOS 12.4 or later. They must also have an Apple ID, along with an iCloud account that is in good standing. Furthermore, the user’s annual percentage rate (APR) for purchases is contingent on their credit history and it can vary from 16% to 27%.  

Apple Savings is only available for holders of Apple’s credit card, the Apple Card. In less than a minute, users can open their savings account directly from their iPhone. All Apple Card spend rewards, also called daily cash, are funneled into the high yield account.  

The post Apple Savings Sees Nearly $1 Billion in Deposits in First Four Days  appeared first on PaymentsJournal.

The early-Monday failure of First Republic Bank—the troubled bank was acquired by JPMorgan Chase & Co. in a government-led deal—has at least two immediate impacts:

• It’s the second-largest bank failure in U.S. history, behind only the 2008 failure of Washington Mutual, which was also acquired by JPMorgan Chase. Three of the four largest U.S. bank failures have occurred in the past two months, with the March collapses of Silicon Valley Bank and Signature Bank joining that list.
• JPMorgan Chase, already the largest bank in the country, just got bigger. JPMorgan, led by Jamie Dimon, acquired $173 billion in First Republic Loans, $30 billion in securities, and $92 billion in deposits, according to news reports. At the end of 2022, JPMorgan had $2.34 trillion in deposits.

From the perspectives of JPMorgan and the government, the move also staved off a larger crisis. With First Republic teetering in recent weeks, private efforts to shore up the balance sheet hadn’t worked, and customers had been pulling their deposits. In stepping in, JPMorgan offered to take the entire bank, minimizing the impact on the FDIC’s insurance fund. The agency expects a hit of about $13 billion.

Dimon, in a conference call with reporters, said the move will help stanch the flow of bank failures.

“This is getting near the end of it, and hopefully this helps stabilize everything,” he said, noting “good results” in first-quarter numbers by regional banks. “The American banking system is extraordinarily sound.”

How First Republic Failed

First Republic Bank, based in San Francisco, saw the value of its bonds and loans squeezed as the Federal Reserve continually boosted interest rates to battle inflation. Those holdings had been purchased when rates were lower. That led to a fleeing of depositors, which took a chunk out of the bank’s capital.

A discouraging first-quarter report exacerbated matters. Rescue efforts—including $30 billion in deposits from a consortium of 11 U.S. banks, including JPMorgan—brokered by U.S. regulators couldn’t right the ship. The bank’s stock was trading at less than $5 by late April. Then came Monday’s events.

“We should acknowledge that bank failures are inevitable in a dynamic and innovative financial system,” said Jonathan McKernan, a member of the FDIC board of directors, in a statement released by the agency. “We should plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending our country’s bailout culture that privatizes gains while socializing losses.”

Criticism of the Move

The idea of a larger, more powerful iteration of JPMorgan isn’t being viewed as a positive in some quarters.

Sen. Elizabeth Warren (D-Mass.), a frequent critic of bank consolidation, took to Twitter, writing, “The failure of First Republic Bank shows how deregulation has made the too-big-to-fail problem even worse. A poorly supervised bank was snapped up by an even bigger bank—ultimately taxpayers will be on the hook. Congress needs to make major reforms to fix a broken banking system.”

What Now?

The assumption of First Republic will be overseen by Marianne Lake and Jennifer Piepszak, co-CEOs of JPMorgan’s consumer and community banking unit, Dimon said. The First Republic name won’t be kept, the CEO added.

As the United States’ dominant bank grows, Main Street banks are finding rougher sledding. The first-quarter earnings reports Dimon cited and praised also reflected deposit declines that have become a big concern. Low rates gave depositors little reason to move their money around, and banks had easy access to funding for loans, bond purchases, and other securities. Higher rates have sent those depositors scurrying and have prompted banks to boost what they pay out on products such as savings accounts and certificates of deposit in an effort to keep those customers.

The post First Republic’s Failure Makes JPMorgan Even More Dominant appeared first on PaymentsJournal.

Banks are at a crossroads and caught in a whirlwind of change—technological, regulatory, and customer-driven as consumers demand superior service. Fraud is another ever-present foe. It’s growing in sophistication and proliferation, without a bona fide solution in sight. With these elevated security risks, banks are more vulnerable than ever to security breaches, which have the potential to destroy their brands and reputations.

As revenue shrinks and closures multiply, bank branches must reinvent themselves amid the rapid digitalization of banking. A Lumen report, Outpace the Competition: Build and Secure the Hyperconnected Bank, tackles the challenges in the current retail bank branch landscape and offers solutions.

The Digitalization of Banking

The pandemic had a big hand in driving rapid change in consumer banking.

As reported by McKinsey in Reshaping Retail Banking for the Next Normal, “retail banking distribution will experience up to three years of digital preference acceleration in 2020.⁵ In some markets, this may translate to 25 percent fewer branches, with those that remain performing a different set of activities with more flexible job configurations.”

Before the pandemic, banks were already closing at a steady rate. According to the data from the Federal Reserve Bank of St. Louis, the number of retail banks has plummeted in just the past 10 years. In fact, the latest data revealed that U.S. retail branches dropped from 36 per 100,000 population in 2009 to 30.5 per 100,000 population in 2009.

During the pandemic, with customers desiring fewer in-person interactions and adopting mobile and online banking technology, banks continued to close at an alarming rate. These trends have spurred banks further to adopt mobile and online banking services.

Still, it is not necessary to declare retail bank branches defunct. On the contrary, mobile banking customers still want to engage with their local branch.

American Banker magazine gave more reasons to uplift this institution, saying that physical branches play a crucial marketing role and remain a “preferred site for many transactions such as opening accounts and replacing debit cards.”

A Forbes survey ¹ found that more than 25% of Americans prefer conducting their banking services at their local branch. It comes down to two vital components: trust and personalization.

So retail bank branches are not on their last legs, but they do need a transformation. To make this happen, banks must be fully integrated and deliver a secure customer experience. But how can they get there? It comes down to integrating a platform approach for their current IT and security infrastructure.

Cost and Resource Constraints Keep Banks from Implementing the Right IT Operating Model

Mounting competition, lower interest rates, and increased regulation have eaten away at the profit margins of most banks. Retail bank closures have been one of the many strategies for shaving operating costs. However, stiffening competition and digitalization are also threats that can’t be ignored.

Banks must transform their legacy operations and invest in new infrastructures that will help them thrive digitally. This comes at a significant expense. It’s easy for most organizations to simply piecemeal solutions and target specific issues with a specialized solution. However, the end result is often fragmented and haphazard. The bank, which hoped to save money, could end up spending significantly more trying to put out the inevitable fires.

For bank branches to reach maximum profitability, they must choose an all-inclusive IT platform solution to address the bank’s needs. This all-encompassing solution can address customer needs, maintain regulatory compliance, and perform tasks at the lowest cost possible.

IT Infrastructure Should Be Outsourced

In the current ecosystem of banking, regulatory compliance is no longer optional. Compliance and security are to work in tandem to meet all the regulatory requirements within the industry. To be fully equipped to handle the myriad attacks that can come against their data, a platform approach can ensure that a holistic security strategy is in place.

As mentioned in Lumen’s report: “Banks must implement an agile IT infrastructure that supports a seamless customer experience, using lower cost channels for transactional flow and higher value channels for premium clients. While IT professionals may initially view IT transformation as a cost savings exercise, the long-term benefits include efficiencies in IT and business operations, enhanced corporate agility and increased profitability.”

It makes more sense to outsource to one platform provider instead of revamping an in-house IT infrastructure. Doing so avoids the risk of implementation failure as well as the loss of time and money due to the need for updates down the line.

The Lumen report continues: “Working with a trusted partner who can bring an integrated platform brings with it broad and deep industry expertise. Branch transformation projects require a specific set of skills across networks, computing, and security services, but too often banks incur risk and inefficiencies. They are fragmented across network providers, computing suppliers, software vendors, and infrastructure services. But with an expert infrastructure partner, banks can tap into a large pool of diversified expertise around the latest technologies and best practices while capturing efficiencies and reducing operational costs.”

¹ Forbes Advisor, Digital Banking Survey: How Americans Prefer To Bank, February 2022

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Signature Bank, a NYC-based bank, failed on Sunday and was taken over by the FDIC. It’s the third-largest bank to have failed in the United States—the FDIC took over Silicon Valley Bank and Silvergate, known as “crypto’s bank,” last week.

“The collapse and closing of three crypto-friendly banks within one week is certainly an issue to the crypto industry,” said James Wester, Director of Cryptocurrency at Javelin Strategy & Research “What is particularly worrisome is the concern that crypto-friendly banks were targeted by the federal government in some way.”

“Regardless, this could provide additional fuel for companies building in the crypto and digital asset space to migrate offshore,” he said.

In a joint statement, the FDIC, the U.S. Treasury, and the Federal Reserve said all deposits at Silicon Valley Bank and Signature Bank would be guaranteed. That said, shareholders and certain debt-holders of the banks won’t be protected, per the WSJ. President Biden has approved this plan, which involves making a “systemic risk exception” for these banks because of the risk of further harm to the economy should customers not have access to their deposits. This is similar to what was done during the 2008 financial crisis, with the bailout of the bank Bear Stearns.

In a separate article, the WSJ highlighted bipartisan criticism of this approach from regulators, and noted that part of this financial instability can be traced to legislation that was passed in 2018 to deregulate smaller banks.

Specifically, the legislation cut the number of banks subject to heightened Federal Reserve oversight by raising a key regulatory threshold to $250 billion in assets from an earlier $50 billion cutoff. By raising the threshold, the new legislation gave regulators space to lighten the load for SVB and other midsize firms like it. 

Had the lightened rules not been in place for such lenders, for instance, SVB’s capital position likely would have eroded slowly over time as the Fed raised interest rates. That would likely have prompted the firm and its supervisors to take steps earlier to place the lender on sounder financial footing before last week’s meltdown, say industry observers. 

Until their collapse, Silvergate, Signature Bank, and Silicon Valley Bank occupied a crucial place in the crypto world: Silicon Valley Bank provided accounts for many crypto exchanges, Silvergate ran the Silvergate Exchange Network, enabling customers to move money between exchanges instantaneously. And Signature Bank has a payments network named Signet, which allowed crypto clients to make real-time payments in dollars 24/7. If Signet goes away, it will become a lot harder for crypto traders to get in and out of exchanges.

The post Crypto-Friendly Signature Bank Is the Latest Bank Collapse appeared first on PaymentsJournal.

ISO 20022, a new global standard for electronic messaging between financial institutions, was initially created to give the financial industry a common platform for sending and receiving data about payments.

However, financial institutions should not look at ISO 20022 as merely a compliance burden to be met, but an opportunity to serve clients better and gain a competitive edge. The amount of data related to payments that will be transmitted under ISO 20022 standards is so robust that it gives banks the ability to know their clients better and create new products and services tailored to their needs.

The robust and granular data will also aid financial institutions in fighting fraud, allowing them to detect potentially fraudulent patterns in payments and stop them before they are completed.

To learn about the importance of ISO 20022 for financial institutions, what benefits it offers, and what it means for the future of payments going forward, PaymentsJournal sat with Andrew Foulds, Director of Global Clearing Solutions, Product Management, EMEA at Fiserv, and Steve Murphy, Director of Commercial and Enterprise Payments Service at Javelin Strategy & Research, for a podcast discussion on this topic.

This blog is the second of a two-part series covering that podcast. Part 1, which covered why the ISO 20022 standards were delayed and what financial institutions can expect around their implementation, can be found here.

The Many Benefits of ISO 20022 Compliance

Foulds observed that when it comes to ISO 20022, “The focus on compliance with these regulatory changes can make institutions lose sight of what the business benefits are. These messages contain a lot more data and richer data. That allows us to look at and examine this data and turn it into information, which can then be used to create new services for clients.”

Foulds added that banks can take the new data and “turn it into something useful and add to the services you are already providing now.”

For example, ISO 20022 data can be used to help business clients better manage liquidity and cash flow. ISO 20022 data can also be applied to supply chains to help solve supply chain network problems.

Murphy noted the vast potential for improving and streamlining B2B payments using ISO 20022. Nacha, the electronics payments association, reported that fewer than 20% of B2B payments are processed automatically. The group further noted that ISO 20022 data can greatly improve automation of B2B payments by automatically extracting and providing typical information found on invoices. Thus, businesses can issue a “request for payment” to a payor and receive the money automatically without the need for any human intervention.

“There is a big opportunity for revolutionizing B2B payments down the line [with ISO 20022 data] when banks learn how to use all that data,” said Murphy.

Benefits from ISO 20022 will likely be seen in consumer-related payments first said Foulds, though he agreed there are massive opportunities in the B2B space.

“A lot of the banks I talk to really understand the benefits and advantages [of using ISO 20022 data in B2B payments] but they say, ‘we’ve got to really get our house in order and understand it fully before rolling it out to our corporate clients,’” said Foulds.

ISO 20022 and the Fight Against Fraud

As payments continue to become faster and more digital, the risk of fraud related to payments continues to increase, making detection crucial.

“Fraud is a big issue for our industry globally,” Foulds said. “Fraudsters are constantly evolving their methods and attacks to try and stay one step ahead.”

ISO 20022 does not have anything to do with fraud per se, but it will enable banks and payment providers to more easily detect and stop fraud due to the greater amount of information and detail around payments that it provides.

For example, Foulds noted that simply checking the name associated with a payment against the name that is on an invoice can reduce fake invoice fraud by 30%. ISO 20022 data will provide many more data points to use to check against potentially fraudulent payments.

“The more data we have, the more we can investigate transactions and make sure every payment is going where it is supposed to go,” he added. “There are plenty of opportunities for ISO 20022 there.”

Murphy noted that the increase in real-time payments makes it easier for fraudsters to get away with payments fraud before it can be detected. He added that digital payments fraud is also up since the pandemic, when many more people started making payments digitally.

“As payments become more electronic, there are more schemes being developed by fraudsters to take advantage of this,” Murphy said. “Banks need to be able to look at behavioral patterns and data and track this 24/7 and 365 days a year to detect and stop fraudulent payments.”

Read part 1 of this article here.

The post How Banks Can Realize Business Benefits and Reduce Payments Fraud With ISO 20022 appeared first on PaymentsJournal.

ISO 20022 may be delayed in its global rollout, but that doesn’t mean banks can afford to put off or ignore upgrading their payments systems to meet this new messaging standard.

Broadly speaking, ISO 20022 is a global standard for electronic messaging between financial institutions and was initially created to give the financial industry a common platform for sending and receiving data about payments.

This new standard will provide much more granular and robust data about payments, which financial institutions can use to ultimately serve their clients better. Around 21 domains of business processes are specified in the ISO 20022 standard, along with the messaging and data necessary to support the different processes.

PaymentsJournal sat with Andrew Foulds, Director of Global Clearing Solutions, Product Management, EMEA at Fiserv, and Steve Murphy, Director of Commercial and Enterprise Payments Service at Javelin Strategy & Research to discuss the current state of ISO 20022 and what to expect. In Part 1, they chat about the importance of ISO 20022 for financial institutions, why it was delayed, and what banks can anticipate around this standard going forward.

Delays Should Not Create Complacency

ISO 20022 was meant to go live globally in November 2022 but got pushed back to March 2023. A big reason was the need for some market infrastructure platforms to iron out technical kinks. Notably, the European Central Bank (ECB) delayed the migration to its Target2 real-time gross settlement system, which would incorporate ISO 20022 standards, which in turn had a “domino effect,” explained Foulds.

“It caused other market infrastructure systems to delay their go-live dates,” added Foulds.

Swift, the global financial messaging network, also announced it will go live with ISO 20022 in March of 2023, but said that institutions will have until 2025 to adopt the new standard.

This may have lulled some financial institutions “into a false sense of security,” said Foulds, but it doesn’t mean that banks should be complacent in migrating to ISO 20022 standards.

“It’s something we are going to have to deal with as an industry,” he said.

Murphy added that U.S. institutions are not impervious to ISO 20022 standards, since the Federal Reserve will be adopting ISO 20022 standards for messages in its Fedwire Funds service, as well as The Clearing House for its CHIPS network.

The Clearing House noted that it “remains committed to the ISO 20022 message format to enhance the efficiency of payments processing, to allow participants and end user customers to glean value from enriched data content and structured message formats,” and added that approximately 95% of CHIPS payments have a cross-border component to them.

“There are global implications to this any way you look at it,” Murphy observed.

Opportunity Cost for Banks

Murphy asked Foulds how banks should be preparing for this massive change and if they should rely on their payments service providers to help with the transition or use in-house resources.

Foulds responded that larger banks likely have the in-house resources to begin working on migrating to ISO 20022 standards, and they are generally being more proactive in getting it done as quickly and as comprehensively as possible since much of their business is done globally.

Smaller banks will likely have to rely more heavily on help from their payments providers and vendors, but no matter the size of the institution, Foulds warned that none should put off the work to move to the new messaging standard.

“Since Swift gave until 2025 [for its institutions to adopt the new standards], some smaller institutions may put this off,” he added. “Our recommendation is that you should engage with your service providers and have a strategy to deal with this.”

That’s because there is an “opportunity cost” associated with delaying migration to ISO 20022 messaging standards, Foulds said.

“The earlier you go about this, the better it is, we think,” he added. “Don’t think about this as a mandated, regulatory issue, but view it as a business opportunity. There are more robust, rich data points transported via ISO 20022 messages, and institutions can use that new data and turn that information into new services for their clients.”

By way of metaphor, Foulds compared previous data sent through payments messaging as “about the size of a baseball, or a cricket ball” while data sent via ISO 20022 messages would be akin to the size of a basketball.

“There is a vast difference in the amount of data,” he added.

Foulds said this means that institutions that do not incorporate ISO 20022 standards will be at a massive competitive disadvantage. For example, when the European Central Bank’s aforementioned Target2 system goes live in March, it will be a “big bang” approach rather than a phased approach.

“That means on Friday at the end of day they’ll retire the old system, and Monday morning the new will be in place. So if you’re not ready, you won’t be able to do business. It’s really more of an existential business issue than just a regulatory issue.”

The post ISO 20022: What Banks Need to Know About Delays and Opportunities appeared first on PaymentsJournal.

As the shift to digital banking continues, physical bank branches are losing their raison d’etre and closing in many locations. More than 3,000 bank locations have closed in the United States over the past year, with more closures expected in 2023.

More than ever, it’s important for banks to adapt to the changing landscape and leverage technology to keep pace with what consumers expect. According to Lumen, a multinational technology company, banks can learn a lot from retailers, including Apple, and shift their focus to meet consumers where they are and how they want their banks to be. Lumen’s Revolutionizing Banks through Branch Transformation whitepaper gets into how banks can change their approach.

Banking in the Digital Era

The pandemic proved that although consumers need banks, they don’t necessarily need to go to a physical location for most services. Most consumers visit a physical branch for the personal touch many offer, as well as out of habit. This is especially true when much of banking can be done online, so to get customers in the door, banks put an emphasis on knowing their customers personally.

According to Lumen, banks can set themselves apart from competitors by addressing the omnichannel experience. That comes down to ensuring that they offer a user-friendly and reliable experience across mobile, desktop, and in-person transactions. This is similar to what is happening in retail environments. Initially, stores thought of e-commerce as a separate, secondary business and treated it accordingly. Now retailers are working to integrate physical and digital business assets for a unified customer experience, and banks are following suit.

Improving customer service can also be a game-changer. Indeed, customer service is the factor that sets the best apart from the merely good. And as in the retail space, customer service can help banks not only drive in new customers but also, just as important, retain current ones, building on long-established loyalty.

Turning to Retail Innovation for Answers

In many ways, banks and retailers face similar issues. But unlike many retailers, banks have been slow to adopt new technologies and stay ahead of the curve. An examination of successful retailers and taking some of the key lessons that have worked well for them will help banks long term.

According to Lumen, banks should look at Apple for inspiration. Central to Apple’s optimization of the customer experience are specialized cameras that track customers as they move through the stores. “By monitoring how customers used their stores, Apple has been able to continually improve the in-person services and products it offers to give customers a consistent experience across all its locations, while also tailoring services for local needs in each store,” the whitepaper noted. “The in-store interaction fits in as a part of the company’s omnichannel strategy, so customers have a familiar experience when they’re using a smartphone or computer or talking with an employee in a store.”

Banks can leverage tracking and customer identification technology in a similar way to learn how customers use their services, then use that knowledge to create compelling customer experiences that will keep bringing them in. For example, smartphone proximity sensors can pick up on where phones (and their owners) are in the room and use that information to track how customers move and spend their time in a bank.

Smartphones have a small infrared LED and photosensor located near the earpiece. The infrared light emitted by the LED is reflected back by the objects near the phone and sensed by the photosensor on the phone. The sensor measures the time it takes for the pulse of light to return and uses this to determine the distance between the phone and the object. It then sends a signal to the phone’s processor, triggering an appropriate action, such as turning off the screen. But IR light can be picked up by other photosensors in a room. Using the same principles the phone uses, photosensors scattered throughout a room can be used to triangulate a phone’s location as it moves through a room.

Photo sensors are complemented well by cameras that use machine vision. These cameras can visually track customer movement through a store. The combination of data from these two technologies can help determine which in-store activities consistently require human interaction and which don’t. Biometric facial recognition could help employees provide quicker account access and make it easier to address customers by name when they walk in.

Banks could use this technology to create a more interactive and engaging in-branch environment. This can include using digital displays, interactive kiosks, and other digital tools to enhance the customer experience and make the branch a more enjoyable place to visit.

Furthermore, technology can personalize the banking experience for customers and draw in new ones. As peoples’ lives have become more digital, a personal interaction is likely to become a stronger selling point. Indeed, for people who work from home and spend most of their days on the computer, going out to do errands and talking with real human beings may become highly desirable. That will be especially true if the people they interact with at physical bank locations know them personally. The reorienting of part of society around digital, remote work has the potential to enhance physical retail and banking locations, if those businesses play their cards right.

Although banks historically put more of an emphasis on reliability than on innovation, now is the time for differentiation. Bank branches need to become innovative showcases with a personal touch. One idea might be to transform a bank into a financial literacy center, with courses on budgeting and investing—similar to how bookstores bring in authors for book signings and host community events. Although these events are not part of the core banking business, they build relationships with the community and get customers in the door. This approach, coupled with the technological advances advocated by Lumen, could help bank branches differentiate themselves and thrive well into the digital age.  

The post What Bank Branches Can Learn from Retailers appeared first on PaymentsJournal.

The future of banking is rapidly changing in response to technological advancements, shifting customer expectations, and increased competition from fintech firms. Banks are no longer the gatekeepers of financial transactions and are instead shifting towards becoming facilitators for transactions between various parties. Three key trends are driving the future of banking transactions: embedded finance, decentralized finance (DeFi), and the growing trend towards the central banks of several countries experimenting with central bank digital currency (CBDC).

Embedded Finance

Embedded finance refers to the integration of financial services into non-financial products and services, allowing customers to access financial services through the products they already use. For example, a customer may be able to access loans or insurance through a ride-sharing app, rather than through a traditional bank.

Embedded finance is a win-win for all stakeholders involved. Customers benefit from frictionless banking experiences, such as the ability to make purchases using buy now, pay later (BNPL) options. Merchants and brands also benefit from the ability to attract customers with digital financing options and expand their business. Banks, on the other hand, can expand their services to more customers without incurring the costs of distribution.

Progressive banks are approaching embedded finance with a product management mindset. They are building ecosystems of digital platforms, fintechs, e-commerce players, and other entities to offer a wide range of financial services to their customers. This enables them to offer new products and services, such as digital wallets, mobile payments, and other digital financial services in a cost-effective way. By partnering with digital platforms, banks can also gain access to new customers and markets that were previously out of reach. In addition, embedded finance enables banks to increase revenue from existing customers by providing them with additional services such as lending and insurance. This allows them to increase customer loyalty and retention.

DeFi

Decentralized finance refers to the use of blockchain technology to create decentralized financial platforms and services that operate independently of traditional financial institutions. DeFi platforms provide customers with greater access to financial services, such as lending, borrowing and trading, and provide increased transparency and security through the use of smart contracts.

One of the key advantages of DeFi is that it’s built on blockchain technology, which allows for secure, transparent, and tamper-proof transactions. This creates a trustless and decentralized environment for financial transactions, which means that there’s no central authority that controls the system, making it more resistant to censorship and fraud. DeFi also enables greater access to financial services for individuals and businesses that may not have access to traditional banking services. This includes those in emerging economies, as well as underbanked or unbanked populations.

However, DeFi also poses some challenges, such as the lack of regulatory oversight and the potential for security risks. While still in its early stages, DeFi has the potential to revolutionize the way that financial services are provided and consumed.

CBDC

Central bank digital currency refers to digital versions of fiat currencies issued and backed by central banks. One of the key advantages of CBDCs is that they have the potential to enhance financial inclusion by providing access to digital payments for those who may not have access to traditional banking services. This could be particularly beneficial for individuals and businesses in emerging economies or for underbanked or unbanked populations.

CBDCs also have the potential to simplify cross-border transactions by providing a unified digital currency for countries to use, reducing the need for currency conversions and exchange rate fluctuations. This could also reduce transaction times and costs, making international trade more efficient.

However, there are also security and privacy concerns surrounding CBDCs, including the risk of hacking and the potential for governments to monitor citizens’ financial transactions. It’s important for central banks and governments to address these concerns and ensure that any implementation of CBDCs is done with proper security measures in place.

Key Takeaway

In summary, embedded finance, decentralized finance, and central bank digital currency are all key trends that are driving the future of banking. These trends are providing customers with new ways to access financial services and providing new opportunities for financial innovation. Banks must adapt to these changes to remain competitive in the future.

Puneet leads global marketing and FinTech engagements for Finacle. In this role, he is responsible for charting out marketing strategies, enhancing brand differentiation, and driving growth. Today, banks in over 100 countries rely on Finacle to service more than a billion consumers and 1.7 billion accounts.

The post Adapt or Die: How Banks Can Survive in the Age of Embedded Finance and Decentralized Finance appeared first on PaymentsJournal.

Direct Deposit has been a part of our banking system for more than two decades, and employers commonly use it to issue employees their wages directly into their bank accounts. Today, Direct Deposits can be used to pay taxes, bills, and other charges.

“Direct Deposit has been around for quite some time and it’s very well received throughout the United States,” said Debbie Barr, Senior Director of ACH Network Rules Process & Communication at Nacha. “Over 93% of American workers use Direct Deposit. We know the federal government uses Direct Deposit for tax refunds and EIP [economic impact payment] payments. But what we really wanted to know was to dig down deeper into one segment of the population: We decided to look at the millennials.”

Nacha, the payment system organization that manages the ACH (Automated Clearing House) Network, recently launched a campaign to encourage millennial workers to use Direct Deposit to receive their wages directly into their bank accounts. The survey consisted of 700 U.S. consumers ages 22–34. Half of the millennials surveyed were W-2 workers and the other half were gig workers. Here are the findings.

“What we found was that 97% of those surveyed have a bank or credit union account,” said Barr. “This means that they already have the tools they need to receive Direct Deposit. Eighty-three percent are already receiving their pay by Direct Deposit. Seventy-one percent said they primarily keep their money in their bank or credit union account. Almost all of them have deposit accounts. The vast majority have savings accounts. That’s a great thing as we think about Split Deposits. The top uses for Direct Deposits are salary, wages, receiving those tax refunds, and EIP payments.”

Barr believed receiving Direct Deposit creates a gateway to the many other benefits of using the ACH Network. “Receiving Direct Deposit creates this great foundation for using ACH for other things, like your bill payment,” she said. “The more you use ACH, you get this level of trust because you see the benefits of ACH, the reliability, the convenience.”

Barr continued, “With the trust level, we found that 80% of those who received their salary with Direct Deposit consider it highly trustworthy, giving it an 8, 9, or 10 out of a scale of 10. So that is exciting for us. It builds that foundation that moves them into using ACH for other things like Direct Payments. Seven out of 10 said they use Direct Payment for at least one bill each month. We were very happy to see those results.”

“I don’t think I’ve seen a paycheck in 25 years,” said Brian Riley, Co-head of Payments at Mercator Advisory Group. “It goes in, everything works, and it’s flawless. I had an issue with one of my kids — my daughter was filing her taxes [and] she checked off that she did not want to get an ACH on her tax refund but wanted a check. I said, ‘Do you realize that will add about five weeks until you actually get the funds?’”

Who Are the Millennials and How Do They Get Paid?

Nacha’s reasons for targeting millennials as a group to potentially benefit from Direct Deposit are well-founded. These college graduates are entering the workforce, are earning salaries, and have a car payment.

“These are college graduates; they have annual salaries of at least $35,000 a year,” said Barr. “They all had either a student loan or a car payment. That really tightened up the group for us. With our W-2 employees, 88% are already using Direct Deposit. But less than half [47%] of gig workers are getting paid that way. We see a great opportunity there to educate that audience on the benefits of Direct Deposit. Some in our survey do both — they have their W-2 job and they also do some side work. With that group, we found that 92% of those were using Direct Deposit at least once a month to receive their pay.”

Barr continued, “With our gig employees, just over half [56%] are primarily storing their money in bank accounts. The rest are storing them in nonbank payment apps. So that’s a great opportunity to talk to them about the benefits of using Direct Deposit and having that bank account available for that.”

“This is basically a no-lose strategy,” said Riley. “It’s cheaper for the employer to do a DDA (daily demand deposit account or checking account) drop than it is to cut a check. That’s a significant channel. For the employee, it loads up that account quicker and [they do] not have to wait for funds to clear through a check deposit.”

A Look into Nacha’s Campaign

Many benefits are tied to Direct Deposit payments. They are a fast, reliable, convenient, and environmentally friendly way to get paid. Nacha understands that as workers age, there will be a natural increase in ACH use as they begin to add utility payments, mortgage payments, and additional car payments. The time to educate millennials on the value of using Direct Deposit is now.

“We started our campaign looking at three different channels,” said Barr. “We have display ads that follow our targeted market audience throughout their internet [use]. We also have some native ads that, if they [millennials] are online and looking at articles, the native ads will be there, too. We also have 15-second videos where we picked three different types of gig workers. These are real gig workers that are doing their job, working hard, trying to get their pay. We have one that is in food delivery. We have one that is in rideshare, and one that is a dog walker. They are in our static ads and in our videos. Using Direct Deposit, their pay arrives when they expect it, and it’s there for them to use.”

“We really wanted to push this campaign out to help them understand like, ‘we know you guys are working hard and you deserve to get every dollar that you’re paid,’” Barr added. “And getting [paid] on the day you expect it. Making sure they understand all the benefits [that] go along with having Direct Deposit as your payment choice.”

Did Nacha receive any pushback from respondents about Direct Deposit? The study found that pushback stems more from a lack of education and awareness for this option than from an opposition to using this system.

“It’s really an education piece more than there being a holdback, so it’s helping people to make sure they understand the ease of signing up for Direct Deposit and the reliability that your pay will be there when you expect it to be,” said Barr. “And the security. There’s always a little concern when we do anything online that there might be some issues, but the ACH Network is a very secure way to make your payments.”

“It doesn’t cost anything,” said Riley.

Helping Millennials to Adopt Direct Deposit

To learn more about all the benefits that Direct Deposit has to offer, millennials can easily get more information on Nacha’s dedicated website.

“Visit our website, directdeposit.org/gigworkers,” said Barr. “There you will see a lot of great tools.”

Barr also invited financial institutions to get onboard, spreading the news about how Direct Deposits benefit both employers and employees.

“We want our financial institutions [involved] because they touch both sides of the transactions,” said Barr. “They have the employers as their corporate customers and making sure the employers understand that Direct Deposit is a great benefit to them to offer besides being a benefit to their employees. It’s more economical. It’s easy once it is set up. Making sure that the employers have the tools they need to get the Direct Deposit set up but also to educate their employers or their employees on the benefits of ACH.”

“Our financial institutions also have the employees as their customers,” Barr added. “We have the millennials with their bank accounts, and so making sure they understand the benefits of Direct Deposit. With that age group, they have the phone in their hand all the time. They have the bank app on their phone. Making sure they understand where in their bank app they can grab that routing number, the account number, the information they need to sign up for Direct Deposit, and know what it is. It’s probably on the app, but can they find it? Make it easy, clear, and call it out. The beauty of ACH is once you’re signed up, it’s set it and forget it.”

Direct Deposit is more ubiquitous than ever, as more providers are offering it as part of a payroll provider’s offering.

“Direct Deposit is something that is offered across the board. Any of your major payroll providers and the majority of the smaller, independent payroll providers know ACH, know Direct Deposit — it’s something they are able to offer,” said Barr. “It shouldn’t be something that you have to educate your payroll provider on.”

“As you start receiving ACH credits, you get that comfort level with ACH. You start doing some Direct Payments for this group [millennials] — it may be their student loans, their car payment that they set up as auto pay. As we age, we add more lifestyle payments such as utilities, mortgages, subscription services, donations — there’s so many opportunities for Direct Payment. As consumers age, they add more lifestyle payments and the more they add as Direct Payment, the easier it is. It’s such an easy way to handle your finances and manage your money.”

Check out directdeposit.org/gigworkers for tools and more information on the benefits of Direct Deposit.

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There is no doubt that a credit storm is brewing, but as we say in sunny FLA, that storm might just be a “Category 3”, not a “Category 5.” The trick to surviving is to be prepared, stock your fridge, have extra batteries, and not flinch as the rain comes. In the context of credit cards, add capacity, justify your numbers, and leave no stone unturned in resolving consumer issues, and credit card delinquencies.

Look at the Foundational Credit Numbers

Keep an eye out for the upcoming Mercator Credit Card Data Book, which will recap key market indicators from various sources.

• Focus on growth rates, what credit quality segments have been growing, and how much open credit is available.
• Understand delinquency flows and watch out for upticks. For example, look at loss rates, which are on the upswing but still in the 2% range. Although that metric surged beyond 10% during the Great Recession, remember that anything under 3% is considered good.
• Look at the consumer budget we studied in this  Mercator report.
• Watch economic drivers, like savings rates, inflation, and of course, the prime,

Yes, Credit Card Delinquencies will Rise

We will go with TransUnion, a top credit reporting agency, for this metric.

• From a delinquency perspective, TransUnion forecasts serious credit card delinquencies to rise to 2.60% at the end of 2023 from 2.10% at tafter2. Unsecured personal loan delinquency rates are expected to increase from 4.10% to 4.30% in the same timeframe. Serious auto loan delinquency rates are expected to decline more modestly to 1.90% in 2023 from 1.95% in 2022.

And charge-offs will follow but on a smaller basis.

No One has More at Risk in U.S. Cards than Chase

But. Chase keeps a steady ship. This morning, the Motley Fool reported:

• JPMorgan Chase, the largest U.S. bank by assets and a top credit card lender, expects card loan losses to rise significantly this year as credit quality returns to historical norms.
• For much of the past three years, consumers have had excess savings buoyed by federal stimulus payments and because of reduced spending when people were hunkering down to prevent the spread of COVID-19. But as inflation soared this year and people drew down their savings, there have been signs that consumer finances are weakening.
• But it will take time before a loan balance becomes a charge-off, which typically begins when an account is delinquent for at least 90 days. As a result, JPMorgan expects credit card charge-offs to climb from 1.47% of total credit card loans at the end of 2022 to 2.6% at the end of 2023, representing a 113-percentage point jump.

From experience, I can tell you that Chase manages the numbers. There are capacity plans that increase collection staffing requirements. In addition, they have routine backlog studies to ensure collectors can get through volumes.

And, if you ever want to have a bad day at Chase, do not have an explanation for why one basis point in delinquency deteriorated. But, on the other hand, from an absolute value in forecasting, if you improved by a basis point, you should be ready to explain that too. Nobody wants a surprise, good or bad.

The challenge is for more than just top issuers who surfed through recessions with their fifty-year-old businesses, such as American Express, Bank of America, Citi, Chase, and Discover. Instead, the risk lies in firms like Goldman Sachs, which bet against the reliability of metrics such as the FICO Score. 

The risk also lies with those needing to prepare for the credit storm. Finally, and most importantly, small issuers will face issues managing the ebbs and flows of the credit card business. In the case of smaller credit card issuers, the upcoming Credit Card Data Book will illustrate how those not in the top 100 class of lenders charge off at three times the rate of leading banks. From where I sit, it is a classic case to consider a credit card white-label program, such as the program U.S. Bank offers smaller issues through their Elavon business.  More volume, less risk-with big-bank controls and features.

Here we are in January. We expect things to start deteriorating in June-July. If you are prepared, expect a Cat-3 storm. If not, you’d better hang on to your hat and batten down the hatches.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.

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Banks are facing more competition than ever as fintechs continue to leverage the power of data, networks, and innovation to create and offer their customers the products and services they need.

Many banks are struggling because they’re still using legacy systems that were built decades ago, and this issue isn’t limited to banks. Automated clearing house (ACH), real-time gross settlement (RTGS), and Society for Worldwide Interbank Financial Telecommunications (SWIFT) systems, as well as card networks, operate within an antiquated system that’s no longer suitable for this 24/7 digital climate.

Equally difficult is that each one of these systems operates within its own specifications and is not equipped to communicate with each other. Every one of these systems functions within its own regulatory framework, processing, and settlement rules, as well as messaging standards, resulting in a deeply fragmented landscape where the customer is more likely to experience a poor payments journey.

Luckily, the innovative payments landscape is experiencing a significant shift. It’s moving from transaction-based, closed, and proprietary models toward open architecture frameworks that can facilitate context-based transactions. It’s this transition that is bringing about a more omnichannel experience for customers.

It has been discovered that digital platforms should be erected based on “customer-focused value propositions” and user experience, which would enable networks to not only scale but to grow the number of members who join their community.

Networks Must Be Resilient and Ready for Increased Transaction Volumes

With the oncoming transaction volumes, banks, fintechs, and other players within the payments space must provide network connections that are robust. Therefore, it’s important that the networks that are built within the digital ecosystem are secure and reliable. The networks must also be equipped with an effective fraud system that offers real-time data analysis to prevent fraudulent transactions.

With the growth of the digital ecosystem, public internet connections will no longer be appropriate for high-value and large-volume transactions, including sensitive data.

In order to thrive in this highly competitive space, banks, fintechs, network operators, and retailers must be able to connect with their network from anywhere in the world without needing public internet access. Once their solutions are successful, organizations should consider migrating their apps from public internet structures and into private network connections.

Data Are Valuable but Not Forever

Innovative technology such as artificial intelligence (AI) and machine learning has enabled countless organizations to amass considerable data. These data are a gold mine where valuable insights into customer behavior can be extracted, paving the way for new products and enhancing the customer experience.

However, regardless of the tremendous value that consumer data hold, they do have a shelf life. Businesses can waste vast data if the data are not stored, handled, or used within a certain time. Before any of this can happen, however, the customer must agree to have their data used. In order to encourage customers to grant access to their data, businesses must offer exceptional value and convenience.

Where Banks Stand

Banks are currently missing out on the vast array of data that are both interaction- and transaction-based. Herein lies the critical information needed to both develop and launch digital solutions to meet bank customers’ needs.

To remain competitive and agile, banks must redirect their focus to offering nonbanking, third-party services. Because banks tend to be trusted institutions, the transition should be smoother. As an example, Starling Bank, a bank in Germany, offers services outside its core offerings, such as pensions, wealth management, and credit scores, all included within its app.

More than ever, customers are spending considerable time on their mobile device for their personal needs. It’s important that banks meet their customers where they are and on the platforms customers most interact with. Whatever data are mined from banks’ AI and machine learning systems, banks should use to predict how their customers will act in the future.

As with any organization operating within the digital space, banks must both ensure their customer data are secure and have all the necessary protection to prevent fraud.

What’s Ahead

The days where physical banks are important hubs within a community are long gone. Consumers now want an all-in-one solution where all their personal business can be handled in one, secure, and seamless platform. Staying adaptable and having interconnectivity within critical networks will help banks stay relevant and competitive in the coming years.

The post Interconnectivity, Data Sharing, and Security Are Vital for Banks to Thrive appeared first on PaymentsJournal.

Within the banking industry, it’s important to secure hardware as soon as you need it. This will ensure your operations continue to run at peak performance and to meet compliance requirements. Unfortunately, the procurement process has become slow and cumbersome for many financial institutions. This is due to supply chain snags, disparate systems and lack of resources to manage this necessary function.

Automating the procurement process can help banks save time and resources. Ordering all hardware through a single vendor can further simplify the acquiring process.

In a recent podcast, PaymentsJournal sat with Alex Kennedy, Director of Hardware Advantage at Fiserv, to better understand the importance of automating the procurement process.

Procuring Hardware for Retail Branches

Financial institutions require a lot of business hardware and supplies — PCs, check scanners, printers and ink cartridges — to ensure their business is functioning. Increased maintenance costs, decreased security, non-compliance and compatibility issues are just a few reasons to regularly update or upgrade hardware.

“Today the rising demand for hardware is due to changes in regulations, cybersecurity, as well as mergers and acquisitions,” said Kennedy. “In addition, the impact of the pandemic has given rise to supply chain delays from equipment manufacturers.”

Despite automation availability, many banks still procure their equipment through manual systems. According to a recent survey by Oxford Economics, 47% of banking executives reported that most, if not all, of their procurement processes are manual. Kennedy explained that this can be a problem for banks. Not all equipment is compatible. Working with different vendors can result in varied delivery schedules, especially when supply chains are already strained.

Benefits to Automating Hardware Procurement

Working with a single vendor such as Hardware Advantage from Fiserv streamlines and simplifies the procurement process dramatically. This will require fewer workers at the banks. Dealing with just one vendor also means that the equipment procurement process goes quickly. And new institutions can be up and running quickly as well.

“Banks can increase efficiency and agility and reduce expense and risk to their institution while improving transparency,” Kennedy said. “It can also free up employees involved in procurement for other tasks, allowing a bank to do more with less.”

Simplifying Hardware Procurement During Unsure Economic Times

During the pandemic, sourcing hardware became more difficult for businesses, and financial institutions were no exception. But, for companies that partnered with a single large vendor like Fiserv, simplifying hardware procurement lessened the challenges.

“During the pandemic, a large client of ours needed 700 laptops to accommodate its large workforce that was forced to go remote. Normally, an initiative like this takes months of planning, but we did it in under a week,” said Kennedy. “The alternative to using Hardware Advantage was buying out all the inventory of smaller regional resellers and trying to piece together a solution — which even if it was able to be done would have caused an administrative nightmare with multiple vendors shipping multiple products. In the end, we were able to work with the client and minimize the challenge of getting the equipment they needed in a timely fashion.”

Supply chains have improved somewhat, though they’re not back to pre-pandemic levels. One commodity that is still lagging in supply is computer chips. “The ongoing computer chip shortage is making equipment that is critical to day-to-day operations difficult to get in a timely manner,” said Kennedy. “Having a partner you can trust to help you maneuver through these delays and backlogs, and help you plan ahead to ensure your deadlines are met, can help alleviate potential impacts to your business.”

Conclusion

Supply chain disruptions, inflation and the pandemic have increased pressures to reduce costs and to overcome obstacles in procuring hardware. Letting a single vendor take care of all of this is a good solution. It frees up bank staff for other purposes and also removes a lot of distress for senior management. Financial institutions should consider going that route for peace of mind and cost savings as well.

The post Expediting the Hardware Procurement Process at Financial Institutions appeared first on PaymentsJournal.

For most financial institutions, modernization and digital transformation are top priorities, yet many still struggle in these efforts. Many are unsure where to start and also wary of the potential risks with modernizing legacy systems. Therefore, a large number of banks and credit unions are still in the beginning or exploratory phase of digital transformation.

Yet these projects are more important than ever. Financial institutions face more competition than ever. This is not only from other financial institutions. But they face competition from fintechs and digital-only neobanks, too. This also includes consumer expectations derived from nonfinancial firms such as Amazon and Uber.

Digital transformation and modernization may seem a monumental task, but by using open architecture and taking advantage of partnerships, financial institutions can make great strides. To learn more, PaymentsJournal sat with Lance Homer, Global Head of Digital Payments and Banking Ecosystems for digital infrastructure company Equinix, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service for Mercator Advisory Group.

What Makes a Better Bank?

Ultimately, modernization projects are embarked upon to create a better bank. There are several aspects of what constitutes a “better bank,” noted Homer.

“It’s about being greener, connected, smarter, modular, distributed, and automated,” he said. “These are the things driving digital transformation across the landscape.”

All of the above are byproducts of moving out of legacy data centers and into the cloud. That includes using open application programming interfaces (APIs), breaking up the legacy tech stack, and moving toward a platform model. As one example, Homer noted that moving to the cloud and operating fewer data centers mean banks can reduce their carbon footprint and reach ESG goals quicker.

Furthermore, by adopting a platform model using open APIs to connect with best-of-breed partners, banks can offer more innovative products and services to their customers and bring them to market quickly.

“It’s difficult for banks to differentiate on the thing they used to, like interest rates,” said Homer. “It’s about operating smarter and creating a better end-user experience.”

Grotta added that modernization is a “hot topic” in banking at the moment and that “I get at least two calls per week from financial institutions thinking about embarking on some level of modernization.”

Digital Adoption

She observed that in the past few years — especially spurred on by the pace of digital adoption during the COVID-19 pandemic — many bank and credit union executives are more sensitive to how their institution is lagging when it comes to digital capabilities.

“A lot of them are not happy in the way their institution has reacted when new digital products are launched into the marketplace, and they have a tough time delivering the digital customer experience they want to be known for,” Grotta said. “They need to keep up not only with the competitor down the street, but deliver on experiences that consumers and business are finding in other places as well.”

Homer said it is hard for many institutions to know where to start when it comes to modernization projects, but the ideal place to begin is replacing the “plumbing.”

“For banks, this means positioning to move to the cloud,” he said. “Figure out which applications can move to the cloud and which can’t. Determine where your cloud on-ramps sit and where your partners connect. Then it’s easy to move workloads one at a time.”

Financial institutions should also work to separate their technology stack into its component parts; this can be difficult due to having to work through years of “spaghetti code,” but being modular will enable institutions to be more agile, Homer said.

Banking-as-a-Service

These modernization efforts ultimately help institutions work toward a “banking-as-a-service” (BaaS) model and embrace embedded finance, Homer added.

“We are seeing this as-a-service model being adopted everywhere, across industries,” he said. BaaS “is about rethinking the digital supply chain and rethinking how a bank builds its infrastructure.”

BaaS enables a quicker time to market and the ability to identify new revenue opportunities and to distribute services at the edge. The latter point is critical especially in helping banks move into new geographies by enabling them to manage and store data in the different geographies they operate in.

A platform model is also helpful in facilitating real-time payments, which consumers and businesses are increasingly asking for.

“In the old-batch processing model, you just need to get the file sent by the cutoff time,” said Homer. “But with real-time payments, you need always-on connectivity.”

Finding a Trusted Partner

When it comes to modernization, financial institutions can’t do everything at once so finding a partner to help guide the process is critical. For example, Equinix does not operate its own public cloud, so it can be an effective neutral party in helping banks and credit unions evaluate the different cloud providers, said Homer, as well as to advise how banks and credit unions should build their new tech infrastructure.

“You need to consider the relative strengths of the various cloud providers,” he added. “Also, where do you put non-cloud apps? Not everything can go on the cloud. Some banks can have up to 3,000 apps that are not cloud-ready. They still need to talk to each other. So how do you build an infrastructure so those cloud and non-cloud apps still talk to each other as they did when they were sitting side by side on computers in your data center?”

Grotta noted that banks that are not thinking about these issues need to start doing so now or risk falling behind the curve.

“Open banking is here whether we have mandates about it or not,” she said. “If you don’t have a plan for it now, you are putting your business at risk.”

The post How Banks Can Achieve Modernization Through Partnerships appeared first on PaymentsJournal.

This is the second article in a series of four articles. These articles discuss the impact of the growing shift towards digitalization on US card issuers. In the previous article, we covered Digital-First experiences – what they are and why they are important. Card issuers must seamlessly embed card experiences into customers’ digital lives.

Legacy distribution: Let the customer come to you

Till recently, physical touchpoints were the primary medium of interaction between a customer and their bank. From opening accounts, to withdrawing cash, or to making payments, customers relied almost exclusively on branches, ATMs, or call centers to access banking services.

As a result, scaling organically limited an issuer’s ability to grow. It also limited the ability to build a meaningful footprint across those channels. Every new distribution channel (e.g., branch, ATM, or call center) required an upfront investment. This inhibits the ability to maximize economies of scale on existing infrastructure.

Platforms did not ‘embed’ banking into customers’ lives outside the financial ecosystem. For example, to finance a new purchase, customers had to reach out to their financial provider to arrange a loan. Then they worked separately with the merchant to receive the product. As a result, the financial industry largely operated in its own silo. The customer experience at the merchant and with the bank was disjointed. And interactions were fragmented & time-consuming.

This trend was consistent for cards – issuers were limited by their scale, leading to slow Go-To-Market and long innovation cycles. And, growth was always limited to issuers’ ability to expand and scale distribution networks independently.

Next-gen distribution: Take your product where your customer is

Today, customers want greater integration across industry platforms to help them manage their digital engagement, shopping experience, and financial lives. For banks, how and where they engage with customers is as important as what they offer. According to EY^[1], 3 in 5 US customers choose a better integration of financial services as a key consideration while deciding on their primary bank.

Customer interactions have been truly revolutionized in the digital age and moved away beyond banks’ physical-only channels. At the same time, forward-thinking issuers have expanded the scope of their distribution beyond just their own channels. They are partnering with non-banking players, such as telcos, retailers, and big tech, to complement and expand their distribution networks.

The trend is even more pronounced in payments – customers expect to be completely frictionless and invisible.

To achieve this truly – banks must expand the scope of their payment channels to integrate non-bank players. This creates a cohesive network of relationships that transcend traditional channel boundaries. This will unlock tremendous value. Customers will get the seamless payments they need. While issuers will have a clear path to the top-of-the-wallet and increased usage. Thereby generating higher spends and income as well as reducing acquisition costs significantly.

How card issuers can become embeddable-banking ready

To become truly embeddable-banking ready, issuers need to address the following areas.

A.   A Technology Stack Built with Partners as First-Class Citizens

The technology available to issuers to launch card programs today was built decades ago. It was built with a fundamental premise that products will be created by issuers and distributed via traditional channels. The concept of an external & synergistic external partner entity being part of an issuer’s ecosystem to drive distribution did not meaningfully exist. Therefore, embeddability, even if offered, is merely an afterthought in such legacy systems.

As issuers look to expand their reach through partnerships and make inroads into embeddable banking, they need to consider technology which natively model external partners as integral components in the issuer ecosystem. The platform must also natively provide APIs, control panels, workflows, & other rich capabilities for these partners to achieve true success.

B.   Frameworks to Manage & Mitigate Risk

One key issue that limits issuers’ ability to participate in the embedded banking revolution is the lack of adequate controls for risk and compliance – after all, the buck stops with the issuer. An issuer is responsible for all products originating on their platform, irrespective of the distribution channel used. Therefore, clarity on roles, responsibilities, and control between the issuer and the distribution partner is critical.

Issuers need to consider how technology can help them build controls and empower them to define what a partner can and cannot do. For example, issuers need to ensure that limitations can be placed on which fields a partner can change in a credit card application schema or which elements of a product configuration the partner can or cannot modify.

C.   Drive Innovative Product Usage through their Partners

To support true embeddability in the context of what a customer needs in 2022 (anywhere, anytime, real-time, omnichannel, etc.), an issuer’s technology stack must enable real-world use cases that allow granular definition of where/how/when their product can be embedded.

A state-of-the-art solution would allow different partner specific configurations in the context of an individual product line, for a customer, for one or more payment instruments (i.e., a specific card), or even each transaction. For example, a customer’s credit card account may have an add-on travel card issued with American Airlines and a BNPL originated at Amazon during a payment flow of a purchase.

Legacy technology is not built to support complex use cases as it often presumes a customer, account, and instrument as one. But, if issuers are to make payments truly embedded, they should consider upgrading to technology that supports programmable and configurable constructs to allow them and their embedded banking partners to innovate on product constructs in response to consumer needs.

Conclusion

With customers demanding faster, differentiated, and cost-effective products that offer seamless interactions, the trend toward ecosystem-based distribution will accelerate in the card industry. Partnerships with next-gen card processing platforms, like Zeta, will help issuers meet customer expectations on embeddability.

Zeta natively supports onboarding digital distribution partners such as co-brands and fintechs through a multi-level multi-tenant construct called Virtual Bank Operators (VBOs) – enabling issuers to participate in the Embeddable Banking revolution.

With Zeta’s unique VBO model, issuers can delegate certain aspects of product management, such as customer onboarding, customer management, and customer support, to 100s of partners while maintaining control over key aspects of the program, including product configurations, application schemas, and product limits. In addition, to allow VBOs to manage their programs seamlessly, Zeta enables them to self-serve through access to their very own control panels & API catalogs.

In the next part of this series, we will look at the need for hyper-personalized experiences and how issuers can leverage technology to build deeply personalized customer offerings.

^[1] https://www.ey.com/en_gl/banking-capital-markets/how-can-banks-transform-for-a-new-generation-of-customers

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Capital One has built a strong reputation in the payments industry since its founding in 1994 as a monoline bank focused solely on credit cards. Initially a spinoff from Signet Financial (now part of Wells Fargo), the company diversified into auto loans by 1996 and later expanded into retail banking in 2005. Along the way, Capital One moved into private-label credit cards and gained a stake in ClearXchange, a peer-to-peer payment platform later sold to Early Warning, the bank consortium behind Zelle.

Capital One’s Focus on Technology

Technology has always been a core strength at Capital One, driven by its founder and CEO, Richard Fairbank, a recognized leader in the application of technology to the payments space. Fairbank’s strategic vision and use of technology have cemented Capital One’s status as a market leader. If there were a “Credit Card Hall of Fame,” his name would certainly be included.

Capital One’s Diverse Credit Card Portfolio

Today, Capital One offers over 30 different credit card products, catering to a wide range of consumer needs. These range from the Capital One Platinum Mastercard, designed for those with lower credit scores, to the Capital One Venture Rewards Card, which targets individuals with high credit scores and offers a 75,000-reward point bonus.

The company’s success in the credit card space is largely due to its use of advanced proprietary technology in areas such as pricing, risk management, and collections. By leveraging data and analytics, Capital One can tailor offers to specific customer segments and price products according to their associated risk. This strategy allows the company to balance its asset mix across both card and non-card products, addressing both high-risk and low-risk customers effectively.

As the economy faces challenges like inflation and rising interest rates, Capital One remains well-positioned. Recent quarterly reports show a slight reduction in marketing expenses, likely in response to economic conditions, while an 11% increase in operating expenses indicates a focus on credit risk provisions and collections capacity.

Capital One’s Expansion into the Technology Vendor Space

Capital One’s latest strategic move is its foray into the technology vendor space, offering data management and cloud computing solutions to other companies. This shift is the culmination of years of innovation and internal transformation. As VentureBeat reports, Capital One launched Capital One Software to sell the data management products it developed for its own use to other organizations navigating the shift to cloud computing.

According to Ravi Raghu, head of the new business and a long-time leader at Capital One, this transformation has been part of the company’s DNA since its inception. Data has always been at the heart of Capital One’s information-based strategy, and as the company scaled its use of data and cloud technology, it recognized the opportunity to offer these solutions to other businesses.

In 2016, Capital One made the bold decision to go “all in” on the public cloud, completing this transition by 2020. This move positioned the company as not just a top bank but also a cutting-edge technology company. By combining the strengths of a traditional bank, such as risk management, with the innovation of a tech company, Capital One has set itself apart in both industries.

Looking Ahead: Payments and Technology

As Capital One continues to evolve, its expansion into the technology vendor space places it in a prime position to support companies moving to the cloud. With economic uncertainty and a potential credit storm on the horizon, this diversification beyond credit cards reflects the company’s forward-thinking approach and will help keep Capital One at the forefront of the payments and technology industries.ve a solution that will help those moving or currently in the cloud. The upcoming credit storm is anticipated in 2023. This move is as intelligent as the firm’s plan to diversify beyond credit cards. It will keep Capital One at the forefront.

The post Capital One: (Much) More Than a Credit Card Company appeared first on PaymentsJournal.

Wildfire Systems Inc. released a survey that provides insights around consumers’ expectations for their banking reward programs amid rising inflation. Over 1,000 adults participated in the survey, and here are the key takeaways:

Cash(back) is king!

Consumers place a high value on cashback reward programs.

• 78% of respondents prefer cashback over other card reward types, such as points or travel rewards.

The Rising Cost of Goods

The rising costs of goods has left consumers pulling off desperate attempts to pinch pennies.

• 90% of consumers are more interested in receiving discounts, utilizing coupons, and earning cashback rewards due to rising prices.
• This phenomenon does not discriminate by income, either. 82% of those with a household income of $100,000 or more say they seek money-saving tactics when shopping and place a high value on their rewards programs.

Convenience Needed

There is an overwhelming need for convenience with card reward programs.

• 79% of consumers prefer their rewards to be automatically applied to their purchases.

Customer Loyalty

Consumer loyalty is on treacherous water due to inflation.

• 24% of respondents would switch or already have switched their banks because another bank offered a cashback rewards program or had a better version of a rewards program than their current bank.

Jordan Hirschfield, Director of Prepaid at Mercator Advisory Group, recently examined how loyal consumers can be swayed by rewards programs in his deep dive on the Dunkin’ Rewards Program. Both merchants and banks alike need to be mindful of consumer needs during a time of inflation.

Banks have first-handedly witnessed the rising costs of goods as they see their consumers rack up debt. CNBC highlights how inflation has caused the price of goods to increase as much as 100%. This indicates that consumers are not buying more things to rack up this debt; they are simply spending more money on the same things they typically purchase. Banks are making a killing off this, as a part of their revenue comes from interchange fees. Interchange fees are paid to banks by merchants who accept debit and credit cards. A main lever to interchange is total purchase price, and when that goes up, interchange revenue goes up (for unregulated debit and all credit transactions).

To help during these hard times, banks should enrich their cashback programs, given the evident demand. The threat of a quarter of customers switching banks for a better program hopefully will motivate banks to act on these findings.

Overview by Sophia Gonzalez, Research Analyst, Debit Advisory Service at Mercator Advisory Group.

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There’s a moment in Charlie Puth’s music video, “Left and Right” where he pays for his therapy session. He uses his Chime debit card. It’s the kind of product plug that product managers dream of. It took just two months for the video to rack up well over 200 million views. The exposure shows no sign of slowing down any time soon. What does this have to do with BaaS?

Geared towards Gen Z who prefer mobile banking, Chime is enjoying tremendous success. Last year the company generated more than $950 million in revenue from its 12 million subscribers. 8 million for whom Chime serves their primary bank.

Only Chime isn’t actually a bank. It’s a fintech company that offers banking services to its customers via the banking-as-a-service (BaaS) model. Bancorp provides debit services to Chime customers behind the scenes. For bancorp, BaaS is the gateway to servicing millennials and Gen Z consumers. These consumers, according to Tearsheet, “will be the dominant banking consumers in the next decades, redefining digital engagement as well as financing and payments.” There are at least 172 BaaS companies as of this writing, and many more are sure to come.

What Is BaaS Exactly?

It’s a model in which chartered banks provision services—checking, savings, loans, investment—via APIs to third-party companies. Banking has always been modular. This means chartered banks have discrete capabilities (think of them as building blocks) that third-party companies can leverage to offer products and services to communities they view as underserved in one way or another. For Chime, it’s younger consumers who bristle at overdraft fees. For Ababil, it’s companies that want to offer products that adhere to the financial values of Islamic culture. Others may want to create services geared towards, say, the Asian American community, or investments for veterans.

Fintech companies are just one type of BaaS client, the other are large corporations that have strong relationships with consumers. For instance, Apple’s BaaS relationship with Goldman Sachs to offer credit cards to its customers. One can see big retailers like Walmart or Costco following suit.

BaaS is a win-win for everyone involved as the BaaS client takes on the responsibility of building a brand and marketing to customers, while the chartered bank does what it does best: manage a customer’s money.

Trust through Improved Processes

Any banker reading this article knows that servicing a customer’s banking needs is far more complex than managing money. They need to build trust in their organization, along with self-service models and transparency into operations. Let’s break this down.

BaaS clients rightly expect their chartered bank partners to detail every aspect of every process so that they, in turn, can tell their clients what to expect when they bank with them. If a consumer deposits a check with the BaaS company, when will it clear? Will a certain amount of money be available right away?

Keep in mind that the BaaS company will design an offering around the chartered bank’s processes, which means those processes must be laid out in full detail early on in the relationship. If the BaaS company promises that up to $100 will be made available to a checking customer upon deposit, the chartered bank must be able to honor that promise. If it can’t, that bank will lose the trust of both its BaaS client and the end consumer.

Self-service processes are equally critical to trust. When customers fund a checking or investment account, they need complete assurance that their money will be available to them to use it whenever they need it. That begins with a range of self-service models—checking a balance, transferring money, canceling a transaction, ordering checks or replacement ATM cards—that are absolutely bulletproof. Can the bank transfer bank activities to its BaaS clients in real time so that balances and debits are accurately reflected? How exactly does that update work?

Transparency in BaaS

Transparency also comes into play. If the BaaS company wants to offer mortgage or small business loans to its clients, it will need transparency into the chartered bank’s processes so that it can be transparent with its customers in turn. For instance, what are the loan processes? What weight does a FICO score have in the decisioning?

Customer Experience Matters

And then there’s customer service to consider. To the BaaS client, the end customer’s experience matters greatly, and any bank should expect them to do their due diligence prior to entering an agreement. Expect ghost callers to phone the bank’s customer care center to assess quality and response time. Afterall, the BaaS client will be on the hook for incoming customer care calls, and they want assurance upfront that problems will be resolved quickly.

Customer care is always complicated when a middleman is involved. Therefore, it’s critical to plan out every possible event that can occur, and ensure a rock-solid process is in place to address it. For instance, let’s say a Costco checking account customer bounces a check and the recipient of that check calls Costco. How does Costco handle that call? Or what happens if someone who shouldn’t open a banking account opens one anyway? How does Costco provide that information to your bank? You’ll also need workflows to address routine customer service issues, such as a Costco client who insists that an overdraft fee should be waived.

Customer care processes can get complicated pretty quickly. Let’s say that the checking account customer begins the request to waive the fee via a live chat. Who’s on the other end of that chat? Who decides if that request should be granted? What if that customer is unhappy with the decision and wants to escalate it and calls a customer care center later on? What technology should the agent on the service side use? Does it have a copy of the earlier chat transcript? And what data should the summary of the call include?

Success in the BaaS market requires that the bank specifies what happens at each step for all parties involved, including the technology that’s used in the end-to-end processes. As you can see, banks have quite a bit of homework to do in order to ensure that Charlie Puth can pay for his therapy sessions without any hitches, but it’s well worth the investment, as it will serve as your differentiator among BaaS customers.

The post The BaaS Market Has Huge Potential, but Experience Matters appeared first on PaymentsJournal.

Malware encrypts a victim’s files through ransomware. Unless you pay a ransom, the files are inaccessible. Ransomware typically spreads through phishing emails or by exploitation of vulnerabilities in software. The ransomware will scan for and encrypt important files on infected systems. This includes files such as documents, photos, and spreadsheets. The system will demand a ransom from the victim, typically demanding payment in Bitcoin.

Financial institutions in the U.S. reported more than $1 billion in possible ransomware payments last year. The Treasury Department shared this data exclusively with CNN.

The article details the ongoing security issues that the Biden administration has tried to rein in since a ransomware attack took place in May 2021, where a U.S. pipeline operator was rendered inoperable for days.

Although banks are getting better at reporting and tracking ransomware payments, ransomware attacks are continuing to grow. “Ransomware—including attacks perpetrated by Russian-linked actors—remain a serious threat to our national and economic security,” FinCEN Acting Director Himamauli Das told CNN.

Adding to the problem is the lack of regulations for companies to report ransomware attacks to the government. As a result, there’s not enough data out there that provides a clear picture of the severity of the problem.

A new law may require certain companies to report all ransomware attacks as well as payments to the Department of Homeland Security.

The post U.S. Banks Continue to Fight Against Ransomware Payments appeared first on PaymentsJournal.

Consumers want more autonomy when it comes to payments. According to a survey conducted by Entrust, consumers want a “digital-first, not digital only approach.” They want a frictionless payments experience.

That was certainly evident in the survey’s key findings. For example, more than 50% of U.S. retail shoppers said they prefer to access their bank information through a mobile app versus going to an actual branch. What’s more, nearly half of respondents said they would rather open a new account via a mobile device. To put that in perspective, 26% of respondents said they prefer to open a bank account online, while nearly as many respondents said they prefer to do that in a physical branch.

In this highly competitive market, if financial institutions want to remain top-of-mind, they must be take a digital-first approach. However, it’s not all or nothing. Customers want the benefits of both digital and physical payment capabilities, depending on the use case.

Overall, more consumers are using their mobile device to make purchases and even send money to friends and family. This trend is expected to continue as the expectation for faster, frictionless payments becomes the norm.

Andy Cease, Product Marketing Director of Payments at Entrust notes, “It’s clear that consumers are looking for intuitive payment options that get them what they need when and how they want it. Independently, each payment option has its own merits, but when delivered as a suite of offerings wrapped up in one secure and seamlessly integrated experience, they become a powerful acquisition tool and brand affinity builder.”

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Monett, Mo., October 20, 2022 – Jack Henry (Nasdaq: JKHY) announced an expansion of its existing relationship with Mastercard^® that will enable credit unions and banks to provide their accountholders the ability to securely see all of their financial accounts – within and outside their primary financial institution – in one place. Together, the companies establish a partnership that makes secure, API-based data-gathering affordable for community and regional financial institutions.

Jack Henry will provide this consolidated view of data through Mastercard’s open banking platform with certain services delivered through Finicity, a Mastercard subsidiary. This will help enable consumers and businesses to make more informed financial decisions and place community and regional financial institutions at the center of their accountholders’ financial lives.

It’s not uncommon for a Gen Z or millennial couple to do business with 30 to 40 financial providers. This complexity makes it difficult to track finances easily and accurately. Through this collaboration, financial institutions can offer their accountholders secure access to external providers and financial data — consolidating, categorizing and enriching that data in a simplified digital experience. As part of Jack Henry’s commitment to reducing the barriers to financial health, these services will be available to more than 700 financial institutions on Jack Henry’s digital banking platform.

Jess Turner, executive vice president of Global Open Banking and API at Mastercard, said, “Consumers and small businesses need financial experiences that meet their unique needs. Together with Jack Henry, we can drive innovation and financial inclusion at scale, enabling community and regional financial institutions to maintain their competitive advantage of service and trust. This is a big step toward reducing financial fragmentation by providing people with a real-time picture of their financial health through their bank or credit union.”

Financial fragmentation continues to complicate accountholders’ financial lives. According to the Financial Health Network’s (FHN) latest Pulse report, consumer financial health declined in 2022, the first time in the report’s five-year history. FHN estimates that 176 million Americans, or 70% of the population, are not financially healthy and 80% of consumers want their financial institutions to help them improve their financial health. This is a major opportunity for financial institutions to empower accountholders with a complete view of their financial lives.

Mark Schwanhausser, director of digital banking at Javelin Strategy & Research, added, “Financial fragmentation is more than a trend – it’s a steady, unstoppable, tectonic shift. It poses a threat to every financial institution and fintech provider that aspires to win the biggest ‘share of wallet.’ In this era of financial fragmentation, they must also win ‘share of mind’ – but that is unlikely unless they enable customers to monitor and manage the big financial picture.”

In a recent presentation, Ben Metz, chief digital & technology officer at Jack Henry, commented, “By working with industry leaders like Mastercard, we’re helping community and regional financial institutions become the hubs of the fintech ecosystem, and we are providing accountholders with safer, comprehensive access to their data and finances. This partnership will also simplify account opening, streamline account funding, and significantly advance our lending capabilities. Overall, it’s a pivotal improvement in banks’ and credit unions’ digital front door experience.”

About Jack Henry & Associates, Inc.

Jack Henry^Ô (Nasdaq: JKHY) is a well-rounded financial technology company that strengthens connections between financial institutions and the people and businesses they serve. We are an S&P 500 company that prioritizes openness, collaboration, and user centricity – offering banks and credit unions a vibrant ecosystem of internally developed modern capabilities as well as the ability to integrate with leading fintechs. For more than 45 years, Jack Henry has provided technology solutions to enable clients to innovate faster, strategically differentiate, and successfully compete while serving the evolving needs of their accountholders. We empower approximately 8,000 clients with people-inspired innovation, personal service, and insight-driven solutions that help reduce the barriers to financial health. Additional information is available at www.jackhenry.com.

Statements made in this news release that are not historical facts are “forward-looking statements.” Because forward-looking statements relate to the future, they are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those discussed in the Company’s Securities and Exchange Commission filings, including the Company’s most recent reports on Form 10-K and Form 10-Q, particularly under the heading “Risk Factors.” Any forward-looking statement made in this news release speaks only as of the date of the news release, and the Company expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether because of new information, future events or otherwise.

The post Jack Henry and Mastercard Expand Collaboration to Address Financial Fragmentation appeared first on PaymentsJournal.

PROVIDENCE, R.I.–(BUSINESS WIRE)–Citizens today launched its Carbon Offset Deposit Account solution to provide corporate clients with another tool as they transition to a lower carbon economy. The account provides clients a simple way to acquire carbon offsets using credit earned on their deposits and to integrate sustainability into their strategies and products. It joins Green Deposits as part of Citizens’ portfolio of solutions to help clients achieve environmental, social and governance (ESG) goals.

Reducing greenhouse gas (GHG) emissions is an important tool in combating climate change. Quality carbon offsets allow companies to compensate for emissions that can’t yet be reduced and to make an immediate positive environmental impact while they work on their longer-term emissions reduction strategy. All offsets under Citizens’ Carbon Offset Deposit program are produced from high-quality projects registered with one of the four leading offset registries ensuring offsets are real, additional, permanent and third party verified.

For clients who have not measured their emissions, complimentary carbon emissions estimates will be available upon request to help clients understand the scale of their carbon impacts, identify reduction opportunities and to right-size offsetting options. Citizens works with the client to help identify emissions data sources and to facilitate measurement with their vendors.

“Citizens is committed to helping create a more sustainable and inclusive future, which includes meaningful action on climate change,” said Michael Cummins, executive vice president and head of treasury solutions at Citizens. “This commitment is an important extension of our company’s Credo, which has helped us serve our customers, colleagues, shareholders, and communities with integrity throughout our history. Across the bank, we are hard at work reducing our operational impact on the environment, navigating climate risk and delivering innovative solutions such as Carbon Offset Deposit Accounts, to support our clients as they transition toward a greener future.”

To learn more about Citizens’ sustainability efforts, please read the recently released 2021 Corporate Responsibility Report, Creating a Brighter Tomorrow, which highlights enterprise-wide initiatives that advance the bank’s commitment to responsible citizenship. Later this year, Citizens will issue its inaugural climate report, aligned with the recommendations from the Task Force on Climate-Related Financial Disclosures.

To learn more about Citizens’ Carbon Offset Deposit Accounts, visit here.

About Citizens Financial Group, Inc.
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $226.7 billion in assets as of June 30, 2022. Headquartered in Providence, Rhode Island, Citizens offers a broad range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions. Citizens helps its customers reach their potential by listening to them and by understanding their needs in order to offer tailored advice, ideas and solutions. In Consumer Banking, Citizens provides an integrated experience that includes mobile and online banking, a full-service customer contact center and the convenience of approximately 3,300 ATMs and more than 1,200 branches in 14 states and the District of Columbia. Consumer Banking products and services include a full range of banking, lending, savings, wealth management and small business offerings. In Commercial Banking, Citizens offers a broad complement of financial products and solutions, including lending and leasing, deposit and treasury management services, foreign exchange, interest rate and commodity risk management solutions, as well as loan syndication, corporate finance, merger and acquisition, and debt and equity capital markets capabilities. More information is available at www.citizensbank.com or visit us on Twitter, LinkedIn or Facebook.

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• Vert offers full-service payment acceptance solutions for merchants via mobile devices, apps and at the checkout

• Vert continues to invest to meet the emerging needs of today’s merchants

Deutsche Bank and Fiserv, a global leader in payments and financial services technology, have launched Vert, a comprehensive payment acceptance and banking services provider to small and medium-sized enterprises (SMEs). Vert is the only German provider to combine payment acceptance and processing and traditional banking solutions, meeting market demand for an integrated offering and streamlining access to innovative products for merchants of all sizes. Vert also provides next-banking-day pay-outs, providing merchants with faster access to their funds.

Merchants are seeking user-friendly, integrated solutions that enable them to accept payments and move and manage money. Vert clients benefit from an offering that includes faster payments, modern technology, acceptance of common payment types and an online dashboard providing transaction data and other business reports.

“By combining the strength of Deutsche Bank, Germany’s largest bank, with Fiserv, the world’s largest merchant acquirer, we can provide our Vert members with a secure, fast and technologically advanced payment acceptance solution,” said Thorsten Woelfel, Managing Director Sales & Product at Vert.

“Our mission is to help our members grow and get the best out of their business,” added Gert Vido, Managing Director Shared Services at Vert.

Initially, Vert offers three solutions, suitable for a wide range of businesses, from mobile food trucks and brick-and-mortar restaurants to retailers and medical offices.

Issued by the media relations department of Deutsche Bank AG Taunusanlage 12, 60325 Frankfurt am Main

Phone +49 (0) 69 910 43800, Fax +49 (0) 69 910 33422

Internet: db.com/news Email: db.media@db.com

• Clover Flex is a mobile-optimised, full-featured and portable payment device that makes it possible for merchants to accept a broad range of payments and better manage their business. Clover Flex offers a tip function and apps that facilitate business management.
• The Go by Vert app allows a merchant to use their own Android smartphone or tablet as a contactless payment terminal. Merchants can receive contactless payments in seconds – anywhere, anytime. Vert also offers secure PIN entry, the sole such solution in the German market, meaning merchants can accept payments above contactless-only limits.
• The PAX A50 is a portable and robust card reader that enables merchants to accept card payments at the counter and at the table without having to carry around a heavy device.

Vert plans to continuously expand its product range, with solutions for online payment acceptance and for currency conversion coming soon.

“Vert brings together the expertise of two market leaders in cash management and payment acceptance technology. In co-operation with Vert, we can provide accounts, payment solutions and banking services to our SME customers,” said Kilian Thalhammer, Head of Merchant Solutions at Deutsche Bank.

“With a unique combination of payment and banking capabilities, Vert is already helping small and mid-sized enterprises in Germany do business more easily, with less complexity,” said John Gibbons, Head of EMEA at Fiserv. “We look forward to helping thousands of merchants streamline their operations and continue to delight their customers.”

Features of Vert include:

• Payment on the next banking day, meaning faster access to money
• Future-facing Android operating system solutions
• Acceptance of the most common payment methods, meaning merchants can sell more
• A single merchant portal with a complete overview of all transactions, invoices and reports
• Exceptional customer service and telephone advice for business guidance
• Secure payments and data via partnership with Deutsche Bank
• No hidden fees, so no surprises

Deutsche Bank, together with its Postbank and Fyrst brands, has around 800,000 SMEs who will be able to access the new solutions, with some merchants already live. Vert expects rapid growth within its existing customer base. Vert’s services are also available to non-Deutsche Bank customers and the bank expects to attract new business clients in other areas as payment behavior is likely to

continue to develop towards cashless payments in the future. According to a survey by Deutsche Bundesbank in 2017, 74% of respondents preferred to pay with cash. Since then, the proportion has fallen by 14 percentage points to 60% in 2021.

Further information about Vert can be found on the website: www.vert.de

Image files for the logo and products can be found in the attachment to the email.

For further information please contact:

Deutsche Bank AG Heinrich Froemsdorf
T. +49 69 91047689
M. heinrich.froemsdorf@Ashish-Sabadra

Fiserv Markus Juhrs
T. +49 911 945 8134
M. markus.juhrs@fiserv.com

Vert – Deutsche Bank Partner Vaniti A. Paul
T. +49 69 7941 401
M. vaniti.paul@vert.de

About Deutsche Bank
Deutsche Bank provides retail and private banking, corporate and transaction banking, lending, asset and wealth management products and services as well as focused investment banking to private individuals, small and medium-sized companies, corporations, governments and institutional investors. Deutsche Bank is the leading bank in Germany with strong European roots and a global network.

About Fiserv
Fiserv, Inc. (NASDAQ: FISV) aspires to move money and information in a way that moves the world. As a global leader in payments and financial technology, the company helps clients achieve best-in-class results through a commitment to innovation and excellence in areas including account processing and digital banking solutions; card issuer processing and network services; payments; e- commerce; merchant acquiring and processing; and the Clover® cloud- based point-of-sale and business management platform. Fiserv is a member of the S&P

500® Index, the FORTUNE® 500, and has been recognized as one of FORTUNE World’s Most Admired Companies® for 11 of the past 14 years and named among the World’s Most Innovative Companies by Fast Company for two consecutive years. Visit fiserv.com and follow on social media for more information and the latest company news.

About Vert
Vert (“FSDB Merchant Services GmbH”) provides digital payment solutions and innovative financial and banking services for merchants and service providers in the German market. Vert aims to remove complexity, increase merchant productivity and drive innovation – so that Vert’s customers (“Members”) can focus on what’s important: Their actual business.

As a joint venture, Vert combines the expertise and technology of its parent companies Fiserv, a global leader in payment and financial services technology, and Deutsche Bank, the leading bank in Germany. Vert’s regulated payment acquiring solutions will be provided through Fiserv affiliate First Data GmbH.

The post Deutsche Bank and Fiserv launch Vert, Germany’s newest payments company appeared first on PaymentsJournal.

It wasn’t that long ago that the digital capabilities of the largest U.S. retail banks paled in comparison to those of a host of digital-only banking start-ups. Boy, how the tables have turned.

The largest U.S. banks have significantly improved their digital capabilities in recent years, while digitally native neobanks continue to lose money despite providing high-quality digital experiences.

That doesn’t mean banks can get complacent. On the contrary, digital-only banks have discovered a winning formula by establishing their brand as a lender before expanding into banking services. The strategy has enabled them to tap customers for new products and services, slashing the acquisition costs that plague the single-product neobanks.

But regional banks have many competitive advantages, notably established customer relationships, products, and brand equity. Moreover, consumers trust their banks to process their banking transactions and secure sensitive financial data—certainly more so than a start-up or one of the tech giants.

Most banks don’t maximize the value of this trust relationship, though. Instead, they must start by delivering the digital experience that customers have come to expect outside of banking. The largest retail banks and neobanks have closed that gap. Most regional banks? Not as much. That’s too bad because new technology has made advanced features much more straightforward and cost-effective to implement. Your card network, Mastercard or Visa, and card-issuer processor may also be able to provide the capabilities discussed below.

Let’s take a look at the digital features banks should provide to level the playing field with the big guys.

A Data Management Dashboard

Consumers have bank accounts and payment cards connected to many services. As trusted custodians of our money, banks are best-equipped to help their customers track, manage, and secure these relationships.

Chase’s Security Center dashboard, for example, lists where users have stored their cards. That’s a big time-saver when your card has been lost or stolen, and you’re getting a new card and account number. The dashboard also lists the devices, apps, and websites that can access your accounts. The user can deactivate access with a couple of simple clicks.

Banks that launch these capabilities will have laid the groundwork for open banking applications by enabling customers to control which data points are shared with other companies.

Many of the largest banks now also provide a subscription tracking dashboard to keep track of all monthly bills for streaming TV, music, etc.

Credit Card Features of “The Big Boys”… and Then Some

A handful of banks—including Citi, Chase, Bank of America, and Capital One—dominate U.S. credit-card issuance, mainly because of co-branded partnerships with airlines, hotel chains, and many others.

But that doesn’t mean your bank can’t compete for credit card customers and the steady fee revenue that comes with them. The card business tends to operate independently from the rest of the consumer business, and therein lies an opportunity.

Your bank could offer a cash-back rewards card, which functions as a debit card that taps a checking account and a credit card, similar to the OneCard offered by neobank Upgrade. The credit feature could also include a Buy Now, Pay Later (BNPL) option.

Product innovation aside, your card must also offer the digital capabilities now standard for cards provided by the giants. These include:

• Pay with Points: Accrued reward points should be easy to track and use for online purchases with partners like Amazon and PayPal. Your card-issuer processor should be able to set up a rewards and redemption system for you. Card networks Visa and Mastercard also provide APIs that link your rewards program with their partners.

• Lost or Stolen Cards Are No Longer a Worry: If you fear that your card has been lost or stolen, your bank’s mobile app should enable any user to lock and unlock the card while they try to find it. The user should be able to order a new card on their mobile app or website, but the account number, expiration date, and 3-digit CVC code should be available immediately. This feature lets the user replace the old card number with the new one everywhere it’s stored. The user can also use the new credentials to make online purchases. And here’s another way your bank can differentiate itself, offer to make the new card available as soon as possible at a local branch or arrange to have the card sent by overnight mail. Unless you ask for overnight service, it takes 7-10 business days to get your new card from one of the big card issuers.

• Automate Digital Wallet Activation: Make it easy for customers to add their cards and bank accounts to their mobile wallets of choice. If the process is manual, the customer may delay adding or opt to add those from banks that have automated the process. In addition, being “top of wallet” may not be vital as it once was. Customers typically use the card or account that makes sense for that purchase based on available rewards. But, your card must be one of your customer’s digital wallet options.   

• Automated Savings: Automated savings programs do not have to remain the sole domain of fintechs like Chime and Acorns. You should be able to track spending by category and provide real-time alerts with actionable insights. 

• Account Aggregation:A data network like Plaid can enable your bank’s customers to connect their other accounts to a dashboard on your platforms. A customer with multiple accounts typically has more assets than other customers and is more likely to treat your bank as a primary relationship if you have this capability. Moreover, the relationship will likely stick with your bank once these connections are established. Unfortunately, in most cases, account aggregation services do nothing more than track the customer’s total assets. To add value, the bank must continuously apply analytics to the data to deliver actionable insights that add value.

The Time Is Now to Grow Digital Capabilities

Banking applications that provide only basic functionality, such as checking a balance and paying a bill, are no longer enough. Customers want their bank to simplify their financial lives. 

The list above is daunting, especially if your bank doesn’t offer any of this functionality today. But technology has become much more accessible and affordable in recent years, and you may not need to change any of your existing architecture. Software-as-a-service (SaaS) offerings hosted in the cloud and connected to your systems via applicational programming interfaces (APIs) have opened new opportunities for banks and credit unions of all sizes.

The post Five Digital Capabilities Your Bank Must Have appeared first on PaymentsJournal.

A Banking as a Service (BaaS) collaboration between Visa and Finastra is set to enhance cross-border payments for small and medium-sized businesses and individuals. The agreement enables Finastra to create a new functionality on its Payments Hub solutions to allow access to, and utilization of, Visa Direct, which in turn provides push to account payment capabilities across the Visa network. 

Finastra’s bank clients can integrate with Visa Direct through the company’s FusionFabric.cloud open development platform. It appears to be a win-win as Finastra further builds its Hub capabilities and Visa expands its network uses for payouts.

In a related article released by Payments Dive, Visa is increasing its efforts with B2B and remittances, given the large market that these combined uses account for. Although these estimates often vary widely, Visa’s Chief Financial Officer, Vasant Prabhu, indicated that the B2B ‘cardable’ market is $20 trillion opportunity, whereas remittances are currently an $800 billion market. 

We have been tracking the growing B2B strategies of the three major card networks for years so this is nothing new, but it signals the potential growth opportunities, and reinforces the ongoing focus.

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.

The post Visa and Finastra Team Up for BaaS Offering appeared first on PaymentsJournal.

Embedded finance, the seamless integration of financial services adopted by non-financial companies, has been making waves in the payments industry for years. One form of it, BaaS (Banking-as-a-Service), has received particular attention for its innovation in the sector that reaps benefits in banking’s competitive market.

In BaaS, a financial institution partners with a fintech or other non-financial institution brand to offer financial services to the partner’s customer base. Now, banks need to build on this B2B2C model to further leverage customer data from a more human-centric consumer experience (UX). Banks should utilize all the tools available to them, such as artificial intelligence (AI) chatbot, to create data analytics for a deeper understanding of consumer behaviors and needs. This is BaaS at its best: When it allows enterprises to personalize and upgrade their financial service offerings.

BaaS opens a gateway to new sales opportunities, white-label solutions, and credit services for merchants. Well-known examples include Starbucks, which offers an integrated wallet and payments in its app, and Lyft, which provides a debit card to its drivers. A customer-centric mindset helps businesses gain a competitive edge as they deep-dive into consumer lives to see where convenience and efficiency could be improved – and offer the appropriate products and services in response.

Let’s look at how a BaaS model of embedded finance is helping banks and enterprises alike to connect with new pathways for growth.

BaaS hype so far

First, let’s examine the current embedded finance market. Due to regulations and lack of financial capital, fintech companies and retailers would rather use banks’ financial products than develop their own.

Cornerstones’ survey of financial institutions found that 11% of banks already have a BaaS strategy, 8% are developing one, and 20% are considering it. The increasing competition puts pressure on banks to adopt advanced technologies and offer their services to many consumers. Extending the current BaaS approach is good for brands as it means better oversight, control, and flexibility in program terms with a direct relationship with their customers.

However, there are some prominent downsides to BaaS for banks. As they are, partnerships bring a lot of money to entrepreneurs, while the risk remains on the side of financial institutions. This risk can even lead to significant losses on the financial side: According to American Express, a few years ago, 21% of outstanding credit card loans were for people with a Delta credit card. There can be a myriad of personal factors that contribute to why individuals are unable to pay off credit cards so banks that take a holistic view of their customers will be better placed to understand why and help individuals find tailored solutions.

In addition, when enterprises are used as BaaS platform providers, it makes it difficult to establish a direct interaction between brand and bank. Therefore, banks should find additional ways to sell individual financial products or services to merchants. Then, they can prove themselves in the area they are best known: Being customer-focused financial services providers.

When established banks offer white-label or co-brand their financial products, their customer acquisition, and awareness can be negatively impacted. A collaborative co-brand approach allows banks to reach multiple customers (B2B) at a lower cost, but they lose out when it comes to customer (B2C) as this relationship is passed on to the merchant.

BaaS for new revenue potential

Effective BaaS solutions could upgrade the UX status quo of financial services offerings such as payment processing, credit fraud management, compliance, and account management to all enterprises and companies who, in turn, issue them to their employees and clients. BaaS represents a new way of looking at customer service at scale. In the digital era, the traditional bond between bank and client has been lost, but technology is also there to rehumanize banking for the mass market, and profitability will follow.

The idea is for banks to expand their products in this B2B2C space and focus on financial services and wellness. While banks often simply license in BaaS, the core is to permit services. To put it bluntly, banks can approve their entire platform and lend it out entirely for a reasonable sum of money. One example is where banking giant Goldman & Sachs reached a new market by delivering the entirety of their banking services to end-users via the Apple card. In turn, Apple is seen to have reinvented the credit card to have the simplicity they’re widely regarded for.

Elsewhere, Amazon has instrumented its own approach to embedded finance by introducing banking services for sellers on the Amazon platform. The fast-moving consumer goods (FMCG) giant is known for revolutionizing industries and methods, and its offerings to small and medium-sized businesses (SMBs) could further disrupt the financial sector. Twitter CEO Jack Dorsey has also developed financial services for small businesses as his fintech company Square grows beyond payments processing for an integrated approach to business banking.

Discover fresh embedded finance possibilities

But this is far from exhausting all the avenues for growth. Increasing competition makes it harder for banks to attract new customers, and there is pressure to differentiate further; so where are more market opportunities? One emerging trend is further embedded banking potential at the enterprise level: the employee/employer.

BaaS allows Company A customers and employees to use Bank B’s product through their platform. Typically, employees in a company using their own bank account can provide it to the company and give them their payroll. But this is where the great potential for banks lies. What if the company works closely with a bank and offers far more services than a payroll transfer? For example, what if that account helps the user build employee financial health?

Whether someone is employed or working in the gig economy, the integration of bank accounts with the employer or contractor is becoming a key trend – especially for larger companies looking to improve their recruiting.

BaaS offers a chance to reimagine our current banking system so both banks and enterprises can go beyond what they’re currently offering. Fintechs may have disrupted traditional financial markets, but this shake-up has also set loose new possibilities across the sector. Banks who think collaboratively with enterprise partners and prioritize customer UX will see the value of creating BaaS-driven, holistic customer journeys.

The post Embedded Finance: How Banks Can Go Beyond BaaS appeared first on PaymentsJournal.

A neo bank is a financial institution that offers banking services but is not a traditional bank. Neo banks are often online-only and use technology to provide a more modern banking experience. They typically offer a limited range of financial products and services, such as personal accounts, debit cards, and money transfers. Neo banks have grown in popularity in recent years as more people have become comfortable using financial technology. Many neo banks are priced similarly to traditional banks, but some offer lower fees or interest rates. How does Walmart fit into this?

Walmart has made no secret of the fact that it wants to play a broader role in financial services.  Years ago, it sought a bank charter, but when that didn’t materialize, it partnered with traditional and non-traditional providers for services such as gift cards, general purpose reloadable cards, bill pay, money transfer services and the list goes on.  Now, according to a report in Finextra, it is ready to roll out a checking account through its startup group, called One. 

The market is full of neo, challenger, digital-only bank options for consumers offering free or nearly free banking services.  This will be a test to see if the power of the Walmart brand can attract account holders among its employee base and its over 100 million active U.S. shoppers away from their current banking provider.  If they attach compelling rewards to the account, they will likely be very successful, particularly in this economic period of high inflation.  It will be interesting to watch if they attract customers who are currently receiving financial services from other neo bank solutions or if they draw their customers from traditional banks and credit unions.

 Here’s what the article reported:

The move marks a major escalation in the world’s largest retailer’s foray into financial services, with lending and investing products expected to follow.

The bank account will be offered through One, the independent fintech unit Walmart has established under the leadership of former Goldman Sachs consumer banking chief Omer Ismail.

Initially called Hazel, the unit rebranded earlier this year after it acquired neobanking player One and earned wage access firm Even. At the time it already had 200 employees and more than $250 million in cash on its balance sheet.

Walmart has 1.6 million US associates and 100 million-plus weekly shoppers. Initially, the checking account will be tested with thousands of staffers and a small percentage of the retailer’s online customers, says Bloomberg.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Here Comes the Bank of Walmart appeared first on PaymentsJournal.

In the late 1990s, Linus Torvald launched Linux as a way to democratize source code. Shortly thereafter, other companies released their own source code, and from there, the radical notion of sharing your software for all the world to use took off like wildfire.

The actual term “open source software” (OSS), was coined later in the decade at a conference in Palo Alto, California. There, advocates worked together to create a strategy for continuing this new model of software innovation. The group introduced the term “open source” in an effort to move away from the negative implications of the term “free software” and to set a more inclusive tone. Shortly after, its followers began to grow exponentially.

Today, according to Forrester, more than 50 percent of Fortune 500 companies use open source software (OSS) for their development projects. As it was from the beginning, the appeal is the community nature of the software. People like to belong to a community, and developers are no exception. OSS allows them to work on projects they’re most interested in and put their talents in the spotlight for all to see, appreciate and benefit from.

As programming code created by software developers and offered publicly to anyone who wants to modify and build upon it, OSS has one clear rule of the road. If you use it to build a product, you must pay it forward by offering that product as open source as well.

Yet, while most people believe OSS is always free, that’s no longer always the case. Many forms of OSS, such as MySQL, require you to purchase a license, which includes upgrades and support. For some forms of OSS, a purchasing a license is not required, but if you require support from the developer, then you need to pay a fee for support services. And, most often, fees paid to OSS developers are only used to improve the code base.

Part of the appeal of OSS is that it’s everywhere – many of the websites and devices you use daily are built upon open source. It’s used by Meta (formerly Facebook) via MySQL. Android is based upon the open source programming language Java, so there’s a good chance your phone is built upon OSS. In addition, many of the popular video games nowadays are built using Python, another open source programming language. But the ubiquity of OSS isn’t just in the consumer world; leading business applications are built upon open source, and the apps just continue to get better as more innovators apply their craft to improving them continuously.

Open Source Software in the Finance and Payments Industries

Within finance and payments markets, which are competing for a greater share of customers, open source software offers an affordable way to build scalable solutions that provide their customers with greater flexibility and options. Mobile apps allow customers to conduct banking transactions whenever and wherever they choose. It also allows retailers to provide all of the popular payment platforms that their customers are accustomed to. These applications can be customized to meet the unique needs of particular companies… and all can be built using the same open source code.

Why Consider OSS Today

The attraction of OSS is nothing new, and we will continue to see its incredible growth in the coming years for three key reasons:  financial uncertainty, rising cybersecurity challenges and a tech talent shortage.

There are signs that the U.S. and many other countries are on a steady path to a recession due to rising inflation, the war in Ukraine and other factors. Companies are looking for ways to tighten their belts and leveraging (mostly) free source code is a way to keep digital transformation on track in the most cost-effective manner possible. 

Why OSS Can Be More Secure Than Proprietary Software

As mentioned earlier, cybersecurity threats continue to plague companies everywhere. Take, for example, the recent SolarWinds cyber attack. Last year, the company made a routine software update to its network management system that was pushed out to its customers. Hackers believed to be directed by a Russian intelligence service slipped malicious code into the software and used it as a vehicle for a massive cyberattack against America.

OSS software, which is completely transparent and visible to everyone, can provide a greater level of security because so many people can view it and identify anomalies. In fact, according to an article in Digitalogy, Linus Torvalds said, “Given enough eyeballs, all bugs are shallow.” This means that the more people look at code and test it, the greater the probability of finding problems and uncovering suspicious business.

Additionally, open source fulfills a great need at a time when software engineers and other tech talent is at a minimum. A 2021-2023 Emerging Technology Roadmap report from Gartner Inc. noted that 64% of IT executives had cited talent shortages as the most significant barrier to adopting emerging technology. Companies are able to get a leg up on software development when they use existing source code and customize it to meet their unique needs.

The Challenges of Open Source

Despite its appeal, there are many developers who are not into it quite yet, but that too will change. For software developers looking to reach their professional goals, having OSS contributions listed on GitHub certainly puts them to the top of the candidate list, and it’s fast becoming essential to any good resume.

OSS, however, is not the answer to every company’s software development needs. Due to the competitive nature of business, OSS will never supplant proprietary systems. Additionally, for many companies, the software they have now works well and is scalable.

Another issue is that typically, software developers love to write code, but hate to write documentation. OSS detractors complain about the dearth of documentation for open source software. A lack of documentation increases the time it takes to understand and implement the source code.

Despite these challenges and others, Red Hat’s 2022 State of Enterprise Open Source report found that 77 percent of IT leaders have a more positive perception of enterprise open source than they did a year ago, and 82 percent of them are more likely to select a vendor that contributes to open source.

From its early roots, OSS has embraced collaboration and innovation and can be the answer to the finance and payments industries’ quest for secure and reliable software that helps them compete in a complex and competitive marketplace.

The post Innovation and Community: Why the Time Is Right for Open Source Software appeared first on PaymentsJournal.

Bankrate published a report on banking fees, specifically overdraft / NSF fees and ATM surcharges.  With NSF and OD fees being widely demonized, it is not surprising that the average fee charged has declined substantially to $29.80, according to the study’s results.  The article comments that they find that nearly all banks and credit unions are charging these fees despite trends to eliminate them altogether.   The study also looked at ATM fee and found the cost of using and ATM not supported by one’s own financial institution has increased to $4.66.  That’s a combination of the foreign ATM fee your financial institution may charge plus the fee levied by the ATM owner. 

This is very interesting information to have, but what would also be insightful is to know  the percentage of individuals who encounter these fees.  With several of the largest banks eliminating NSF/OD fees and only a small number of individuals using foreign ATMs, the number could be rather small.

Here are the key findings from the article:

• The average overdraft fee declined to a 13-year low of $29.80, which is down 11 percent over last year’s record high of $33.58. The average nonsufficient funds (NSF) fee decreased to $26.58, the lowest since $25.81 in 2004. While these averages have gone down and some accounts have entirely eliminated such fees, 96 and 87 percent of accounts surveyed still charge overdraft fees and NSF fees, respectively.
  
• The combined total of the average out-of-network ATM fee assessed by one’s own bank and the average surcharge levied by the ATM owner increased to $4.66, the highest since 2019. The surcharge on non-customers ($3.14) reached a new high, up 1.9 percent from $3.08 last year.
  
• Among the metropolitan areas covered in the survey, the city with the highest average total combined ATM fees is Atlanta, where you’ll pay around $5.38 for using an out-of-network ATM. Meanwhile, you’ll find the lowest combined average fees in Los Angeles at $4.21.
  
• The number of free checking accounts has decreased slightly in 2022 to 46 percent (down from 48 percent last year), although 99 percent of noninterest checking accounts are either free or can become free when certain requirements are met. These may include maintaining a set minimum balance or having your paycheck directly deposited.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Consumer Banking Fees See Big Shifts appeared first on PaymentsJournal.

The ongoing overdraft debate in the financial industry has long focused on fees. Many financial institutions are putting “fee-free” programs in motion, but the simple fact is that reducing or eliminating fees isn’t enough to change the overdraft game. More needs to be done to help consumers, particularly now, as they struggle due to current economic conditions.

Financial institutions have not focused on transparency related to NSF and overdrafts, and this is hurting consumers. The industry has made some progress on reducing fees in a short period of time, but they’ve left customers without a path to resolve Non-Sufficient Funds (NSF) and overdraft transactions before they end up with negative consequences. The only thing that has been addressed is how and when they charge fees.

The service fees that financial institutions receive from these practices have more than doubled over the past three decades. The U.S. Consumer Financial Protection Bureau said that NSF and overdraft fees impose onerous costs on consumers, particularly those who are least able to absorb them. Overdraft fees bring in $33.4 billion with a median overdraft charge of $30 for community banks, credit unions, and fintechs, according to a Moebs Services Overdraft Study. Only 18% of account holders pay 91% of overdraft and NSF fees, disproportionately bearing the burden. According to a Pew Charitable Trust research study, 25% of these consumers, it represents a week’s worth of wages in overdraft fees annually,

Why more is needed to help consumers with their payments

Here’s how it works at the moment for many financial institutions: If a customer tries to pay their car payment from their checking account but doesn’t have the money to cover it and doesn’t have overdraft protection, the transaction will be returned, and they will be faced with potential late fees and damage to their credit. Eventually, they could be prevented from opening a bank account, which severely limits their financial future. Whether or not they were charged an NSF fee doesn’t change the outcome because the customer was never given a chance to resolve the issue before they incurred the negative consequences. In the current economic environment, with inflation on the rise and the threat of a recession looming, many consumers will turn to short-term liquidity solutions to help them get through the rough patches.  However, data suggests that these options may be far more limited moving forward because of the changes being made at some financial institutions.

A recent analysis of three of the top ten most prominent financial institutions in the US indicates a significant reduction of purchasing power has occurred due to changes made to their overdraft policies. Based on data from the 2021 FFIEC Call Reports, including data on overdraft fees paid, it’s estimated that just within these three banks, they have eliminated $5B dollars of purchasing power or consumer liquidity (source:  Velocity Solutions, 2022).

Ultimately, the biggest risk is that, over time, this could lead to more people becoming underbanked or unbankable, not to mention the potential impact to financial inclusion efforts.

To avoid this, Financial Institutions must offer consumers better solutions when they are faced with insufficient funds. They should alert them when there’s a problem before they suffer negative consequences, instead of penalizing them. They should offer them alternate ways to cover their balance or, at a minimum, let them prioritize which transactions should be paid and which should be returned, so their most critical transactions are protected, such as rent and utilities.

Changes to overdraft programs

Some institutions are eliminating their overdraft programs completely, but that doesn’t solve the problem. Overdraft has a purpose and shouldn’t be fully eliminated. Without overdraft protection in place, each shortage would lead to an NSF, which means overdrawn transactions wouldn’t get paid. Remember how, years ago, people tracked every payment in a check register? Today, that’s not the case. Payments today include frequent use of debit cards, automatic payments (ACH), multiple subscriptions, recurring payments, and digital wallets. This means that virtually no one keeps track of their detailed expenses anymore, so overdrawn accounts have become more common. 

Even without overdraft and the related fees, there will still be costs for customers. The only difference is that they may not all originate from a consumer’s financial institution—they’ll come from the potential late fees of whomever they intended to pay. Overdraft programs save consumers from such frustrations and can help keep their financial reputation intact.

While it’s good to update overdraft programs, they need to help, not hurt, customers. The current changes to overdraft programs today are creating pain points for consumers:

• Elimination of overdrafts, resulting in more payments being returned, which can lead to repercussions for the customer such as late payment fees, merchant fees, and potential negative impacts to their credit.
• New parameters in place for people to qualify for overdrafts, such as specific types of fee-based checking accounts or a required minimum balance, which can lead to more returned payments if someone doesn’t qualify.
• Reduced fees, but also a reduction in the amount of overdraft allowance covered by the financial institution, which leads to Non-Sufficient Funds (NSFs).

In this difficult economic time, consumers need more support from their financial institutions. Giving them more time, and a second chance to make payments can help them through a financial crunch. Some overdraft updates that financial institutions should consider are: developing customized overdraft limits for each customer, such as assigning overdraft limits based on the consumer’s ability to repay it, and offering small-dollar, short-term loans, similar to CashPlease by Velocity or Qcash’s microloans.

There are many ways to help consumers over the hurdle of difficult economic times. Finding ways to help them bear the burden will not only benefit your organization, but it will also help gain the trust and loyalty of your customers.

The post Overdraft Reform: Why Reducing or Eliminating Fees Isn’t Enough appeared first on PaymentsJournal.

This article at Fintech Futures is a warning to banks not to let themselves get outdated. We have written much on the topic of bank modernization and how critical it is to the FS industry. The author is this case is a proponent of banks establishing partnerships as the primary means to this end.  The author is also a senior at a fintech specializing in cross-border payment transactions.

‘Partnerships are not a new feature of the industry – and we are seeing more of them emerge every single day. Just recently, Santander announced a partnership with SAP Spain to support digitisation and enhance the onboarding process for new clients, while Morocco’s Attijariwafa Bank launched a partnership with Thunes to power their cross-border payments….To understand the importance of partnerships, it helps to understand the challenges banks face: a growing number of threats and competitors, a customer base that is becoming more open to new providers and a stretched pool of resources to respond to these issues.’’

If you had been at a banking industry event 5+ years ago you may have had a majority of attendees who thought fintechs were the enemy but that has shifted to the point where cloud and BaaS/SaaS technology is being adopted by banks at relatively fast pace for the traditionally slow moving financial services industry.  In effect, banks have always used technology partners for various systems delivery, but the newly minted and fast-paced fintech sector that directly targets bank clients (more so on the consumer side than corporate clients, at least to date) is something that wasn’t a traditional threat.  However, there is a recognition (on both sides) that fintechs can help banks and vice versa, so more partnerships than ever before are occurring to help with bank modernization.

‘Through something as simple as an API integration, banks can offer new products that make customers’ lives easier and keep them engaged and excited to use their services again. And integrations are not simply added value for customers – the time and money they save also converts into added value for a bank’s business, too….Partnerships are a proven solution that allow banks to successfully navigate growth and overcome barriers to innovation. Those that take advantage of partnerships now will retain and grow their customer base and ensure their longevity in an increasingly competitive market. Those that delay action risk ending up like a head of M&S broccoli that spent one day too long in the fridge – you can still use it, but you’ll know that it’s a little past its true potential.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.

The post Bank Modernization Crucial to Financial Services Industry appeared first on PaymentsJournal.

A neobank is a type of financial institution that offers digital banking services without physical branches. Neobanks typically operate through mobile apps and online platforms, providing customers with convenient access to their accounts and transactions. Many neobanks also offer innovative features such as budgeting tools, automated savings plans, and real-time spend insights.

This brief article is found in Business Standard and speaks to a neobank in India that goes by the name of Open, which develops and offers an online platform for banking and intercompany settlement. It has digital banking services for startups and small and medium enterprises that offer accounts and has tools used by this business size sector.  The company also seems to have BaaS capabilities.  We covered the ongoing move to cloud and ‘as-a-service’ models in recent member research.  The gist of the piece is that Open plans to add millions of small business accounts over the next several years,  The company is backed by Google and Tiger Global.

‘Open, the Google and Tiger Global-backed neobank, is planning to onboard about 10 million small businesses in 3 years as it aims to solve a series of challenges faced by SMEs for managing their business finances, using technology….Open offers a business account in partnership with banks that help SMEs automate and run their finances effectively. The firm which work with the top 14 banks in India is aiming to onboard about 250 banks globally which would be using its platform and technology. It plans to scale up its operations globally in markets such as Europe, Southeast Asia and the Middle East.’

The article goes on to discuss other things that the neobank is pursuing, including lending, cross-border payments and BaaS services to traditional and other neobanks as well. This seems ambitious for a 2017 startup but with substantial financial backing and what seems like a strong product release plan, it may indeed be reachable.

‘Achuthan said that SME lending is the need of the hour as small businesses have been largely lacking access to robust capital resources. A recent IFC report indicated that SMEs take up a minuscule 6-7 per cent credit share and face a credit gap of close to $1.1 trillion….The firm recently received a go-ahead from the Reserve Bank of India (RBI) for its new cross-border payments product. This comes after Open completed the test phase of the second cohort under the RBI’s regulatory sandbox structure themed ‘Cross Border Payments’.Open is one of the 4 entities that have completed the testing phase of RBI’s regulatory sandbox….Open has also come up with ‘Zwitch’ a no-code embedded finance platform. This enables businesses from any industry to build personalized financial products and services that fit into the customer journey.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group.

The post Neobank backed by Google adds Millions of Small Business Accounts appeared first on PaymentsJournal.

The last few months have been a painful crash course in inflation for financial service institutions. And while inflation has reached its highest level in decades in many countries, the US ranks consistently high when compared to the rest of the world. How can we nurture a loyal customer base?

What does this mean for banks?

With the recent interest rate hikes, banks have had to look beyond the balance sheet and focus on the origination and sale of value-added services. This imposes a greater pressure on sales productivity and customer experience since customers are now hyper-aware of how inflation is affecting them and will spend time shopping for the best deal. To add to this, there’s a looming threat posed by neobanks, fintech firms, and financial service offerings by big tech organizations.

Luckily there’s hope… according to McKinsey, two thirds of a recovery post-crisis happens within the first 18 months. Meaning now is the time for banks to act. 

Here are three steps banks can take to navigate the present and position for the future.

Sharpen Customer Focus

With the Federal Reserve increasing interest rates to allay demands, customers are more sensitive, cautious and on the lookout for greater value in deals.

Regional banks can no longer take comfort in their loyal customer base whom they have served for generations. Newer banks and fintechs are moving in and offering core banking products to customers, making it vital that traditional banks leverage their core value proposition and build digital journeys around this.

As a first step, banks must evaluate existing services and convert them into compelling digital experiences for their customers – if they haven’t already. For example, Chase Bank (one of the early adopters of self-serve banking systems) offers their customers a digital mortgaging experience that provides a simple, fast and transparent end-to-end home financing experience. 

Enhanced experiences such as analytical insights or AI-powered virtual assistants assure customers that their long-term financial health is being taken care of. And while this helps strengthen the bank’s brand and reach, this also gives banks deep, unique perspectives on consumer behaviors.

Hone in on Origination and Sales

With the recent interest rate hikes, banks and financial services organizations have had to shift from balance sheet businesses and making money on spread, to sales and origination. McKinsey’s Global Banking Annual Review pegs the return on equity (ROE) from origination and sales to 20%, five times higher than that of 4% for balance sheet-driven businesses.

While most “Big Tech” companies start out with lending, many are aggressively moving into selling other financial products and services. For example, Amazon Lending was built on the motto of “business lending doesn’t have to be complicated” and touts itself on the ease of giving financial support to small and medium-sized businesses without the paperwork and lengthy wait times.

This is something banks should take a close look at considering since 2011, Amazon Lending has made more than $3 billion in business loans ranging from $1,000 to $750,000 to help small and medium-sized businesses grow their enterprises.

Bolster Sales Productivity

From a market valuation perspective, the gap between the best and the rest in banking is widening and this is only going to get further exacerbated. To gain a lead, sales teams need a system of insight that provides a deep analysis of customer behaviors, patterns and habits for quicker conversions, and ways to nurture loyal customers.

According to Forrester, organizations now need intelligent, AI/ML solutions that help:

1. Their sales, marketing, and post-sales personnel understand and manage their omnichannel touch points across the buying cycle;
   
   
2. Automate and orchestrate manual repetitive tasks, as well as deliver insights and tools that improve efficiency and effectiveness;
   
   
3. Users understand preferred engagement channels, identify missing contacts, and surface important account, contact, and opportunity insights.

It is a difficult balancing act – investing in sales tools while cutting costs. But if banks can leverage technology to build these systems of insight for their sales teams, it will enhance sales productivity and the bank’s overall book of business. And a step-change increase in productivity would cut costs per unit and raise supply, putting downward pressure on prices.

As the economy recovers from one crisis and prepares for newer challenges, banks should consider an inside-out transformation to survive, compete and succeed.

The post Can a Loyal Customer Base Help Banks Ride Out Inflation Threats? appeared first on PaymentsJournal.

From the people who brought BankAmericard to market in 1958, which later turned into Visa, life is grand. With a successful Stress Test in hand, Bank of America sailed through the requirements, as they indicate on their website.

The Financial Times reports.

• Consumer spending across Bank of America’s debit and credit cards jumped 10 percent in the second quarter, demonstrating the resilience of consumers despite flagging economic sentiment.
• Brian Moynihan, chief executive of the second-largest US bank by assets, told investment analysts on Monday that the trend remained in place in July, saying that “consumers continue to spend at a healthy pace.”
• BofA said it processed a record $2.1tn in consumer payments in the first half of the year, driven by increases in every category including travel, gas, and services.
• Average credit card balances also rose 10 percent to $81bn in the second quarter, although they were still below the $93.6bn reported in the same period of 2019.

The Motley Fool, which published a transcript of the earnings call:

• Our asset quality remains very strong with net charge-offs in the second quarter of 2021 still 50% below pre-pandemic levels in late 2019 when credit was pretty good.
• Breaking down the performance by segment, I would make a few comments. Our consumer banking segment continued to see good momentum as we grew loans at the fastest quarterly pace in three years.

Similar to Chase, Citi, and Wells Fargo, Bank of America is ready for the storm.

Let us just hope consumers are ready, too.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Recession or Not, Life is Rosy at Bank of America appeared first on PaymentsJournal.

In recent years, there has been increasing pressure on banks to reform their overdraft policies. Previously, the Federal Reserve passed legislation that put limits on how and when banks could charge overdraft fees. As a result of this legislation, many banks have changed their policies regarding non-sufficient funds. However, there is still much debate on this topic and it is clear that the issue is far from resolved.

Because it makes for great political sound bites, legislators are firing up the idea of placing price controls on financial institutions again and the fees they charge for overdrafts and non-sufficient funds (NSF) fees. While some banks’ and credit unions’ practices to maximize their fee income through transaction posting strategies is reprehensible, having legislators set pricing usually doesn’t turn out well either. An article in Fortune noted: 

Despite more than a dozen major banks recently reducing or outright eliminating overdraft fees, Democratic lawmakers continue to push for legislation that would curb the practice on a national level. 

On Tuesday, Rep. Carolyn Maloney (D-NY) and Senators Cory Booker (D-NJ) and Elizabeth Warren (D-MA) renewed their push to restrict overdraft fees through federal legislation. The bills aim to eliminate non-sufficient funds (NSF) fees and limit the number of overdraft fees levied—as well as stipulate that these charges need to be “reasonable.” 

“Billions of dollars are being made off of the backs of low-income families who are struggling to make it,” Senator Booker said Tuesday during a press conference. “And so we now have to change this. We have work to do.”

One of the unintended consequences to a federal price control was highlighted:

… while some major banks have implemented [fee] changes, there are critics who contend that restricting overdraft fees could create more challenges than it solves for consumers. Overdraft protection provides bank customers with a viable source of short-term liquidity, and without it, some consumers may be forced to use alternatives like payday loans more often. 

Mercator Advisory Group has put some thought around this topic in a recent report: Overdraft Fees at an Inflection Point, Not a Cliff. This research looks at the complex state of overdraft fees and the changes that are occurring.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Devise an Overdraft Fee Strategy Before Washington Does appeared first on PaymentsJournal.

Although IT resiliency has long been a common theme and practice for financial institutions, the rapid digitalisation of financial services is underscoring its importance.

Over time, the financial system has become progressively more connected, and in turn, the risk of operational disruption more acute. As a result of threats to financial stability, resiliency has become a key focus for regulators. Most recently, in the EU and UK, the introduction of new rules will soon require financial institutions to take a more prescriptive approach to operational resiliency, by understanding how they provide their business to their clients, including operational risks and how prepared they are to manage them when disruption strikes. 

The problem for banks is that while modernising payments architecture is operationally disruptive, it is key to meeting growing customer needs. Equally, outsourcing services or relying on third-party providers can enable agility but it also has the potential to create Service Level Agreement (SLA) challenges. And although API convergence, Open Banking, and 24×7 system availability are opportunities to embrace innovation and connect with customers, they demand higher levels of IT resilience than ever before.

As banks lift and shift the legacy systems and applications that process payments to respond to the demands of the digital economy, what are the key considerations when it comes to their resiliency frameworks?

Developing a payments strategy for IT Resiliency

Before embarking on a digital transformation programme, banks need to really understand the tapestry of their existing payment systems and how any changes could impact resilience. This requires a clear vision and roadmap for legacy payment applications. While developing a strategy can be a tricky equation, as challenges around cost and complexity will mean tactical changes along the way, having a clear roadmap in place from the outset will make it easier for banks to analyse, estimate, and mitigate risks.

Determining ‘High Availability’ requirements for IT Resiliency

Functional and non-functional requirements are usually documented very well during the design and development phase of a payment application. Operational ones, on the other hand, tend to receive less attention. Considering all incumbent banks and financial institutions have legacy systems, BaU operations and support processes in place, it is very important to consider the ‘as-is’ functions and inputs from these areas. In fact, a very well captured operational requirement is a key driver for ensuring ‘high availability’.

Designing a highly available payments system requires an assessment of all interfacing applications, their complexity and affinity with the business. This in turn helps to determine SLAs. As payment processing systems are highly modular in design, it also helps to assess the requirements for each application and then categorise them into a critical graph to define the highly available environment that is needed. This in turn makes it possible to fine-tune the payment application and set the priority of execution and further processing, for example: Order Management → Payment Execution → Gateway → Scheme. 

Governance and risk management

In the wake of the pandemic, banks are building flexibility into their products and services to adapt quickly to changing customer needs and market dynamics. This is moving resiliency beyond the traditional parameters of fault-tolerance, technical failure, and fail-overs, to include processes and people. It is also emphasising the important role technical authorities play in ascertaining the resiliency of payments applications before they move into production. Every business needs IT to support its goals, and the design and development of payments applications must be aligned with overall strategy.

Furthermore, payments have high-risk areas which should be understood, assessed, monitored and communicated to Governance boards early in the design phase. Any unidentified risk may affect the operational resiliency of the application, so regular assessment of actions and controls should also be carried out, and a strategy in place for any known and / or accepted gaps.

Service and incident management

Banks’ payments processing environments are a complex patchwork of systems and integrated applications.  Some of which are operated outside of a bank’s own network, usually through a cloud service or third-party vendor. When any critical application is hosted on a shared resource or server, capacity planning is an important tool to avoid critical issues caused due to a lack or misconfiguration of resources. Having SLAs in place with such third parties is therefore paramount for maintaining quality of service.

Incident management is another key consideration. Payment applications are always designed with high availability, usually with ‘zero’ RTO and RPO requirements, and so incident management plays a crucial role in fixing production issues. Although banks have traditionally focused incident monitoring on infrastructure health, monitoring and alerts must be enabled at the application, transaction, infrastructure, and network level of the payments stream. This is particularly important for low latency applications to meet the requirements of the UK’s Faster Payments Service (FPS), and other real-time payment schemes around the world. It can also provide valuable insight into trends over time which can be used to proactively avoid SLA breaches and incidents in the future.

The post Building Operational Resiliency in Payments appeared first on PaymentsJournal.

Supporting the financial well-being of their customers may not top the list of services banks offer their customers, but maybe it should. 

With the cost of living skyrocketing in the U.S. (gas is $4.94 a gallon on average, food costs are up 11.9 percent from last year, and rent rates are through the roof), achieving some form of monetary breathing room is at the forefront of most consumers’ minds. 

One study found 64 percent of Americans currently live paycheck to paycheck. In other words, more and more financially-stressed consumers are feeling the pinch. Not only are they looking for ways to cut costs, but they are seeking guidance on how to best manage their money and plan for the future. 

Many have turned to social media for help. (In 2021 alone, finance-related hashtags in TikTok grew by 255 percent.) 

But, when asked, most consumers say they still prefer to get money-related insights from more traditional sources, i.e., banks. One study found 80 percent of those surveyed expect their primary financial institution (FI) to help them improve their financial health. But guess what? Only 14 percent of consumers believe their FI is actually delivering on this preference.

Are FIs missing out on a major opportunity to form meaningful connections with their customers by helping them improve their financial well-being?

Most U.S. Consumers Lack Financial “Health” 

One recent study determined 66 percent of Americans fell short of being “financially healthy.” 

By definition, financial health is “the extent to which a person or family can smoothly manage their current financial obligations and have confidence in their financial future.” This includes managing day-to-day finances and being resilient to financial shocks while maintaining future goals and overall confidence in one’s financial situation.

The same study showed 35 million Americans struggle with all or nearly all aspects of their financial lives. And although these kinds of numbers usually get blamed on COVID-19 or inflation, it’s important to keep in mind that as early as 2019, the Consumer Financial Protection Bureau (CFPB) concluded many Americans were financially fragile. At that time, only half could cover two months’ expenses had their primary income source dried up.

Now add to that more recent pain points like spikes in housing, food and travel costs. No wonder 48 percent of Americans are “very” or “extremely concerned” about making late payments.

Gap in Financial Literacy 

A lack of financial literacy may be partially to blame. Despite making critical money decisions daily, only one-third of American consumers can answer four (out of five) money-related questions.

Less than half of America’s states require high school students complete personal finance courses (though this number is improving), so it’s no wonder many Americans are looking for advice. 

But even a college degree doesn’t guarantee a strong understanding of dollars and cents. In fact, with the national student loan debt looming above $1.7 trillion, college may be adding to the many money-related woes young Americans wrestle with. So it’s no wonder that more than one-third of millennials and Gen Z Americans say a lack of financial guidance has inhibited them from preparing for retirement.

Prioritizing Financial Goals

The good news is — as of 2022 — most consumers are prioritizing financial goals over all others. 

And the banking industry should know most are turning to their primary FIs for help.

Consumers want tips on managing their money and improving their spending habits. In exchange for this advice, they are even willing to share their data. Just look at the surge in TikTok’ers mentioned earlier. So many people now seek fiscal guidance through social media platforms the term “FinTok” has taken hold with Gen Z’ers and Millennials (who are perfectly happy surrendering their information to TikTok’s algorithms to get it). 

Yet, despite the growing popularity of FinTok, nearly half of consumers would still prefer their FIs show them the way. When asked, 48 percent said access to their financial information makes them feel more financially resilient, noting that current  “challenges” have made them more “financially aware.”

Banking on Financial Well-being

Achieving footing in today’s economic landscape is more challenging than ever, but financial institutions are perfectly positioned to help their customers find their way. 

Eight-in-ten consumers already trust their banks. Helping customers bridge gaps in their financial literacy while providing them with the right digital tools to better manage their lives is one meaningful method of building rewarding, long-term customer relationships. 

By reframing how banks think about and serve their customers, FIs can transform the customer experience from being a trusted service provider to becoming an attentive partner.

In addition to offering loans and other traditional banking services, there is a clear opportunity for FIs to provide sound, trustworthy advice that empowers consumers to achieve long-term financial well-being. By doing so, FIs can secure long-term loyalty from their customers.

Want to know more? Check out Banking on Financial Well-Being, BillGO’s latest whitepaper, which identifies the guidance today’s consumers crave and why financial institutions are perfectly positioned to come to their aid. 

The post Why Banking on Financial Well-Being is a Winning Strategy appeared first on PaymentsJournal.

The financial sector has been one of the most early and active adopters of digitization. In recent years, we have seen a major shift from paper-based financial transactions to digital ones. This trend has been driven by a number of factors, including the increasing prevalence of mobile devices and the need for faster, more efficient financial services. As a result of this shift, we are seeing an increase in the use of mobile banking, online payments, and other digital financial services. The benefits of digitization are clear: it enables faster, more convenient financial transactions, while also reducing costs and increasing efficiency. However, there are also some risks associated with this trend, including the potential for cyberattacks and financial fraud. Nevertheless, the advantages of digitization seem to outweigh the disadvantages, and we can expect to see further adoption of digital financial technologies in the years to come.

Trends towards digitization, based on both customer desire and the challenges of a global pandemic, have forced players within the financial sector to address the challenges required to keep pace. Sara Khairi explores how Citibank is addressing the challenges in Tearsheet:

“Citibank is diversifying digital solutions to enable growth, speed-to-market, and deliver a better user experience. To keep up with the new wave of digitization, Citi provides online and mobile banking solutions to its clients via the web-based banking platform CitiDirect. For file exchange, messaging processes, and API solutions for cash management, the bank has developed the CitiConnect online channel service. The bank also facilitates digital wallet transactions for users across the globe.”

In her discussion with Steve Elms, Citibank’s Global Head of Sales for Citi Treasury and Trade Solutions for Corporate, Commercial and Public sectors, he discusses how Citi is changing their mindset towards digitization to modernize systems:

“The landscape we find ourselves in is complex: companies are going global at record speed; many of our clients are born global these days. Digitization is creating the need for massive scale and greater agility. Businesses and geopolitics are so intertwined that they’re creating an entirely new paradigm for multinationals. From Citi’s perspective, we have embarked upon a transformation to become the preeminent banking partner for institutions with cross-border needs, a global leader in wealth management and a valued personal bank in our home market.”

Elms specifically speaks of the benefits attained through tokenization in mobile wallets as a lead that will pave the way for additional enhancements with increasing use of blockchain:

“With tokenization, whether managed mobile wallets or payment intermediaries — with the likes of PayPal, Apple and Google, Alipay and WeChat Pay — we are moving towards technologies that are always on and allow for commerce and payments to be transacted in a 24×7 environment. Furthermore, many are now starting to evolve further through the provision of offering through blockchain/DLT technologies, which not only allow for immutability but can also provide programmable solutions such as directly linking the transfer of assets to the transfer of payments. This is helpful to solve some of the inherent challenges that are common today – of separate delivery v/s payments processes.”

Citi’s response to the evolving environment highlights the need for FI’s to evolve internally and seek expertise and partnership from tech disruptors both inside and outside of banking to provide optimal service for customers moving forward.

Overview by Jordan Hirschfield, Director, Prepaid Advisory Service at Mercator Advisory Group

The post Citibank Is Embracing Digitization to Face Modern FI Challenges appeared first on PaymentsJournal.

The payments systems infrastructure at many traditional financial institutions — banks and credit unions — is showing its age at a time when new, nimble players are entering the space.

These lumbering systems, many of which were constructed 50 years ago for electronic funds transfers and card services, are being left behind entirely by fintechs, or they are being shored up with patchwork infrastructure additions and payments islands that can handle new authentication methods.

Whatever the case, it all adds up to an existential challenge for traditional financial institutions, one that was broken down in a conversation with PaymentsJournal by Jens Audenaert, Global Head of Payments Software at Diebold Nixdorf, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group.

In their discussion, Audenaert and Sloane advocated for a move away from dated legacy systems to a cloud-based infrastructure, focusing on these key points:

• The inherent risks of legacy systems.
• The primary drivers of modernization.
• How to make the transition from legacy systems.
• Key features financial institutions should seek in cloud-based infrastructure.

“The pace of changes in payments has been unbelievable in the last seven to ten years,” Sloane said. Meanwhile, he said, the traditional model “has poured concrete around [traditional FIs’] payments infrastructure.”

“It’s time for everyone to start to recognize that and think, ‘How are we going to be competitive?’”

The Inherent Risks of Legacy Systems

Traditional financial institutions derive 30% to 40% of their revenue from payments, Audenaert noted. Accordingly, the risks of maintaining legacy systems that he outlined all dovetail with banks’ need to continue generating those revenues.

The risks include:

• Costs, including the technical depth required to maintain legacy systems, the duplication of effort, and the software and hardware requirements compared with the cloud.
• Resilience issues, including outages of the systems. Audenaert noted that 24-hour (or longer) outages have been “a huge issue.”
• Talent acquisition and retention. Legacy systems are often constructed in COBOL, and COBOL-versed programmers are growing older and steadily retiring.
• The burden of meeting compliance requirements.

Audenaert also mentioned the difficulty in leveraging data on legacy systems, which affects such areas as fraud scoring and decisioning. Most important, he said, was the drag on innovation and time to market.

“In those siloed, legacy systems, introducing new technology is extremely difficult,” Sloane said. “If you can’t do it, you’re going to be challenged by your competitors.”

Sloane noted that with new and emerging payment schemes and authentication methods, many traditional financial institutions have had to build islands to handle them: one for the bank, one for the branch, one for card use, and one for the call center. The result, he warned, is attrition.

“The consumer will walk away,” he said. “They’ll just get so frustrated, they’ll leave.”

The Primary Drivers of Modernization

Staying competitive and relevant would be enough to make any institution take heed. Add to that the steady encroachment of fintechs and other nonbanks in the payments space and the acceleration of innovation prompted by the COVID-19 pandemic, and financial institutions face an imperative to keep up.

One relatively new system, real-time payments, offers instruction here. According to a Deloitte report, Economic Impact of Real-Time Payments, the scheme’s impacts include:

• Displacing a series of other payments methods.
• Financial savings garnered by the transition from legacy systems.
• A more inclusive environment for financial institutions, which can bring in more unbanked consumers with payments offerings that appeal to them.

Then there is the cost saving of in-cloud services as opposed to clunky, in-house legacy systems. Savings, Audenaert noted, are another form of lifting the bottom line.

“Customers that move to the cloud are cutting their costs by 50%, some well over that for a transaction,” Audenaert said, pointing again to banks’ deriving up to 40% of their revenue from payments. “It really adds up.”

How to Make the Transition From Legacy Systems

Recognizing the need to bring in a modern platform isn’t the issue for institutions, Audenaert noted. It’s deciding where to start and where to commit.

“Changing a payments platform for a bank is like open-heart surgery,” he said. “It’s really risky.”

Sloane described it this way: “I need to get to the cloud, but which applications do I move, how quickly can I move, [and] how do I manage security as I make that transition?”

As banks work through these questions — and they must because their merchant clients and rising generations of customers want modern payments — Audenaert noted that the flexibility of modern systems is on their side. New systems can be built in parallel with existing systems, allowing for the piecemeal migration of functions and services.

“It’s a very de-risked approach,” he said.

Key Features Financial Institutions Should Seek in Cloud-Based Architecture

Audenaert suggested an elevated view of the benefits of moving to the cloud. It’s less about individual features and more about remaining nimble, a quality that the legacy systems don’t empower.

“Really look at what’s the architecture, what’s the technology,” he said. “So it’s future-proof.”

Sloane noted that many traditional financial institutions start the process of installing new systems with an on-premises notion of housing the infrastructure. That tends to fall away as they see how the cloud-based structure works.

As with anything, he said, the transition involves risk. But not as much risk as continuing to patch together legacy systems amid rampant change in the payments space.

“Sit back and consider where the real risks are,” he concluded.

The post Unburdening Financial Institutions from Legacy Payments Systems appeared first on PaymentsJournal.

We already live in a world where fraud detection technology automatically notifies banks’ customers to authenticate with digital codes via alternative communication channels. But proactive notifications are yet to be used to enhance customer experience. Instead, banks expect customer service agents to react to customer issues when they could be supporting their customer’s financial health.

Historically, customers with financial advisors had money to afford the support – and those who needed advice often suffered alone. Digital support is entering the banking industry in more ways than optimizing security: embedded banking, interactive savings plans, and agent superiority are outcomes of the digital transformation.

Some fintech customers can open financial accounts within seconds without an agent, regardless of credit scores, transaction history, and income. At the same time, automated fraud detection and geotagging make it possible to keep information secure. Customers are growing accustomed to predominant digital communication. However, at what point does the agent intervene? And how do they know when it is vital to do so?

Let’s look at how proactive notifications can support agent efficiency while benefiting the customer’s financial health and the bank.

The power of digital interaction

With the support of artificial intelligence (AI), pattern recognition, and open banking data, banks can read where customers are spending in real-time and set up automation to notify the customer of special rewards while informing the agent of any unusual behavior.

Suppose customers just arrived in Madrid, forgetting to tell their bank. After a long journey, they buy a train ticket to get to their apartment, and their bank blocks them from using their card. They spend hours waiting for an agent, still carrying all their luggage. Now envision that their bank shared data with their phone’s geotagging and could locate that they were in Spain – they can use their card freely, and they may even receive a unique promotion from their bank to spend or exchange money abroad.

When banks and third parties share data with the customer’s consent, they can provide personalized products, rewards, and benefits that suit their customer’s needs. The more data available to the bank, the higher chance of fraud protection and accuracy in customer profiles to provide bespoke offers that support the customer’s financial health with low risk to the bank.

In addition, banks are using application programming interfaces (APIs) that provide digital savings plans. Customers can receive personalized notifications to help them reach financial goals and improve their financial health.

Take buy-now-pay-later (BNPL), for example. When banks understand a customer’s financial abilities, the payment method can be promoted healthily, not at the expense of the customer’s existing debt. However, this doesn’t stop shops from offering the payment plan – it’s down to the banks to use their data and help keep customers financially secure. An API that alerts the customer at the point of purchase, whether their bank recommends using BNPL for a particular item, can protect many shoppers unaware of the method’s risks.

With automated solutions, customers can expect to interact more virtually at the time and place they need support, alleviating pressure on the bank’s agent. At the same time, the customer can feel secure the bank understands them by digitally tracking their unique behaviors and sending them personalized rewards.

Customer Service Agents at the ready

As technology takes a proactive approach to notify customers of their spending capabilities, security authentications, and special promotions, customer service agents gain time to focus on deeper issues and react with style. 2022 will see a rise in empathy training and improved data visibility, enabling specialized customer support and customer understanding.

The combination of intelligent design and simple user experience (UX) dashboards gives agents a holistic view of their customers at a glance. With the information readily available and easy to digest, agents can save time on calls and cut straight to the matter at hand, rather than increase the customer’s stress with questions ‘they should know the answer to’.

Machines are to become proactive: Finding contextual information to understand the customer better, telling them apart from the hackers, and helping them spend wisely. Conversational AI can do this by asking questions over time. For example, in cases where customers go over their savings caps: ‘We noticed you’re struggling with your financial goals. Would you like us to amend the cap? Is everything OK?’ – a financial advisor for everyone, imagine that.

Say a customer does run into an issue where a chatbot or FAQ can’t help, the customer service agent is not only there to support but has the exact information accessible in a dashboard to go above and beyond the customer’s issue.

In addition, digital dashboards with automation could trigger to send short surveys. Let’s say a bank notices large sums of money leaving their customers’ accounts to a neobank. AI chatbots or an automated survey could ask them why they use their other card to make their payments. What is it that their current account could do better?

Agents can then read the survey results and design new products their customers will enjoy without putting them, or their bank, at risk.

When banks start asking their customers what they can help with and what kind of service their customers appreciate, they will see their customer loyalty skyrocket. And with the support of digital taking a proactive approach, if a customer does have to interact with a live agent, the agent has the tools and the information to build even more trust with them.

Automated notifications, data-sharing, and a holistic customer view can support banks to financially advise their customers digitally and accurately while informing agents when to intervene.

The post Taking the Pressure off Bank Customer Service Agents in 2022 appeared first on PaymentsJournal.

It’s the end of overdraft as we know it. Large banks are reimagining their overdraft programs amid increased regulatory scrutiny and the emergence of challengers with short-term liquidity offerings that bear little resemblance to traditional fee-laden overdraft protection. It is no small undertaking, and it could lead to serious financial repercussions for banks that don’t handle the transition properly. Traditional overdraft programs are huge revenue drivers, earning American banks more than $6 billion in the first nine months of 2021 alone. Still, challengers have figured out that meeting customers’ short-term liquidity needs in a supportive fashion―as opposed to a punitive one―can pay significant dividends in the form of customer acquisition, loyalty, and lifetime value.

Customers and Overdraft: It’s Complicated

Customers who cannot access traditional credit options often need to find financial flexibility somewhere. Despite the high fees, overdraft meets that need. These individuals―who often lack savings, credit cards, and disposable income―use overdraft as a means to access short-term credit to supplement income between paychecks. For consumers with few other options, overdraft serves as a quick fix to cash flow problems.

However, overdrafting has been shown to do much more harm than good in the long run. The people who need overdraft the most are those that can least afford to pay the fees–and those fees add up fast. Very few account holders actually use overdraft options, but those who do, use it a lot. In fact, 75% of all overdraft fees are paid by just 8% of customers, according to the Financial Health Network. With each instance of overdraft incurring a fee of $35 or more, it is not hard to see how this can create a cycle that keeps customers’ accounts continually overdrawn as they attempt to catch up with bills and other expenses.

Why Now?

Regulators have been eyeing what they view as predatory overdraft practices–including high fees and the practice of processing debits before incoming credits to maximize fee revenue–for years. Along with regulatory pressure, providers also are facing intensified competition from challenger banks and their novel approach to overdraft. As a result, banks are lowering non-sufficient funds fees or eliminating them altogether.

In December 2021, Capital One and JP Morgan Chase both introduced changes to their policies, kicking off the shift that is now underway in earnest. In January 2022, five of the largest banks in the country—Bank of America, Wells Fargo, U.S. Bank, Truist and Regions Bank—announced changes to their overdraft, small-value loan, and non-sufficient funds (NSF) fee policies. Now, Citigroup has announced its intention to eliminate all overdraft, overdraft protection, and non-sufficient funds fees by this summer. Pew Charitable Trust estimates that the changes made in January 2022 alone will save consumers upwards of $2 billion each year.

Not Your Traditional Overdraft

Several neobank and challenger banks have come up with new, innovative ways to extend small lines of credit to its customers. Some offer early paydays, microloans, or “buy now, pay later” (BNPL) options to address customers’ liquidity needs, and have eliminated the fees associated with using these options altogether. Although customers typically need to meet some requirements to gain access to these small-dollar loans, they are usually more accessible than traditional barriers to revolving credit. By tying overdraft alternatives to existing programs that are monetizable, banks can offer flexibility without putting undue burden on the customer—while still making a profit.

Let’s say a neobank wants to increase usage by encouraging enrollment in its direct deposit program. It may consider rolling out a free overdraft protection initiative for customers who direct deposit at least $500 each month. They might decide that anyone who enrolls will have access to $200 in overdraft at any given time, and the outstanding balance (without any additional fees) will be repaid from the customer’s next deposit. This model would offer users the option for fee-free microloans while still driving revenue for the institution because direct deposits can be monetized.

This is just one example of the many options available to financial institutions looking to revamp their overdraft models. Fintechs are increasingly developing creative ways to solve customers’ liquidity problems without using the traditional overdraft model and its associated fees. Whether it is microloans, temporary credits, early access to pay, or something completely new, each bank or fintech must decide what structure works best for them given their business model, risk appetite, customer profile, and technological capabilities.

The good news? Customers will reward providers who give them access to the liquidity they (sometimes desperately) need―especially if it comes without additional fees. The key is meeting customers where they are and providing next-generation banking options that work with them and for them while reinforcing behaviors (like direct deposits) that drive profitability for the institution. With today’s technology and consumers’ openness to new structures and services, an alternative to traditional overdraft could be as simple as reduced fees, as goal-oriented as the approach of the neobank described above, or anywhere in-between. That is a win for consumers and banks alike.

The post The Power of Next-Generation Overdraft Programs appeared first on PaymentsJournal.

Neobanks, struggling to provide comparable customer service at levels similar to traditional banks, are expanding their customer service channels. Miriam Cross reports further in American Banker:

“Startups may be able to get away with sparse staffing and email-only responses early on, when customer needs are simpler. But shortchanging this part of the team can cause a backlash when things go awry with customer accounts.”

Customer service can suffer as a non-essential critical business function at the outset of a startup’s market entry but businesses quickly learn they must provide additional support to retain business.

“’Customer service has always been a case of, how little can I do and still keep the customers I have,’ said Emmett Higdon, director of digital banking at Javelin Strategy & Research. ‘But as challenger banks expand into more lines of business, and as those relationships get more complicated, they have to ramp up customer service or risk losing those more profitable customers to another provider.’

Cross notes new procedures by neobanks such as Varo and NorthOne to add additional customer service channels beyond email, such as phone and live chat, in an effort to think of customer service as a more strategic function.

“It’s an investment we’ve made,” said Eytan Bensoussan, NorthOne’s CEO. “We decided it is such an important part of what the banking value proposition means for a small business that it was worth going the distance and thinking of it as a real big prong of our strategy.”

As neobanks continue to mature, further customer service investments seem likely to compete effectively against traditional banks and to increase the connection customers feel by moving beyond anonymous email help to more personal chats, phone, or secure messaging.

Overview by Jordan Hirschfield, Director, Prepaid Advisory Service at Mercator Advisory Group

The post Neobank Differentiation with Excellent Customer Service appeared first on PaymentsJournal.

Similar to what has been happening in the consumer realm over the past decade, traditional financial institutions have seen a growing number of small-to-medium sized businesses (SMBs) flock to fintechs and digital neobanks to meet many of their financial needs. One major reason for this exodus is that the legacy technology infrastructure inherent in many banks and other traditional financial providers does not allow for quick and easy development of new digital products and services.

How this problem can be overcome was part of a broader discussion about what kind of technology SMBs want when it comes to managing their finances in a recent PaymentsJournal webinar titled “SMB Banking Disruption and Innovation: What SMBs want, how their needs shift and how to win using a customer first approach.” The webinar featured a lively discussion between Brian Riley, Director of Credit Advisory Services at Mercator Advisory Group, and Scott Johnson, the Head of Strategic Expansion at Galileo Financial Technologies, an API-based card issuing and payments platform.

SMBs Look Beyond Traditional Providers

A major part of the discussion was around how SMBs are looking beyond the traditional financial providers to meet their banking and payments needs. One sobering statistic that was shared, which came from a survey of small businesses done by consulting firm 11:FS, is that only 18% of small businesses say they “completely agree” that banks are providing the services they need to effectively run the financial side of their business.

“Overall, SMBs are not happy with the services that banks provide,” said Johnson, adding that with about 33 million small businesses in the U.S., this is a very large and potentially lucrative market.

SMBs are increasingly looking for one single platform to manage their entire financial lives; currently many small businesses use multiple different providers for different financial products and services.

“Businesses want to be able to manage their cash flows and make day-to-day business decisions based upon their entire financial health,” said Johnson. “And then they want that lending component, or a credit component as needed to help them build their businesses.”

Both panelists noted that this trend mirrors what is happening in consumer banking, where many are turning to digital-first upstarts for services like BNPL, budgeting, and embedded finance that banks do not offer. In one poll shared during the webinar, nearly 50% of consumers reported they would use an internet or wireless provider, or a streaming service, for financial needs. About as many said they would use a national retailer or even their employer for financial services.

 “Small business owners are consumers too, and they want those same types of experiences they’ve come to expect from challenger neobanks,” said Johnson. Small businesses also want flexible access to credit when they need it, mirroring the rising popularity of BNPL platforms among consumers.

The Rise of Embedded Finance

One area of particular interest for small businesses is embedded finance and embedded payments. Nearly half of small businesses even said they would be willing to pay a price premium to a digital provider for such services.

Riley noted how the embedded payments experience in a service such as Uber is seamless and intuitive for the user, who doesn’t even have to think about the payment.

“Embedded payments are somewhat of an elusive word, and you probably already experienced them without even knowing it, whether you’re arranging a car service, [or] really [doing] anything in the gig economy,” said Riley.

Small businesses want to be able to offer these embedded experiences to their customers but are often unable to since their banking provider may not offer these digital capabilities.

Johnson mentioned Toast – a point-of-sale hardware provider mostly serving the restaurant industry – as an example of a company doing a good job providing embedded finance to its business clientele.

“They do an amazing job of not only providing an incredible experience for the restaurant to be able to manage everything they need to at the restaurant, but they’re able to now integrate payments holistically into that experience,” he added. “They are able to get so close to their customer that they can even offer a lending product to a restaurant owner because they’re seeing how many sandwiches were sold.”

Johnson continued: “That’s why now they’ve embedded everything within their platform and their product offering. And that’s where we’re seeing these types of really cool embedded finance solutions start to grow, because, again, these solutions are so tied in you don’t even think about it.”

Ultimately, small business owners want to manage the whole continuum of their financial lives – from lending and savings needs, to asset protection to running the business and embedded finance – all from one provider.

How Banks can Overcome Legacy Systems

Banks are well positioned to be that sole provider, since they have a long history with their business customers and are generally seen as more trusted when compared to digital startups. But banks can struggle to offer the embedded digital services their small business clients want due to legacy infrastructure.

“A lot of the infrastructure and plumbing has been around for nearly 40 years,” said Riley, adding that the different data silos internally at banks make it difficult to innovate.

“I think of the days when I was at [a Big Four Bank] a couple of decades ago, and it was easier to get information from a credit bureau about what other relationships the customer had than to look at one internal system that passed through all those silos,” he said.

Ripping and replacing entire core systems is a risky and cost prohibitive solution to this problem for the vast majority of banks. But they can innovate despite legacy infrastructure by adopting an open API infrastructure, according to Johnson. APIs can be layered on top of legacy systems and be used to integrate with various third parties to quickly deploy new products and services. This is especially important considering the pace of digital innovation.

“What’s sexy 3-4 years ago is just OK now,” said Johnson. “But with an open API approach, when the next great feature comes along you can respond quickly without needing a massive tech rebuild or a massive reengineering effort.”

Johnson noted that digital habits that were beginning to be adopted by consumers and small businesses in recent years were accelerated during the Covid-19 pandemic. It is now table stakes for banks to offer the digital products their customers want.

Ultimately, banks don’t have to transform overnight, but can use an open API architecture to begin to meet the digital needs of their SMB clients.

“It doesn’t mean that you have to be all things to all people on day one,” said Johnson. “But I think you need to have this vision of how you grow your product over time.”

Learn More About the Future of Banking for SMBs

In the recent webinar hosted by PaymentsJournal, Johnson and Riley discuss several other key details of SMB banking, including:

• Data on trending interest in banking services from non-financial companies
• Insights into the growth of the embedded finance market
• Specific small business banking use cases

The post On-demand Webinar: What SMBs Want From Digital Financial Experience appeared first on PaymentsJournal.

The days of the plastic payment card are surely numbered. While they account for only a small fraction of a percentage of all the plastic items manufactured globally, there are still several billion being issued each year. 

But environmental concerns mean that plastic cards – which are technically made from polyvinyl chloride, better known as PVC — are becoming unpopular with consumers. They’re also expensive to issue, costing around $7 apiece. That’s why we are starting to see alternatives hitting the market, including cards made from PLA (polylactic acid), wood, metal, recycled PVC and even cards made from recycled plastic collected in coastal areas.

While it’s great to see so many financial institutions getting on board with the UN’s Principles for Responsible Banking, we must also recognise that many of them are also using their eco-friendly cards as a way of attracting the attention of potential customers. But I would argue that fintechs that want to secure a strong future for themselves in a world where plastic payment cards have gone the way of the dodo need to go much further than this.  

Why use physical cards at all?

Advances in payments technology and infrastructure mean that many of us don’t need to use physical cards — no matter what material they’re made of — any more. We simply use our smartphones or wearables, activating Apple Pay or Google Pay or Samsung Pay in a matter of seconds, make our purchase, and we’re on our way again. 

The growth in so-called ‘tokenized’ payment solutions, which allow users to make card payments without actually using the card itself, has undoubtedly been driven by consumer demand. Many people don’t want to carry their wallet or purse around with them, so they are asking for digital wallets instead. These wallets live in our smartphones, alongside all of the other essential services we need to access on a daily basis: maps, the internet, email, messaging services and so on. As the Wall Street Journal said last year: “Wallets are over. Your phone is your everything now.”

In some cases, we don’t even need our phone, and can use a wearable device such as a fitness tracker, a ring, or watch to make the payment. It is an incredibly slick and convenient process for the consumer; however, it does mean that the financial service provider that issued the card has slipped out of sight somewhat. Cards — particularly those that are made of metal or with a personalized card face — are considered something of a status symbol, though they’re not so easy to flash around on the screen of a phone. 

Developing differentiation

But for banking brands that are keen to ensure they remain front of mind with their customers, the actual cards they issue are something they can use as a key differentiator. The color, the feel of the card, the logos that it bears all matter. This is why I think that although *plastic* payment cards will become a secondary payment choice, physical cards of some description will always be around.

But in my view, it is not what the card is made of — PVC, bamboo, titanium, or thin air — that matters. It is what the card represents. And while issuing payment cards made from sustainable materials is a great way of displaying your ecological credentials, financial service providers that really want to stand out and create market-leading banking services for customers need to go much further. 

Coming back to the point I made above about logos, fintechs that really want to get ahead of their competitors should think about creating a premium-tier card service level for customers, bearing the unique logos of Mastercard World Elite or Visa Infinite or Platinum.

To work with Visa and Mastercard at a premium level, players will obviously need to meet certain criteria in terms of licensing and accreditation, and have existing relationships with the right financial and technological organizations. They will need to consider tokenizing their card program and will need to have insurance and unique value added services in place. Partnerships with companies that have direct experience of working directly with the card schemes on developing premium tier services would be a distinct advantage.

But if they want to get these logos onto their cards, there is more still that they will have to do. Tangible, value-added services are the key to getting on the radar of Mastercard and Visa and accessing these premium brand marks. Again, it is the partnerships that these organizations have that will matter; partnerships with providers of services that premium-level banking customers are a must. 

In summary: True banking innovators have a bright future

At the end of the day, there is a massive opportunity for financial institutions to gain a competitive edge by creating truly ‘premium’ services. To be true innovators, players need to have more than just an eco-friendly payment card and think about the features and services that will have real consumer appeal. By developing a strong network of partners that give them access to these services, they stand a good chance of being able to use the brand marks of Mastercard World Elite or Visa Infinite or Platinum on their payment cards — no matter what they are made out of.

The post The Future of the Plastic Payment Card appeared first on PaymentsJournal.

Here is an interesting story in the New York Times about the Central Banker behind Russia’s move to reposition the country after the 2014 Crimea crisis. We referred to many of her strategies in the recent Mercator Webinar on The Impact of Russian Sanctions on the Payments Ecosystem. You can hear a rebroadcast of that event at this link. Elvira Nabiullina is the person responsible for protecting the Russian ruble. Several weeks ago, the Russian economy looked like the Kopeck, a fractional unit of the ruble, would be the defining currency. Still, her strategies are practical and appear to be keeping the economy in check. According to the NYT:

For the second time in less than a decade, Elvira Nabiullina is steering Russia’s economy through treacherous waters.

In 2014, facing a collapsing ruble and soaring inflation after barely a year as head of the Central Bank of Russia, Ms. Nabiullina forced the institution into the modern era of economic policymaking by sharply raising interest rates. The politically risky move slowed the economy, tamed soaring prices, and won her an international reputation as a tough decision maker.

In the world of central bankers, among technocrats tasked with keeping prices under control and financial systems stable, Ms. Nabiullina became a rising star for using orthodox policies to manage an unruly economy often tethered to the price of oil. 

Ms. Nabiullina has an essential role in Putin’s cabinet.

Now it falls to Ms. Nabiullina to steer Russia’s economy through a deep recession and keep its financial system, cut off from much of the rest of the world, intact.

The challenge follows years she spent strengthening Russia’s financial defenses against the kind of powerful sanctions wielded in response to President Vladimir V. Putin’s geopolitical aggression.

She has guided the extraordinary rebound of Russia’s currency, which lost a quarter of its value within days of the Feb. 24 invasion of Ukraine. The central bank took aggressive measures to stop large sums of money from leaving the country, arresting a panic in markets, and halting a potential run on the banking system.

One of the essential takeaways from Mercator’s Webex is that Russia built a solid infrastructure to manage its payment requirements. From the debit perspective, the Russian National Payment System can stand in to distribute payroll and transact locally. However, things are not so rosy on the credit channel because bank liquidity is weak. The merchant function ported to Mir and the National Payment System will be business as usual. But for high enterprise value/low volume payments, Russia will find it hard to replace SWIFT, the global banking clearance network.

Elvira pushes on.

In her last crisis, she turned a catastrophe into an opportunity. In 2014, Russia was rocked by twin economic shocks: a collapse in oil prices — caused by a jump in U.S. production and the refusal of Saudi Arabia to cut production, denting Russia’s oil revenue — and economic sanctions imposed after Russia annexed Crimea.

Besides her record on monetary policy, Ms. Nabiullina has drawn praise for pursuing a thorough cleanup of the banking industry. In her first five years at the bank, she revoked about four hundred banking licenses — essentially closing a third of Russia’s banks —to cull weak institutions that were making what she termed “dubious transactions.”

And from the looks of it, the central banker sounds like she has a heart:

In March, Bloomberg News and The Wall Street Journal, citing unidentified sources, reported that Ms. Nabiullina had tried to resign after the Ukraine invasion and was rebuffed by Mr. Putin. The central bank rejected those reports.

“We are in a zone of enormous uncertainty,” Ms. Nabiullina said.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post Elvira Steadies Credit, Debit, Merchant, and Wholesale Payments in Russia appeared first on PaymentsJournal.

‘Serve yourself’ has very much become a twenty-first-century trend. Whether it’s scanning your groceries at the store, self-pumping at the gas station, or ordering your fast food from the kiosk, organizations are always looking for ways to help consumers to help themselves.

And in the world of banking, it’s no different. In fact, the bank introduced one of the most popular tools for self-service to us more than 40 years ago: Automated Teller Machines (ATMs). These revolutionized how we access our cash, making it easy, accessible, and available, anywhere and everywhere! 

But in today’s world, the ATM is becoming obsolete. Let me explain:

Banking smarter, not harder

The reason that self-service technology has significantly developed over the past few decades is due to its popularity; being able to self-serve makes our lives easier, services more accessible, and saves us time. And banks aren’t in the business of making our lives harder, they want to empower us to manage our finances easily and efficiently.

With this in mind, we’ve witnessed a rise in contactless payments. Things like paying for a coffee, making a donation, or hopping on the subway can be done with the tap of a card. Additionally, there are apps for almost anything; book a taxi with Uber or Lyft, pay for your car parking, or transfer money to a friend. Those very reasons we needed to carry a stack of cash in our wallets have a smarter alternative.

Repurposing the ATM

As the ATM is a tool to provide access to our physical dollars – which we now rarely need – its purpose is fast becoming obsolete. Perhaps you’d expect to see them slowly disappearing from our streets, but that’s not what we’re seeing. 

Instead, as an organization, we’re noticing a shift. Our smart lockers have been popular in the parcel delivery space for some time, facilitating retailer-to-consumer deliveries/pick-up. But now other industries are noticing the potential. For example, libraries are implementing locker solutions for book delivery, grocery stores are using them to enable contactless shopping, and banks are exploring how smart lockers can become the ATM of the future.

You see, banking is more than just handling cash. There are loans, savings and investments, mortgages, and credit cards; in other words, more potential for self-service. Maybe withdrawing cash is a thing of the past, but accessing these vital services is still very much relevant for our present and future. Therefore, banks are implementing smart lockers to act as advanced ATMs. These kiosks are enabling documents to be securely transferred from the bank to the consumer, and vice versa. And as such, are empowering the customer to manage their finances easily and efficiently (the exact reason we love to self-serve).

The future of banking

We know how banks are using smart lockers, but the question is why are they finding an alternative future for the ATM? There are a few reasons:

1. To help them save resources and money. With more processes that are self-service enabled, there’s less need for banks to have physical spaces. The money spent on property can be invested elsewhere, for example in building more innovative solutions like contactless payments. 
2. Facilitate an improvement in the consumer’s experience. For the consumer, more self-service options can only be a positive. There will be no more queuing or waiting around to simply drop off a signed document, for example. And with staff freed up from the more mundane tasks, services will become more efficient and effective.
3. Enable 24/7 access to banking. Typically, banking hours are 9 am-5 pm, the same office hours of many organizations. So, how can workers get their financial admin done when the bank is shut during their free time? Smart lockers enable banks to offer 24/7 services. Customers can drop off documents safely and securely at a time that suits them, much like they can withdraw cash at 2 am if they need to.

The ATM has been a staple in managing our finances for many years and while in its current form the ATM is becoming somewhat of a pastime, the revolution of the ATM is well underway. In the future, we can expect more and more banks to provide advanced kiosks, giving a new lease of life to the concept of the trusty Automated Teller Machine.

The post The Future of Banking: Revolutionizing the ATM appeared first on PaymentsJournal.

The advent of artificial intelligence (AI) and machine learning (ML) in financial services is pushing the eternal battle against money laundering into a new phase.For some time, in a bid to curb the amount of illicit finance passing through their systems and to comply with ever-tightening regulations, financial institutions have been throwing money at anti-money laundering (AML) practices. In 2020, a report by LexisNexis estimated that annual worldwide spending on AML compliance exceeds $180bn a year.[1]

It isn’t working. Despite widespread investment by financial institutions in both compliance staff and alerts-based monitoring technology, the United Nations estimates that between 2% and 5% of global GDP, or $800bn-2tn, continues to be laundered every year.^[2]  In the EU, transactions involving ‘dirty money’ account for about 1.5% of gross domestic product, or €133 billion annually.[3]

Why aren’t financial institutions making a dent? It’s partly a numbers game. The dramatic increase in transaction volumes bears some responsibility, as consumers increasingly favor cards and other e-payment types over cash. In parallel, though, it’s also true to say that compliance officers and transaction analysts simply need more help. They need better monitoring tools and access to more transaction data before they can improve on their identification and elimination of criminal activity.

Legacy transaction monitoring systems are no longer up to the task. Inaccurate identification is allowing fraud to slip through the cracks. Many systems are also generating an unmanageable number of false-positives alerts, tying compliance officers in knots as their investigations routinely come to nothing. Thankfully next-gen AI and ML-driven transaction monitoring systems are addressing both of these issues.

But there’s a bigger, more pernicious problem: Money launderers use more than one bank.

Banks aren’t working together on AML and criminals know

Banks monitoring their own transactions is never going to be enough. Dirty money is almost never washed through a single entity or via one financial institution. Money is placed, layered, and integrated across an elaborate spiderweb of entities in order to obfuscate its origins and frustrate its supervision. And, for the most part, it works. Accurate estimates are hard to come by (by definition) but it is broadly acknowledged that just 1% of dirty money gets seized.

A financial institution’s ability to spot individual instances of money laundering, therefore, can’t solve the problem. Not least because it is almost impossible to uncover a money trail or laundering network from a single transaction. Typically, transaction monitoring practices only cover one small subsection of a much larger, intricate money flow weaving its way through a network of banks and regulatory jurisdictions.

Banks must ‘combine and conquer’ to extend their AML capabilities

Historically, banks have mostly fought the AML battle alone due to commercial and competitive tensions, the lengthy process of setting up public-private partnerships (PPPs), and to comply with the mandates imposed by data privacy regulations, like GDPR. To do so, they have relied either on software built internally to monitor payments and transfers or have worked with a third-party supplier for their transaction monitoring. Thanks to data privacy laws, even when external software is used by multiple institutions, there has been little potential for compliance officers to work in concert with one another.

But consider this: what if a third-party provider, in addition to supporting PSPs and banks with their transactions, also enabled them to perform network analysis across multiple financial institutions without violating compliance mandates? Extending this thought, imagine the crime fighting potential of an approach that combined ML algorithms with open banking APIs to aggregate and analyze transaction data from thousands of banks. Think of the visibility that could be generated (potentially uncovering entire criminal networks) and the amount of financial crime that could be halted in its tracks, in real-time, as a result.

Key factors enabling cross-institutional cooperation

Taking a cross-institutional approach to transaction monitoring and risk profiling goes against almost most banks’ instincts. It is also difficult to achieve technologically. Then, there are regulatory hurdles to clear. To counter this and ensure trust across the network, security and data sharing guidelines must be negotiated and agreed upon ahead of the cooperation. Then protocols of communication and feedback mechanisms can be put in place to alert participating banks to potential criminal activity.

Importantly, ownership and control of the platforms used to share the data should still belong to the individual banks. Suspicious data will still need to be encrypted, anonymized or AI-synthesized before it can be shared in the network and, most likely, each bank will subsequently be able to act based only on the grounds of its own data, not in response to a broader investigation.

Crucially, such mutual transaction monitoring efforts must never be seen as a substitute for a bank’s internal fraud monitoring. They should be complementary and used to bolster a financial institution’s risk management, based on the analysis of multiple investigators and detection models instead of just their own.

Data is the key to collaboration in AML monitoring

Data is the answer, but it is also the problem. Most financial institutions will have a mix of datasets and transaction monitoring systems already in place. These will be difficult to harmonize and share, so that insights can be drawn across them. They will also vary considerably from bank to bank.

If payments providers partner with top compliance professionals, they can unlock data silos and enable cross-institutional monitoring to happen now, while working within the boundaries of regulators’ varying compliance requirements. The result would be a more quantified, holistic, and continuously up-to-date view on all aspects of risk for all individual entities and processed transactions.

Should financial institutions adopt this collaborative approach, it will significantly increase the business value of their transaction risk investigators and, finally, enable a coordinated – and substantially more powerful – response to the money laundering menace.

[1] The Economist: The war on money laundering is being lost

[2] United Nations Office on Drugs and Crime

[3] DW.com: The EU declares war on money laundering

The post Why Banks Must Join Forces in the AML Fight appeared first on PaymentsJournal.

The Neobanking Market is set to grow from its current market value of more than USD 45 billion to over USD 600 billion, as reported in the latest study by Global Market Insights Inc.

With COVID-19 bringing the use of mobile and online banking to the forefront, the global neobanking market is slated to register momentous gains through the forthcoming years. While these services were witnessing rapid adoption even before news of the virus broke, their uptake has picked up significant momentum since the pandemic took hold.

In fact, according to Fidelity National Information Services, an American multinational financial corporation that works with more than 50 of the largest banks in the world, an unprecedented 200% increase in new registrations for mobile banking was reported in early April 2020, with mobile banking traffic jumping 85%.

A plethora of neobanks have successfully leveraged these conducive industry conditions to foray into the sector, so much so that prominent industry players, namely Brazil’s Nubank S.A., Germany’s N26 GmbH, and USA’s Chime Financial, successfully accrued valuations of $10 billion, $3.5 billion, and $14.5 billion respectively by Q4 of 2020.

Explosive growth of industry players

Since the meteoric rise of neobanks, including those aforementioned, during the pandemic, their growth trajectory has consistently risen. In fact, the three players mentioned above have gone ahead to raise their respective valuations in the two-year span of 2020, and 2022.

Nubank’s total valuation hit the $41.5 billion mark, higher than the nation’s biggest bank, as it made its Wall Street debut via an initial public offering in December 2021. The number made Nubank the most valuable publicly listed financial institution across the entirety of South America. In December 2021, the company also raised more than $2.6 billion through a minority stake sale.

Meanwhile, earlier in 2021, Chime raised more than $750 million through a Series G funding round in August, bringing its valuation up to $25 billion. The company managed to effectively raise its valuation by approximately $10 billion within the span of a year, showcasing an incredibly strong investor and consume appetite for neobanking.

The global financial inclusion imperative

A determinant that would be playing a major role in further proliferating industry revenue would be the global financial inclusion imperative. According to the World Bank, being excluded from a formal financial system is recognized as one of the biggest barriers to a society without poverty.

As per the most recent World Bank estimates, more than 1.7 billion people across the world do not have a bank account. The ratio of those banked against the unbanked is particularly more skewed in emerging economies, particularly ones in MEA and the Asia Pacific.

However, this does not necessarily translate to the unbanked leading an inactive financial life. In fact, the so-called gap in the system has made way for an informal financial ecosystem to prop up in such regions, one that heavily relied on physical transactions and did not give way to formal system inclusion for many years.

This scenario changed when COVID-19 spread across the world and crippled the physical transaction-heavy informal system. Neobanks have seen great success in bringing in the unbanked demographic to the fold through mobile money. Service providers and regional governments have both worked in tandem to eliminate hesitancy through favourable policies and offers, laying down the groundwork for neobanks to make the financial inclusion imperative a reality.

Final thoughts

Unlike conventional banking systems, neobanks have shown promise and are being hailed as tools for global financial inclusion. With such ambitious horizons to chase, and the strong investor-consumer appetite they are already witnessing, the neobanking market is ripe to experience a period of distinguished growth in coming years.

The post Growing Popularity of Mobile Banking Platforms to Foster Neobanking Market Outlook Through 2028 appeared first on PaymentsJournal.

When Zelle was first launched, there were no plans to use the app for anything other than person-to-person (P2P) or consumer-to-business (C2B) invoiced account transfers. As Fool.com noted in an article based on the Wall Street Journal’s original reporting, that could be changing. The large banks that own Early Warning Services, the company that runs Zelle, are considering allowing merchants to accept Zelle for purchases. Why the change of heart? Two things, I think: 

• The success of Zelle to attract and continue to grow its consumer base
• Competition from the likes of Venmo and Cash App

If the banks decide to make this move (it’s not certain yet they will, but I suspect it’s highly probable) it will be beneficial for them. They can add this solution to their stable of acceptance devices for their merchant clients and control the pricing. Merchants will like it because of the large, installed consumer base and the fact that Zelle is not associated with the card network rules, plus transactions can be received in real time. The downsides are that this represents a new vector for fraud and the consumer adoption is unknown. Unless incentives and protections are aligned such that consumers also benefit, adoption will be minimal.

From the Fool.com article:

America’s big banks are in a football huddle about whether to call an audible that would screen credit card companies out from one of their most lucrative revenue sources.

According to The Wall Street Journal, several notable Wall Street names are considering expanding their use of money transfer service Zelle to retail purchases, which would come at the expense of card issuers like Mastercard or Visa. Who owns Zelle? The banks.

The banks are reportedly considering creating a payment option on Zelle where money could go from a customer’s bank account to a merchant. Zelle, used by 1,425 banks and credit unions, handled 1.8 billion transactions last year, with $490 billion changing hands. That’s more than double 2019 figures and laps Venmo’s $230 billion worth of processed transactions.

According to sources who spoke to the WSJ, Wells Fargo and Bank of America are in favor of the move, but JPMorgan, US Bank, and Capital One are on the fence.

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Zelle at the Point-of-Sale… Maybe appeared first on PaymentsJournal.

In recent years, a new type of financial institution has emerged: the neo bank. Neo banks are digital-only banks that offer many of the same services as traditional banks, but without the overhead costs associated with brick-and-mortar branches. As a result, they are able to offer competitive interest rates and fees. In addition, neo banks often have cutting-edge technology that makes managing finances easier and more convenient. For example, some neo banks offer mobile apps that allow customers to deposit checks remotely, track spending, and transfer money quickly and easily. As more and more consumers ditch traditional banks in favor of neo banks, it’s clear that this new type of financial institution is here to stay. Where does Starbucks fit in?

Starbucks continues its growth in loyalty and stored value programming, and as Abhinav Paliwal explains in Finextra, the “Starbucks is a bank” vision from Howard Schultz is true, making it a quiet player in the neo-banking industry:

By 2011, 1 in 4 Starbucks transactions (25%) were done via the revamped Starbucks Card program. Starbucks Rewards now has 24m+ members and spending on the Card program has exploded.

In the decade after the gift card launched (2001-2011), customers spent $10B total on it. Today, they load or reload $10B+ per year on the Card program (40-45% of the chain’s entire sales).

The perks and program are habit building. And customers happily keep the Card loaded with money for future consumption.

Most interestingly, Starbucks is essentially operating as a bank without the traditional regulations and its deposit volume would rank it in the upper echelon of U.S. banks:

For Starbucks, stored card value is effectively a “bank deposit”. It is recorded as a liability and Starbucks can use the funds immediately for the business. Stored value has fewer regulatory requirements, though:

• It can’t be redeemed for cash

• It doesn’t offer interest

• It isn’t insured

To put Starbucks ‘ $1B+ in stored value in context, consider that 85% of US banks have less than $1B in assets.

While the scope is clearly limited to Starbucks locations, the opportunity to continue to hold significant consumer share of wallet is a clear differentiator because of the deposited value held along with the volume of locations enabling easy consumer access to spend their stored value credit.

Overview by Jordan Hirschfield, Director of Research at Mercator Advisory Group

The post Starbucks Is Operating Like a Bank appeared first on PaymentsJournal.

Importance of Real-Time or Faster Payments for Banking A2A Transfers:

Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s Report: 2022 U.S. Faster Payments Forecast: A Year to Build On

Importance of Real-Time or Faster Payments for Banking A2A Transfers:

• 19.9% of consumers rate real-time or faster payments use for banking account-to-account transfers as very important.
• 23.5% of consumers rate real-time or faster payments use for banking account-to-account transfers as important.
• 26.1% of consumers rate real-time or faster payments use for banking account-to-account transfers as somewhat important.
• 11.9% of consumers rate real-time or faster payments use for banking account-to-account transfers as not important.
• 18.6% of consumers rate real-time or faster payments use for banking account-to-account transfers as not at all important.

About Report

2021 was an important build-out year for real-time and faster payments in the U.S., as explored in Mercator Advisory Group’s annual look at the market; 2022 U.S. Faster Payments Forecast: A Year to Build On. Payment options such as the debit network’s debit push payments, The Clearing House RTP network, Same Day ACH, and Zelle all experienced strong growth dependent on the specific use cases where each predominates and the maturity of their respective solutions. Following through on the pandemic fueled growth in 2020, more financial institutions and technology providers integrated to faster and real-time rails, launched new products, and advanced their strategies.

“We have found in the last year that consumers are becoming much more aware that some payments transact quickly, even instantly, which for transaction types like bill pay, account-to-account transfer and some person-to-person funds movement is beneficial. This leads to a compounding effect that is creating greater demand for faster payments in more use cases,” comments Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group and author of the report.

The post Importance of Real-Time or Faster Payments for Banking A2A Transfers: appeared first on PaymentsJournal.

Growing consumer demand for innovative digital banking services is higher than ever, yet the strain on IT resources at financial institutions (FIs) is hindering their ability to work on the initiatives that drive innovations that matter – initiatives that elevate the customer experience in a rapidly evolving digital landscape. As customer expectations evolve, low-value, repetitive tasks are congesting and slowing down IT workflows, negatively impacting the employee experience. The fallout from these inefficient processes, antiquated platforms, and the logjams they create? Deteriorating job satisfaction and employee retention.

Colliding with years of IT fatigue, the ongoing labor shortage hits FIs extra hard as employees rethink their expectations for work and pursue new career opportunities. With approximately 47.4 million people having quit their jobs in 2021 and the crisis only expected to continue as workers reshuffle, the talent shortage will impede the ability of FIs to deliver on the critical innovations their clients and members are expecting and impact their bottom-line profitability. 

The growing consumer demand for elevated digital banking experiences drives an acute need among credit unions and banks to accelerate the pace of digital innovation. Customers expect their digital experience to be reliable and intuitive. According to a study by The Harris Poll, 40% of financial consumers would leave their primary financial institution for a better digital banking experience, with 56% claiming their local credit union or bank’s digital offering fell short of their expectations. To meet customers where they stand, before they choose a financial institution that meets their demands, FIs must tee up their IT staff for accelerated innovation and the ability to focus on the high-value tasks that drive institutions forward.

Workload automation and orchestration can alleviate these institutions’ workforce crises while increasing productivity and innovation. Automation empowers overburdened IT departments to provide a better customer experience and eliminates the need to spend countless hours fighting fires to keep disparate platforms online.

Automating IT workflows  

Automation and orchestration allow FIs to manage workloads within departments or across various IT software and hardware functions. This enables companies to easily automate business-critical operations by creating self-service workflows, deploying server updates, and monitoring an entire system from a single user interface. Workload automation software will schedule and manage multiple routine processes across systems in your organization without the need for ongoing staff intervention.

Eliminating person-hours spent completing repetitive tasks frees up staff to spend time working on higher-value assignments while critical business imperatives are running themselves with unmatched reliability. As tedious processes like audits and vast data extraction migrate to automated, repeatable workflows, initiatives that will grow the business have a wider path to success. Meanwhile, employees are empowered to learn new skills that will support their professional development and rest assured the ship will stay afloat after the clock strikes five. 

FIs have complex data pipelines to manage between various applications, and using automation to streamline workloads ensures data gets where it needs to be faster. Most credit unions and banks are familiar with batch processing to handle payments – from Automated Clearing House (ACH) to mortgages to online payments – yet find themselves struggling to maintain a quick and flexible cadence. Traditionally, the common workaround has been to burden staff with late shifts or ask them to log in remotely from home to authorize different steps in the process or fix errors manually. This is not an efficient way to use work hours, with the additional detriment of making staff responsible for work tasks during their personal time. Workload automation and orchestration allows FIs to process payments automatically without human or manual intervention in real-time rather than in a once-a-day batch that bogs down all other processes and threatens staff work-life balance.

Before banks and credit unions began leveraging automation to streamline workloads, increased human errors occurred, staff had to work long hours into the evening and weekend, and processing of financial transactions was delayed.  This contributed to heightened stress levels across staff and negatively impacted the customer experience. Automation helps keep customers around by avoiding processing delays and maintaining service reliability. By automating workflows, financial institutions can develop more consistency in delivering banking tools – and deploy mobile ones quicker. FIs can use automation to streamline many customer-facing operations, such as monitoring for fraudulent transactions and reviewing new account and loan applications. What once bloated customer interactions with physical paperwork has gone digital for many lenders, shortening processes that took weeks to within days, hours, and minutes in some cases.

In line with a migration to the cloud that spans nearly every industry, cloud-based workload automation can create all of the efficiencies above and be up and running quickly by reducing set-up and configuration time. Other perks of workload automation in the cloud include eliminating expensive software licensing fees, reduced overhead costs of maintaining machines, and disaster recovery preparedness that supports more robust business continuity.

Automation is a springboard for innovation

Financial institutions will need to lean heavily on their IT staff to meet rapidly evolving consumer expectations for future product development. As banks and credit unions look to overcome the labor crisis and retain their workforce, workload automation will reduce the burden on IT departments and make their roles more attractive. By using automation, organizations will also be less acutely impacted by the strained labor market, freeing financial institutions to innovate and develop new customer services without the manual, repetitive tasks inherent in IT processes.

The post Freeing Up IT: How Workload Automation Drives Innovation for Banks, Credit Unions appeared first on PaymentsJournal.

Most of the largest banks have announced a shift to the cloud using microservices and APIs. U.S. Bank has selected Microsoft Azure as the target for new projects, as well as for the lift and shift of existing platforms. Key to lowering future maintenance costs and flexibility will be the refactoring of the existing solutions it moves and what it decides to keep on the mainframe.

As the world becomes more productive and cost-effective, banks need to adopt digital operations, even as the internet is transitioning from Web2 into Web3. Banks that are slow to adopt cloud computing and open APIs will have failed to gain the productivity and cost efficiencies these technologies make available. Core solution providers need to be willing to partner with a wide range of service providers, including those with whom they may compete. Cloud-native solutions providers know they become stronger as more third-party service providers add value to their core offerings, and so welcome all valid third parties that are willing to invest to make that integration happen:

“With this move, the Minneapolis bank is joining many of its peers. Accenture published research last week that found that 82% of bank executives intend to move 50% or more of their mainframe software to the cloud.

“That is a significant shift from the data that we had collected prior,” said Nichole Lanza, managing director – technology strategy and advisory for banking cloud at Accenture. “What surprised us even more was that more than 75% of the workloads were expected to go [to the cloud] over the next five years.”

Over the past year, many of the security, risk and compliance challenges have been solved for banks around cloud computing, she said.

“And the technology has matured,” Lanza said. “We have the technology to automate the migration of the workloads.”

Why Azure

The bank chose Microsoft Azure after going through a rigorous evaluation process with all three major cloud providers — Amazon, Google and Microsoft — over the course of several months, according to Venkatachari.

“We considered a variety of technology issues, what’s best from a risk and compliance perspective and security aspects as well,” he said. “And we concluded that Microsoft Azure would meet our needs the best, in terms of their approach to partnering and working together. And frankly, it also helps us further a deeper business partnership that we have with Microsoft.” Bank staffers already use the software giant’s Office 365 and Teams, for instance.

Security and resilience were big topics in the talks between U.S. Bank and Microsoft, said Bill Borden, corporate vice president of Microsoft’s Worldwide Financial Services.”

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

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Don’t miss another episode of Truth In Data! Click on the red bell in the lower-left of your screen to receive notifications as soon as the episode publishes.

Data for today’s episode is provided by Mercator Advisory Group’s Report: 2021 North American PaymentsInsights: U.S. COVID-19 Update and GPR Prepaid Cards Update

Changes in Banking Behavior Since the Start of the Pandemic:

• 16.6% of consumers withdraw cash from an ATM less than they did before the pandemic, while 17.7% do so more.
• 14.2% of consumers deposit checks at an ATM less than they did before the pandemic, while 15.3% do so more.
• 13.4% of consumers deposit cash at an ATM less than they did before the pandemic, while 15.8% do so more.
• 7.7% of consumers use online banking through their primary FI via a computer less than they did before the pandemic, while 25.8% do so more.
• 7.1% of consumers use mobile banking through their primary FI’s app for activities other than deposits less than they did before the pandemic, while 23.9% do so more.
• 7.8% of consumers deposit checks via their primary FI’s app by taking a picture of the check less than they did before the pandemic, while 21.7% do so more.

About Report

Mercator Advisory Group’s most recent report, 2021 North American PaymentsInsights: U.S. COVID-19 Update and GPR Prepaid Cards Update, summarizes the effects of COVID-19 on the payments industry: how the market reacted to the pandemic, what impact it had on the payments industry, and its effect on credit card payments. In addition to providing insights into the state of the payments industry during the pandemic, the report also showcases data on general-purpose reloadable (GPR) cards: what consumers think about prepaid cards and which incentives make consumers more inclined towards certain types of these cards.

The report is based on the North American PaymentsInsights survey administered between August 27 and September 14, 2021, across a representative sample of 3000 consumers ages 18 years or older in the U.S. and 1000 consumers ages 18 years or older in Canada.

“Through the survey data, we have seen some interesting influences of COVID on the increased consumer use of online and mobile banking in comparison to the use of ATMs.” stated Pragya Khanal, an analyst working on the report.

The post Changes in Banking Behavior Since the Start of the Pandemic: appeared first on PaymentsJournal.

Handling rising consumer expectations amidst a digital transformation is the new norm for the banking industry. Online and mobile banking have become routine for most consumers, making digital customer service a top priority for most financial institutions. In fact, according to an FIS Consumer Banking Report, 72% of all bank interactions are now digital. With this rising consumer demand for information at the touch of a button, financial brands will be challenged to provide a seamless customer experience while fostering the personal connection that remains vital to the industry. As we enter 2022, a robust digital customer service strategy can help financial institutions deal with staff shortages and keep up with the evolving digital landscape of banking.

Win new customers in 2022 with industry-leading digital customer service strategies

Financial institutions are known for providing personalized, interactive customer experiences that foster long-term brand loyalty; this is part of what contributes to this industry’s incredible low churn. However, in-person interactions no longer drive this brand loyalty. Today, 71% of consumers regularly bank online, with 43% banking via their mobile devices. As digital banking continues to rise in popularity, customer service expectations are also soaring. According to a recent survey, 83% of customers cited good customer service as their most important criterion when purchasing a product or service. In the new year, brands can win favor, create customers for life, and save money by delivering premium digital customer service.

Check out the following digital customer service tips that can secure long-term relationships and high satisfaction rates in 2022:

1) Simplify agent workflows and facilitate easy channel switching

As consumers increasingly rely on digital channels to resolve their questions, financial institutions are bound to face a flood of incoming questions in 2022. And with omnichannel communication remaining a top priority for most brands, there are now endless platforms where consumers can engage with their bank. In fact, research suggests that most consumers prefer multiple options; 62% want to engage with brands across multiple digital channels, including SMS messaging, social media, online chat, and more.

This can create a headache for customer care and CX teams. Not only do they have to offer the option to switch channels seamlessly; they also have to bolster cross-team collaboration to  understand all aspects of each customer’s journey. But digital-first customer engagement solutions can make this easy. And by enabling seamless channel switching between all digital mediums, brands can provide a cohesive customer experience while saving their care agents time. For instance, a banking customer might reach out about a fraudulent charge via email, but should be able to follow up on phone, SMS messaging, or social media without needing to repeat the issue.

Facilitating channel switching also means prioritizing swift agent response times, a factor that is increasingly crucial for customers across all industries. 79% of consumers want to receive a fast response, and on social media more than one-third of customers expect a response within 30 minutes. Rather than make agents go back and forth between multiple channels to play catch up before addressing an inquiry, offer an omnichannel platform to provide a single view of all previous interactions, making agents’ lives easier and cutting down on response times.

2) Implement digital self-service tools to mitigate high call volume

Post-2020, the majority of digital call centers are dealing with lean teams and high call volumes, making it difficult to maintain SLAs. Many brands are turning for help to call deflection, and the best way to deflect calls is to offer self-service options. This is key for the banking industry to tackle repetitive customer queries and in turn, reduce agent attrition. Self-service allows for customers to answer their questions independently — an option they often prefer, given that 81% already attempt to resolve an inquiry on their own before interacting with an agent. Not to mention, these tools are integral to escalating high-priority cases that require a live agent.

Banking brands can also take their digital customer service to the next level by investing in AI-powered messaging and online brand communities. Advances in AI have played a major role in allowing chatbots to tackle everyday requests like activating a new card or signing up to receive billing notifications. Chatbots also allow your business to provide around-the-clock customer support, even outside of banking business hours. A robust digital self-service strategy should also feature an online brand community, which allows banking customers to answer each other’s questions and share up-to-date information about your brand experience. Not only does this take the burden off of your agents, but allows for peer-to-peer engagement and knowledge building, providing an amplified user experience for your customers.

3) Use customer experience insights to understand consumer behavior across digital channels

With digital customer service in high demand for the banking industry, it’s crucial to utilize a customer experience (CX) insights tool to track customer questions, feedback and overall sentiment about your brand. These tools can be especially helpful to identify your customer’s financial aspirations such as buying a house or planning for retirement, or common questions about certain bank accounts or services. Likewise, CX insights software is vital for industries like banking that rely on high-security software to keep customer information safe.

Analyzing customers’ most common questions can help brands adjust their digital customer service strategy to tackle these simple inquiries before they come up. In particular, a CX insights tool can pull all digital customer service interactions into a single dashboard, making it easy to analyze customer communications across multiple platforms, and identify the challenges that customers face.

Deliver world-class customer service with a digital approach

As we enter 2022, providing a top-notch customer experience for banking consumers will be integral to your brand’s success. As online banking continues to soar, delivering personalized service without sacrificing efficiency will determine existing customer loyalty and new business. Consumer banking isn’t going anywhere, but keeping up with the ever-changing landscape of the industry will put your brand at the forefront of innovation. By investing in a CX insights platform, banking brands can reduce the volume of inquiries from the start and kickoff 2022 with a bang.

The post How the Banking Industry Can Reinvent Its Digital Customer Service in 2022 appeared first on PaymentsJournal.

It’s indisputable that the pandemic has impacted consumer behaviors in all sorts of ways, some more significant than others. The drastic shift to remote work, for example, feels like a sea change – one that has fundamentally rewritten the rules of business and our cultural norms around employment. 

Many of the behavior changes were already underway. As many analysts have noted, the pandemic did not so much introduce but accelerate technology trends and technology adoption. Telemedicine, for example, was already a thing, but I can’t say I ever tried to book a telehealth appointment before the pandemic. I’m not even sure if my GP offered it as an option. She does now, and I’ve certainly gotten used to not driving across town for routine appointments. I’m not shopping for a provider, but if I would insist on the option to book a telehealth appointment. 

As with many industries, banking is having to adapt to rapidly evolving consumer behaviors and expectations. Some of these changes will have lasting impacts on how banks do business, how consumers think about their banking options, and on customer expectations regarding service, access, and the value banks provide. 

The accelerated technology timeline

Prior to the pandemic, banks were already working to meet consumers’ shifting demands and evolving behaviors. A rise in the popularity of various fintech apps led banks to increase investment in initiatives including mobile apps, transfer services, and new savings and financial options. As consumer behavior changed in the wake of the pandemic, these investments only became more important. 

When surveyed, 43% of respondents said the way that they bank has changed due to the pandemic, with 66% stating that they are visiting physical stores far less. More and more consumers are using mobile apps for their primary banking. In April 2020 alone, the industry saw a 200% increase in new mobile banking registrations, with overall use growing 20% over a 6 month period in the same year. 

With digital growth, of course, comes a decrease in the use of physical products. Surveys show a 57% decrease in cash usage among respondents, alongside a rise in payments using credit cards (7% net), debit cards (10% net), and online payment tools (14% net). At the same time, more than 250 banks across 50 markets have closed, as individuals find fewer and fewer reasons to visit physical locations. 

The most exciting thing about these changes is that they’ve dramatically increased mobile adoption among the 55+ demographic, suggesting a watershed moment of adoption for a cohort that otherwise would have likely taken much longer to achieve. 

Consumer expectations continue to evolve

Both in response to the new-found ease of use that digital banking provides, as well as the pandemic itself, consumer expectations continue to evolve, putting pressure on banks to do the same. Twenty-seven percent of survey respondents agreed that banks will become more flexible in the next few years, and 26% said that they expect to invest more to better prepare for the future. 

What’s more, over half of respondents indicated that future purchasing decisions will be impacted by banks actively supporting their community, being transparent, and fundamentally doing good for society. Forty-four percent said their purchasing decisions will be negatively impacted where they see banks focusing on maximizing profits. Consumers have seen how their banks have responded in a crisis, and they’ve formed opinions that will drive their behaviors for years to come. During this uncertain time, PwC recommends that banks should “show empathy to [their] customers while making sound business decisions.”

Regardless of bank behavior, there’s been a widespread accelerated increase in the adoption of financial offerings outside of customers’ primary banks. Again, this is a trend that banks were already dealing with, but the pandemic brought stark fragmentation of consumers’ financial services as they sought out the best deals and options. Banks have been responding to outside pressure from new upstart services, but it’s become more typical for customers to have different services for their respective mortgage, student loans, and payments, just to name a few. 

With diversification comes fragmentation 

With all the change that is transpiring, banks are facing a big challenge: how to meet increasingly nuanced consumer expectations at the same time that the ecosystem of consumer services becomes more diversified and fragmented? How can banks provide the exceptional customer service and brand integrity that customers demand, while dealing with the varied array of services that customers are using in their financial journeys?

The answer is a concerted focus on the customer experience, more so than customer engagement. Your customer’s experience is no longer based on your brand alone, so every interaction your customer has with both you and your partners must be taken into consideration and strategically addressed. This is especially true as integrated ecosystems blur the lines between which engagements — and responsibilities — lie with each vendor. Strategic customer experience will only become more vital as the trends we’ve seen accelerate during the pandemic continue to evolve. 

With these shifting consumer trends comes a huge opportunity. Consumers are more financially aware than they have been in decades, which provides an opportunity for banks to build meaningful, informed relationships with their customers. More than ever, banks will have a prominent role in helping customers become better prepared through savings, investments, insurance, and income-smoothing products. 

We will emerge from this pandemic, but many of the changes to consumer behavior will remain with us. Banks should prioritize their strategic response to these trends, not just in order to survive in the short term but also to ensure long-term growth and success. 

The post How the Pandemic Has Changed Banking appeared first on PaymentsJournal.

The more things change, the more they stay the same. Looking back at 2021 – which promised to be the year that the industry realised the full potential of data-driven transactions, instant payments and cryptocurrencies – it is clear that although there is consensus on the direction of travel and the opportunities, progress continues to be hamstrung by familiar challenges.

Banks remain constrained by existing infrastructure and technology, demonstrating that the time for waiting has passed. Now is the time to prioritise the long-term revenue opportunities and build the capabilities needed to realise them safely and quickly.

As we look to 2022 and beyond, seven key trends mean that potential is starting to be translated into action.

1. The rise of agency banking and Banking-as-a-Service (BaaS).

In 2022, we’ll see the agency banking industry start to catch up with the embedded finance market, and the realisation that payments as a service requires a banking license. At Icon Solutions, we don’t believe that technology is the answer to every question. Hiring a Silicon Valley hotshot seldom solves the root cause of why change is so slow, as tactics without strategy is the noise before defeat.  To effectively transform, the right technology must be coupled with a profound understanding of the business process that translates into a pragmatic, navigable roadmap for change. – Toine van Beusekom, Strategy Director

2. Banks are working out the actual cost of transactions.

Banks don’t know their actual cost per payment transaction. 2022 will be the year they find out. And when they do, it will be too high by at least a factor of two. This means scrutiny will shift from change cost to run cost. Consequently, banks will need to understand their payments estate and build a target and transition roadmap to immediately address these unsustainable cost challenges and deliver wider value. – Liam Jeffs, Sales Director

3. The beginning of the end for core banking.

Any bank that’s been around for 10 years or more (i.e., most) invariably has some form of legacy core banking platform that is no longer fit for purpose. Yes, transitioning to something more suitable for today’s real-time, always-on world is a marathon not a sprint, but banks have been stood pondering on the start line for many years already.

Yet, banks are finally reacting to the starting gun and it’s clear that one size doesn’t fit all. Some banks are spinning up new world architectures, often leveraging cloud-based BaaS platforms and proving it in discrete parts of the business first. Others are de-composing their existing core banking estates, breaking the ‘elephant’ into bitesize chunks to either re-create in new, domain-focused, micro-services built in-house, or to enable third party BaaS components into a heterogeneous, API-enabled, plug-and-play architecture.

For most banks, these are long, hard, yards of change. But this could be the year that core banking as we know it really begins to change, or good. – Simon Barrows, Services Director

4. Impending card-mageddon.

Request to Pay has quickly become one of the most talked about initiatives in the payments industry. From Icon’s recent research, it is clear it has the potential to reduce costs, provide real alternatives to traditional payment options and increase visibility and transparency. This promises to change the way we pay.

Take merchants, who have been trying unsuccessfully for years to circumvent card rails to lower costs. Many in the industry see Request to Pay as an opportunity for merchant’s to finally reduce their dependency on payment cards, as the combination of instant payments rails, open banking APIs and Request to Pay services converge to drive consumers towards cheaper account-to-account (A2A) based payment options at the point-of-sale.

Could this be the sign that card-mageddon is heading our way? For banks, aligning technology with a clear strategy will be critical for Request to Pay services to realise their huge potential. – Louise Shorthouse, Senior Payments Consultant

5. Time for some action on leveraging payments data.

For UK and EU banks, 2022 will see the go-live of ISO 20022 upgrades for the Bank of England’s RTGS, the Eurosystem’s Target2 RTGS, and SWIFT’s platform for cross-border payments. While critically keeping focus on the infrastructure programmes, banks also now need to raise their sights to consider how they can achieve valuable business benefits by making use of the richer and more timely data, alongside open banking opportunities.

Inaction is not an option, with investment is urgently needed just to retain existing business and relevance, let alone generate new revenues or cost savings. The potential use cases for the data are many and varied, spanning improvements to a bank’s own operations and processing, as well as new or enhanced products and services for corporate, SME and consumer customers.

Banks will need to create prioritised plans for developing and launching data-enabled services, supported by an effective operating model, new skill sets, and secure availability of the clean data sources to feed the analytics. – Andrew Ducker, Senior Payments Consultant

6. Money launderers actually getting caught.

The inconvenient truth is that banks are losing the war on financial crime. Criminals are exploiting increasingly sophisticated tactics, customer behaviours are more complex and demanding, regulatory scrutiny is increasing. With the threat of huge fines and reputational damage looming, banks must work smarter to keep up, let alone get ahead.

There are advancements that we expect to see making a significant difference in 2022 enabling banks to find more criminals, faster. For example, machine learning detection algorithms alongside rule-based controls across both fraud and AML have huge potential to cut down on noise and facilitate better identification of potentially suspicious activity. Sourcing and continued management of data will continue to be a key area of focus to drive a more joined-up approach across ‘FRAML’. Cloud deployment architecture and the ability to leverage cross functional data stores will be an enabler for better data management. Improving data quality and currency moving from a periodic batch model to an event-driven approach will support the detection of suspicious behaviour closer to real-time.

This will not only reduce losses and meet compliance obligations, but also better protect end customers and the wider public from the terrible effects of financial crime. – Tom Cleaton, Anti-Financial Crime Centre of Excellence Lead

7. Banks embracing low code approach as middle ground.

Banks have become increasingly frustrated with the inflexibility of change and the constrictions that heavy-code platforms put on them, stifling their ability to innovate and serve their customers properly. This is exacerbated by the war for engineering talent which has reached boiling point.

The advent of the ‘low-code’ approach offers an alternative, wherein deployables (such as payment flows, business functions, rules, you name it…!) can be defined and moulded in a highly intuitive, non-code language, often coupled with dynamic graphical representation, and where the code itself is automatically generated, reducing the reliance on engineer resources. This approach has been catalysed by the adoption of domain specific languages (low-code languages that pertain to a specific domain, such as payments).

What does this mean in practice? Well, change is simplified and accelerated. Banks are less dependent on engineering resource. There is increased alignment and transparency between business and IT in what is being built. And banks have the right tools at their disposal as well as the time to focus on differentiating their offering. – Matt Piper, Pre-Sales Consultant

The post 2022: The Year That Banks Finally Change for Good? appeared first on PaymentsJournal.

McKinsey’s Global Banking Annual Review 2021 revealed that banks are trading just at their book value, versus non-banking financial institutions, which are trading at 1.3 times their book value. This is despite the fact that the financial system as a whole gained more than 20 percent in market cap (about $1.9 trillion) from February 2020 to October 2021. Fintechs are quickly increasingly their hold on the banking industry. As of November 2021, there were 10,755 fintech start-ups in the Americas.

According to KBV research, the size of the global neo-banking market is expected to hit $333.4 billion by 2026, at a CAGR of 47.1 percent. For banks, this is indeed a wake-up call to delve deep and find ways to turn this threat into an opportunity to recapture their revenue and customer base.

Several factors have contributed to the growth of fintechs – including the ability to provide personalized customer experience, greater financial inclusion, and products that address specific financial needs, with quick access and speedy service. Typically, fintech apps run on the latest technologies in a fast-paced, responsive environment that makes such value additions possible.

At the same time, 57 percent of respondents to the recently released ‘Innovation in Retail Banking Report’ from Efma  stated that their digital deployment was partial or that digital investments were not delivering as expected.

The question then is, how can banks mirror the operations of these fintechs, while also capitalizing on their inherent advantages of scale and reach.

How can a bank think like a fintech?

For banks to emulate the behavior of fintech, it is important that they rethink their organizational structure in favor of a flatter structure that allows for greater agility and responsiveness. Also, customer-response teams need to be more cross-functional with product experts, marketing, sales and branch staff working cohesively to deliver superior customer experiences. This also requires gathering customer insights gleaned across various touchpoints during the customer journey. Also, last mile employees in customer facing roles must be empowered with the tools, skills, and data to deliver solutions to customers, rather than merely redirecting them to the next level.

The work environment needs to evolve too to allow for hybrid working, part-time work, and other models that are a part of today’s gig economy. Building a culture of continuous learning in line with changing dynamics in the financial services market is essential for banks to counter the threat posed by fintechs.

Some ways to accomplish these goals are:

1. Build a Digital Twin: Given that banks often have to grapple with complex legacy architecture which could hold them back, building a digital twin that is separate from existing infrastructure can help. One great example is Marcus by Goldman Sachs, created as an online-only bank to add to the 150-year-old Wall Street investment bank’s traditional offerings. DBS’s Digibank, a branchless, mobile-only bank is another great example since it offers all the functionalities of a physical bank, and has gained over 1.8 million customers in India, within 18 months of its launch.
2. Acquire the Right Skills: Banks can choose to partner with fintechs or even buy them out rather than trying to develop the skills inhouse. The bank then becomes a collaborator in the ecosystem and expands capabilities quickly since any lacunae can be supplemented by a partner with those capabilities. This is a win-win for banks and fintechs as the latter will have the scale and reach that they could not achieve alone. A great example is RBL Bank’s digital transformation showcases the incredible journey of a regional, traditional bank becoming lean, responsive by leveraging a large pool of the partner ecosystem to build and deliver compelling digital propositions.
3. Participate in Building the Ecosystem: Banks can engage the start-up ecosystem in conducive geographies so that they have a front seat view of the changing dynamics and are empowered to drive change. For instance, DBS Bank in Singapore sponsors fintech events, providing a sandbox environment and use cases for start-ups. The bank also undertakes incubation of start-ups providing funding and support. Such an exercise can provide powerful insights to the parent organization too and help shape its journey.  

Staying relevant in the changing context

With customers becoming more demanding, countries offering pushing for real-time payment mechanisms, and open banking picking up, banks need to act fast. However, irrespective of the approach that they eventually choose, any strategy for the future must be cloud-first, API-first, ecosystem-first, mobile-first, and most importantly, customer-first. In addition, using the power of AI to leverage ML, deep learning, robotics, analytics and more is all important.

The post How Can Banks Emulate Fintechs to Stay Relevant? appeared first on PaymentsJournal.

This NYT article suggests that the large banks are tiptoeing to the cloud, but the reality is that most are moving as fast as they can. Any perceived tiptoeing is likely because the current IT infrastructure within the bank makes the transition difficult or because the major cloud providers struggle to implement the redundancy and security needed to address the concerns expressed by banks and regulators. The benefits of moving to the cloud are clear: it offers greater efficiency and lowers the effort to adopt new solutions. However, the article could do a better job explaining the difference between the various cloud deployment modes (public, private, hybrid, multi) versus the service type (Software as a Service, Platform as a Service, or Infrastructure as a Service) as most of these were presented as if there was no difference:

“Banks see huge potential for cloud technology to make their systems faster, more nimble and responsive to the needs of their customers. Consumer banks can develop cloud-based tools to quickly introduce new features in mobile banking apps or detect fraud. Lenders can use the cloud to process loan applications and analyze underwriting decisions for everything from mortgages to corporate borrowing. They can use machine learning to detect money laundering. When volumes spike in financial markets, traders can use extra computing power to analyze price movements and handle bursts of client activity. Still, the banking industry has been mostly slow to adopt cloud computing. Currently, major banks run their own data centers, which house computer servers that process vast troves of customer account data, payment records and trading logs. Running the machines is costly because they require a lot of electricity and also need to be kept in air-conditioned rooms.

While Wall Street leaders have long acknowledged the potential of cloud computing to cut costs, they have only allowed their firms to take halting steps. Executives have been hesitant because banks are tightly regulated by governments and any sudden changes involving consumer deposits or privacy aren’t possible. They’re also concerned that computing over the internet will open the door to cyberattacks. And some firms are held back by old computer systems that are difficult to revamp or retire, making the transition even more tricky.”

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

The post Are Banks Tiptoeing to the Cloud or Tripped up by Technical Bottlenecks? appeared first on PaymentsJournal.

The lines between banks and banking are blurring more and more. From credit cards to lending, trading products to cryptocurrency, fintechs are now providing sophisticated apps and tools to consumers who are demanding omnichannel services, low to no fees, and 24×7 on-demand customer service. Traditional banking and financial services firms have been slow to react. However, to remain relevant (or merely survive) you must adapt your bank to the technological and social changes that have created our new normal.

Transforming from the outside in and the inside out

An effective enterprise banking transformation must be informed by the external forces causing change while considering the deeply entrenched internal forces standing in the way. Your external customers, regulators, consultants, and experts are the ones who understand the direction of the market. But to implement changes and be a leader in your industry is akin to steering a mighty ship in a new and unfamiliar direction. Moving that mass and overcoming institutional inertia requires an in-depth knowledge of internal systems, people, processes, data and their collective interconnectedness. 

Successful banking process improvement requires placing equal importance on both internal and external forces. Transformation is also not a one-time exercise. Instead, think of it as a constant and consistent effort to improve the functions that are critical to running your organization. Your need to be effective and efficient in the transformation effort requires comprehensive data and insights into how your bank operates. 

The challenge for banks is in being effective and efficient in finding, implementing, and sustaining organizational improvements in effectiveness and efficiency. Yes, it is a circular reference, but one that can be overcome.

Initiating your banking transformation

Almost every financial institution has a transformation already underway. A recent study found that 8 in 10 banks are currently in the midst of transformation, yet only one-third say their efforts are more than halfway complete. Regardless of the slow pace, those efforts include:

• Expanding cloud usage to minimize infrastructure and increase scalability, 
• Deploying robotic process automation (RPA) to automate processes (with apps called “bots”), 
• Building connectors and APIs to integrate data and processes, and 
• Leveraging processing mining software to discover processes using system and event logs, and then to reconstruct those processes and find efficiencies.

All of these initiatives start with great enthusiasm and promise, but it takes significant time and effort to implement banking process improvement at scale. That’s especially true in larger FSIs as the scope keeps changing and deadlines pass by.

Answer these critical transformation questions

Consider the following questions whether you are in a transformation journey or planning to embark on one. These topics apply to many areas within the organization, from front office and global business services (GBS) to compliance and risk management. The intent is to evaluate the breadth of your processes, people, systems, and data involved in each and every action your firm takes. Only then can you grasp the scale—and potential—of any transformation effort.   

• How many systems and applications (whether legacy, web-based, mainframe, or productivity apps) are used to initiate and complete a specific process? 
• How much effort do workers put on each system and application during each process, and where are the bottlenecks? Is the organization adequately training and upskilling employees?
• How much time do workers spend toggling between different applications to complete their day-to-day tasks? 
• What and where are the operational risks lurking in the background, whether it be making costly calculation mistakes in liquidity and cash management or reporting incorrect regulatory information that can attract high fines and penalties?
• How well do your enterprise resource planning (ERP) and customer relationship management (CRM) systems support the products and services you’re providing to customers today and intend to provide tomorrow?
• How much time, effort, and resources are required to map business processes and update process documentation when processes change?
• What are your golden sources of data, and is the data being used efficiently by your artificial intelligence (AI) and machine learning (ML) systems to give you the insights you need to manage your business?

These questions cannot be answered with manual exercises, or by bringing in an army of consultants, or using traditional BPMN processing mining software. To understand your complex and overlapping universe of enterprise systems and processes requires more intelligence, computing power, and speed than any of these traditional solutions can possibly offer. Unless, of course, you have years to wait for your transformation to take hold. 

Why process intelligence plays a key role in banking transformation

Traditional methods of understanding processes are process mapping, process mining, and process discovery. However, each of these methods returns an incomplete view of processes based on a snapshot of how the process was executed at a single point in time. Additional uncertainty comes from manually monitoring processes, which will undoubtedly disrupt workers and provide inaccurate results. 

More technical approaches avoid this disruption by analyzing application log files, but they miss steps performed manually or outside of a limited set of applications. Finally, these methods only show what happened today, but that data is then stale tomorrow. Not a good foundation for an enterprise-scale transformation.

Process intelligence overcomes all of these shortcomings by automatically and continually acquiring process data at scale across any system in your firm. It uses AI and computer vision to provide clear and accurate visibility into the current state of your processes, and captures data from across regions, shifts, departments, and more—all without disrupting workers. This provides an accurate and comprehensive foundation from which to automate processes, drive digital transformation, and optimize workflows. 

The post Strategies to Kickstart Process Improvements in Banking appeared first on PaymentsJournal.

The banking and finance industries are going through a significant shift with the rapid growth of new payment players like Stripe, trading platforms like Robin Hood, and integration services like Plaid. In the rush to stay relevant, banks are exploring various approaches to accelerate digital transformation. Banks should keep their core competency around compliance top of mind in this process. 

It is tempting to try and rip out the mainframes in a rush to support the latest cloud technologies. But banks and other financial organizations have quite a bit of knowledge already baked into their legacy apps. Banks that develop processes for infusing compliance into existing systems are much more likely to thrive in the turbulent times ahead. 

We saw this in Europe as the banking industry prepared in mass for the shift to Open Banking. Leaders put as much attention on the processes for building apps in a compliant way as the technology for building them. DevSecOps recently grew in importance as enterprises struggle to address the security implications of new features earlier in the life cycle. An increased focus on compliance could give banks a leg up in the rush to monetize new services, products, and partnerships. 

A focus on culture

In the run-up to Open Banking in Europe, technology executives started spending more time talking about organizational structure than technology. Bank technologists weigh the pros and cons of tribes, guilds, and other novel groupings. 

Amidst this backdrop, Barclays, one of the world’s oldest banks, discussed the creation of “control tribes” that worked with other teams from the beginning of any new projects. These teams focused on identifying any potential problems in compliance or security issues when they were easier to fix. 

In 2016, Jonathan Smart, then head of development services at Barclays, observed that in some cases, making a single code change required an average of 56 days to file all of the appropriate forms and wait for approvals. The control tribes found ways to streamline the compliance lifecycle by reusing the existing code and processes as much as possible. This approach allowed them to push out weekly updates and reduce code complexity. 

Breaking through the logjam

Embedding compliance teams into the DevOps lifecycle helps address one of the biggest bottlenecks in the rollout of new financial products. The compliance department often has to veto a lot of ideas. But this faster failure also helps the organization rapidly innovate around the compliant pieces. 

Banks, in particular, need to address massive reporting requirements: this grows in complexity with the constant pace of new financial and privacy regulations. Banks also need to include auditability and accountability as critical components of any software update. 

At the same time, the core competency of bank culture compared to other industries is compliance. They have a long history of developing relationships with regulators, building products that comply, and the investing money in support of compliance. This is one of the most significant barriers preventing other organizations from penetrating the banking industry. 

Many banks attempt to move to digital without realizing the amount of embedded knowledge in their current systems. One of the most effective strategies is to keep what they are doing today.  The organizations create a simple interface layer to surface the legacy data and processes already baked into the system. 

Automating smaller chunks

These existing systems are just the beginning of bringing more agility to the compliance process. The next phase lies in architecting the systems and methods for better compliance management. Carl Nygard, technical principal at ThoughtWorks, recently suggested that compliance teams consider emulating DevOps best practices around composability and automation. 

Modern developers see some of the most significant productivity gains by reusing existing software libraries or customized components as part of new projects. They compose and configure the new application functionality rather than rewriting everything from scratch. One of the significant innovations of microservices is that enterprises found ways to break larger monoliths into smaller applications that could be reused rather than rewritten. 

The most successful organizations move to microservices gradually, one service at a time. Similarly, compliance teams should think about how to expose the existing compliance process to facilitate reuse. Companies may want to start by exposing these processes through middleware rather than starting from scratch. 

On the automation side, compliance teams could benefit by automating compliance testing. This reduces the expertise required to identify and rectify any issues. It also frees up compliance teams to identify edge cases and find further opportunities to test out new business services.  

Banks that take advantage of their existing leadership in compliance have a head start over those that try to reinvent the wheel. It is tempting to start with a new technical architecture. But it is easier to innovate the current compliance process as a starting point for building out the technology that supports it rather than the other way around.

The post Banking Innovation Starts With Compliance appeared first on PaymentsJournal.

Last month, banks and their customers banded together to protest the proposal for financial institutions to report new account information to the Internal Revenue Service. Customers and bankers teamed up to send hundreds of thousands of letters to Capitol Hill, and to make thousands of congressional phone calls, according to the American Bankers Association. This strong partnership between banks and customers was striking because it is not a regular occurrence. 

Of course, this is not the first time that customers have raised their voices and expressed their concerns about banking issues. Customers consistently and directly converse with their banks through a variety of channels – and banks consistently have the opportunity to listen. While banks currently make an effort to respond to customers’ immediate needs, they can also connect the voice-of-the-customer data to actions that make it possible for them to understand, predict, and prevent customers’ growing issues and risks – and improve products and practices. By doing so, banks and customers can see themselves as allies each day – and not just in this particular moment in time. 

One way my team tracks customers’ growing issues at banks is based on their customer complaint data to the Consumer Financial Protection Bureau (CFPB). For example, last year, the CFPB received almost 6,000 complaints about account closure. Customer narratives can shed light on the issues that customers are facing with involuntary account closures – and can guide banks toward balancing both bank and customer needs. 

A growing trend about which banks will want to listen to their customers is Buy Now Pay Later (BNPL). Because this product is still in its early stages, banks now have the opportunity to proactively listen to customers’ challenges and use their customer narrative data to improve the product. Amid its popularity, complaints to financial institutions that offer BNPL are rising and focus on managing, opening, or closing an account; frauds or scams, unauthorized transactions; and other issues. 

Banks and their customers can continue to be allies – and that begins with listening. Banks have the opportunity to approach their customer narratives and complaints as strategic intelligence, which showcase a portfolio of existing needs and predict future issues – and not just as individual issues to be resolved. Customer complaints can be parsed for their severity, making it possible for banks to prioritize their actions. Banks can alleviate customer frustrations, address root causes, forecast future needs, and create strategies to meet those needs.

Banks and customers have many shared interests. They want to have a positive relationship – and that leads to increased brand loyalty and customer retention. Allyship starts with customer listening, and that does not need to be a rare occurrence. 

The post Customers Could Be Banks’ Best Allies Every Single Day appeared first on PaymentsJournal.

Increased environmental awareness gives way to a new wave of sustainable banking practices. A new future of payments arises as today’s environmentally friendly banks innovate new services and practices to meet the ever-growing expectations of conscious consumers.

Today’s consumers like what is socially conscious and expect environmentally friendly banks. They are favoring payment providers who accommodate their values by contributing to a sustainable future.

The new normal: reinforcing environmental awareness

The global Covid-19 pandemic is far from over, but we are already beginning to see what the new normal will look like. Among the many takeaways, we have realized how much nature impacts our daily lives. While the world’s focus centered on the pandemic for some time, the environment is now firmly back at the top of the global agenda. Climate change is no longer considered as “only” an environmental threat, because it affects all economic sectors¹.

Following the extreme weather events of the summer of 2021, we further grasped how environmental factors can directly impact the very fundamentals of our modern society. Case in point, one of the world’s largest consumer goods companies estimated losing hundreds of millions of Euros each year due to worsening water scarcity².

This increased environmental awareness is underlined by the 54% of global consumers who consider reducing their carbon footprint as more important now than pre-pandemic; and another 58% have become more conscious about how their actions impact the environment than ever before³. Additionally, 71% of US adults care more about product sustainability today than they did a year ago⁴.

Let’s look at how this reinforced environmental awareness manifests itself within a new wave of sustainable banking and payments practices.

Yesterday just the shareholders mattered, today it’s all the stakeholders

It can be argued that until not so long ago, the list of what consumers wanted from their bank was fairly short⁵: a bank branch in proximity, current accounts, mortgages, and maybe insurance. Consumer expectations on “green payments” were all but explicit, or as Visa puts it⁶ most people didn’t make a connection between current accounts and carbon, savings and sustainability, or payments and the planet. However, there is no doubt that today’s conscious consumers expect environmentally friendly banks. They favor payment providers who accommodate their values by advancing sustainable banking practices: a whopping 92%⁷ of consumers worldwide think their bank should actively contribute to preserving the planet, and 87% think their bank should offer eco-friendly payment cards.

As customer expectations evolve, we also see eco-friendly banks around the world increasing their environmental focus via net zero and sustainable banking. A total of 53 banks from 27 countries, representing almost a quarter of global banking assets, have joined the UN-convened Net-Zero Banking alliance created in 2021, committing to align their lending and investment portfolios with net-zero emissions by 2050⁸. Sustainable banking practices will play a vital role as the world transitions towards a sustainable economy; notably by providing capital to finance investments in clean energy, sustainable cities and responsible production. For example, in February 2021, Goldman Sachs settled an $800 million Sustainability Bond to accelerate climate transition⁹. Nobel Prize-winning American economist Milton Friedman’s influence on the modern global economy can hardly be overstated, and back in 1970, Friedman wrote “the social responsibility of business is to increase its profits”¹⁰. This philosophy (also referred to as the “Friedman doctrine”) has held sway over many banks and other businesses ever since. But a fundamentally new sustainable banking paradigm is starting to become visible—today’s environmentally friendly banks are moving from a “linear” focus on maximizing profits to “circular” thinking incorporating environmental and social aspects, serving all stakeholders, not just shareholders.

The transition to sustainable banking

The plastic payment card is arguably the most recognizable symbol of a bank and its values in the eyes of the bank’s customers; and plastic is perhaps the most visible example of growing environmental awareness across industries. In a previous article, we spoke about the shift from a linear to a circular economy, and how in a linear economy, raw material is extracted from earth and transformed into products that will be used and then thrown away; whereas in a circular paradigm the material, for example plastics, will be recycled and reused as the product reaches end of life. Only 9% of the plastics ever produced have been recycled¹¹ and 12% have been incinerated. Considering that plastic takes more than 400 years to degrade, a large majority still exists in some form¹². This challenge has not gone unnoticed as reducing waste, reducing air and water pollution, and tackling plastic pollution in packaging and products are the top three priorities global conscious consumers want to address¹³.

A growing number of companies are shifting towards a circular plastic approach, for example via the New Plastics Economy Global Commitment initiative, developed by the Ellen McArthur Foundation and the United Nations Environment Program. Over 500 companies (representing 20% of all plastic packaging produced globally, including major beverage brands), governments, financial institutions, universities and other organizations from around the world unite in this initiative to fight plastic waste and pollution. Various consumer goods giants have committed to eliminating PVC packaging, increasing the use of recycled PET, or even launching refillable containers¹⁴.

The green credit card, a key lever for sustainable banking

Given the shift towards a circular economy and the high percentage of plastics ending up in landfills, it makes sense that many environmentally friendly banks around the world have started to introduce green credit cards made out of recycled PVC as a way to reduce the use of plastic while also preventing plastic waste from entering the environment. BBVA has launched cards made out of recycled plastic¹⁵ and has announced that all its cards will be made out of recycled materials by 2023¹⁶. HSBC has announced it will eliminate single-use PVC plastic payment cards in favor of recycled PVC plastic across all its global locations by the end of 2026¹⁷.

We also see how issuers around the world are using the card as a lever to support environmental causes. Some eco-friendly banks allow conscious consumers to transform their purchases and rewards into meaningful action for the planet while others donate a portion of their customers’ card purchases to climate friendly causes, and yet another gives cashback on purchases at businesses that are members of the Conscience Coalition¹⁸.

Back to the (green) future of payments

Effective recycling first requires consumers to be aware that the product in question is recyclable. A second factor is how easy it is to recycle the material and if existing local recycling infrastructure is in place. Lastly, there is the question about how fast discarded material decomposes. Paper-based materials rank high on all three of these aspects. As we start to see cardboard cards, designed to be disposed of after a relatively limited period of time and use, one could argue that the payment card future is coming back to its roots: the world’s first payment card, the Diners Club card, was made of cardboard back in 1950.

Without a doubt, the future of payments and sustainable banking will come in different shades of green. As Noel Quinn, CEO of HSBC put it in a letter to the bank’s customers: “The Covid-19 pandemic has been a wake-up call for all of us. It has rightly focused attention on the actions we all need to take to build a more resilient economy, and create a safer and sustainable world. Of all the threats that humanity faces, a climate crisis has the potential to be the most drastic in its consequences and longevity. This is something that we take very seriously. I believe that the most significant contribution HSBC can make to addressing climate change is supporting you, our business customers, to decarbonize, while ensuring your ongoing resilience and prosperity. Like us, you are aware of the urgency in tackling climate change”¹⁹.

1. https://ajssr.springeropen.com/articles/10.1186/s41180-020-00034-3
2. https://thepaypers.com/expert-opinion/how-sustainability-is-changing-the-financial-sector–1250938
3. https://www.mastercard.com/news/press/2021/april/mastercard-unveils-new-carbon-calculator-tool/
4. Stifel, Measuring the Growing Importance of Sustainability for Lifestyle Brand Consumers, 2021
5. https://thefinancialbrand.com/113084/garret-eco-friendly-green-banking-sustainable-strategies-neobanks/
6. https://navigate.visa.com/europe/sustainability/mind-the-sustainability-gap/
7. Global independent poll by “Data 2 decisions” (Dentsu Aegis Network), 2,800 respondents in 10 countries, 2020
8. https://www.unepfi.org/net-zero-banking/
9. https://www.goldmansachs.com/media-relations/press-releases/current/sustainability-bond-feb-2020.html
10. https://en.wikipedia.org/wiki/Friedman_doctrine
11. https://www.unep.org/interactive/beat-plastic-pollution/
12. https://www.nationalgeographic.com/science/article/plastic-produced-recycling-waste-ocean-trash-debris-environment
13. https://www.mastercard.com/news/press/2021/april/mastercard-unveils-new-carbon-calculator-tool/
14. https://www.dove.com/us/en/stories/tips-and-how-to/sweating-tips/introducing-our-first-refillable-reusable-deodorant.html
15. https://www.bbva.com/en/es/bbva-launches-spains-first-card-made-of-recycled-plastic/
16. https://www.bbva.com/en/sustainability/all-bbva-cards-will-be-made-of-recycled-materials-by-2023/
17. https://www.finextra.com/newsarticle/37910/hsbc-to-introduce-recycled-plastic-payment-cards-globally
18. https://funds.aspiration.com/faq/Impact%3EHow-do-I-earn-extra-cash-back-with-Conscience-Coalition-
19. https://www.hsbc.com/news-and-media/hsbc-news/our-net-zero-ambition-a-letter-to-customers

The post Sustainable Banking: The Future of Payments for Conscious Consumers appeared first on PaymentsJournal.

The Washington Post and several news outlets reported on Capital One’s announcement to eliminate overdraft and NSF fees for its checking account customers beginning early next year. Their customers can choose not to have overdraft protection in which case any transaction that would overdraw the account would be returned, or they can select to overdraw their account so items will be paid, but they won’t be charged a fee. That sounds like free money. While neither the article nor the company release was clear, it seems likely that there will be some limit on how much or how long a consumer can allow their account to be overdrawn. I can’t imagine they will allow a consumer to take their account negative by thousands of dollars for an unlimited period of time. It was no coincidence that the CFPB also issued a statement to warn financial institutions that they will be considering new regulations around the practice of fees for overdrafts.

Here’s an excerpt from the Post’s article:

Capital One says it will no longer charge customers a fee when their account balances dip below zero, making it the nation’s largest bank to phase out a practice that the regulators and advocates have termed “exploitative.”

Capital One chief executive Richard Fairbank said the move would help bring “simplicity and humanity” to banking, according to the company’s announcement Wednesday. The new policy takes effect in 2022 for customers who are currently enrolled in overdraft protection.

“The bank account is a cornerstone of a person’s financial life,” Fairbank said in a statement. “It is how people receive their paycheck, pay their bills and manage their finances. Overdraft protection is a valuable and convenient feature and can be an important safety net for families. We are excited to offer this service for free.”

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Is This the Beginning of the End for Overdraft Fees? appeared first on PaymentsJournal.

As customer engagement becomes irreversibly embedded with traditional financial transactions, banks are beginning to recognize the importance of connecting across sectors. Participation in these embedded channels for transactions and financial products requires a radical shift from the traditional paradigm of banks as stand-alone institutions that offer customers a one-stop-shop list of products. Rather, banks and other financial players must come to terms with the reality that they are now increasingly pushed to the background of the customer experience. Products such as finance options becoming a part of the purchase pathway for customers rather than an independent activity. Margaret Franco, CMO at Finastra, illustrates this shift through the following example:

“…a holiday is a big-ticket item for anyone. Imagine that during the checkout experience, at the click of a button, the customer is offered a range of options for a loan or payment plan directly through the holiday provider. Imagine too, that these offers are more competitive than financing the transaction on their credit card, and inside the monthly amount that they can afford individually. Then after purchase, they also receive an offer for holiday insurance. Suddenly, the process of financing the holiday becomes much more straightforward and joined up.”

Success for banks and other institutions in this new world of embedded finance necessitates innovation and the ability to effectively deploy available data. By having access to customer purchasing behavior and financial backgrounds, banks are well-positioned to partner with third-party entities to offer customizable, customer-centric products that move beyond standard banking products and target larger market segments. By embracing open banking APIs (as 78% of banks in the U.S. have started to do), banks can leverage their financial infrastructure, brand-recognition, and operating expertise to effectively partner with Fintech and Big Tech entities and create a space for themselves in the customer journey.

“Consumer-facing brands know that confused customers sit on the sidelines. What’s needed is to provide simplicity, clarity, and information to the consumer so they can make a simple decision. Financial service providers, therefore, need to be able to show that they are part of this solution.”

Overview by Shreyas Shaktikumar, Research Analyst at Mercator Advisory Group

The post SaaS to BaaS: Banking as a Service Gains Popularity Amongst FIs appeared first on PaymentsJournal.

Waves of new regulations have rolled through during the past few administrations and swept through the financial services industry since the financial crisis. This should not come as a surprise given that banking is one of the most highly regulated industries. Every day, a Chief Compliance Officer must review and react to about 200 new regulatory changes, according to a Boston Consulting Group report. In the United States, that velocity of change continues to rise, putting organizations increasingly on edge.

Fines have approached nearly $1.3 billion since 2019 in the US, according to CSO Online. Companies such as Equifax, Home Depot, and Uber have been hit with penalties of hundreds of millions of dollars for data breaches that exposed consumer data. Additionally, since 2018, EU authorities have issued a total of 841 fines totaling over $1.28 billion, according to Privacy Affairs.

In contrast, regulations, such as those placed upon credit cards and mortgages, came to be so overbearing at one point, the pendulum shifted. Thus, the Economic Growth, Regulatory Relief, and Consumer Protection Act was passed in 2018 to place fewer restrictions on smaller banks.

Chief Compliance Officers are constantly on the front line trying to manage risks, avoid fines, and preserve their organizations reputation. Following are three things CCOs should consider as they look ahead and consider how to tackle what’s next in compliance.

Banish the manual and automate

With constant fluctuations in regulatory requirements, it’s shocking that organizations still attempt to track them using manual tools. In fact, 63 percent of organizations still use inadequate productivity and knowledge management software, such as spreadsheets, to manage compliance, according to MetricStream’s latest State of Compliance survey.

It’s time to banish manual processes and replace them with automation. The use of manual processes and tools have a greater margin for error and are not efficient. It’s also expensive to engage expert resources in tedious tasks. In contrast, automated tools, including the implementation of AI and ML technology, allows for the monitoring and controlling of compliance issues with greater ease and accuracy than ever before.

Tools that enable you to proactively identify regulatory changes and assess their impact on business processes, policies, risks, and controls are key to moving from the manual state to automated. This includes a centralized framework that aggregates regulatory content from multiple trusted sources, including both subscription and publicly available data sources.

Balance the strategic with the tactical

It’s also important to strike the right balance between the roles of employees and the use of technology. People are primarily needed for the “smart decisions” – the choices that require judgement. On the other hand, smart tools, whether AI or advanced software, are better suited to handle more remedial, repetitive tasks.

For example, consider the critical and timely issue of third-party risk. Whether customers, vendors, or suppliers, third parties represent a tremendous risk to banks, from data breaches to the threat of compliance and legal issues. Manually assessing questionnaires and security attestations from thousands of third parties isn’t reasonable – or even possible. Solutions that leverage artificial intelligence and machine learning can read data, spot patterns, and make recommendations, while analysts spend their time developing the right strategy to resolve issues – instead of manually assessing thousands of pages of text.

Engage the frontline

Staying current and compliant isn’t a one-time event – it’s a process. Strategic compliance officers need a 360-degree view of potential issues. Engaging frontline teams to report potential issues or violations as issues occur will be critical to your success.

In essence, frontline workers are the eyes and ears of an organization. They are the first to deal with others outside the business, and they are the first to interact with internal co-workers and contractors. This unique position enables frontline workers to be an ideal source of intelligence. To address frontline-level risks, organizations should take proactive steps that address policy, tools, and culture. The future of empowering frontline workers to combat threats comes from an ability to allow the frontline (employees, vendors, franchisees and even customers) to provide “observations” instantly and easily through a mobile interface.

Although the banking industry has been addressing compliance for years, the sheer velocity of regulatory changes today makes it essential for automation and technology to be at the top of any organization’s priority list. If you truly want to move from a posture of fear to a position of power, I suggest you consider automating your processes to manage the rate of change faster, empowering your people to focus on strategic initiatives, and engaging your frontline.  

The bottom line is the rate of regulatory change will continue to fluctuate. Your risk strategy needs to be nimble and needs to ebb and flow with the rate of change, no matter which way the pendulum shifts.

The post Navigating the Waves of Regulatory Change in Banking appeared first on PaymentsJournal.

After months of speculation, JPMorgan Chase has launched its digital bank in the UK in a move that sees the financial giant move into direct competition with British mainstays like HSBC, Barclays, Natwest, Lloyds and popular startups like Monzo and Starling. 

Gordon Smith, CEO of Consumer & Community Banking and co-President of JPMorgan Chase, was buoyant about the company’s growth into the UK. 

Speaking at the beginning of 2021, Smith said: “We are bringing Chase to the U.K. because we want to provide customers with a new banking choice – one that will enable them to benefit from a simple and exceptional banking experience, built on the significant capabilities of JPMorgan Chase. The U.K. has a vibrant and highly competitive consumer banking marketplace, which is why we’ve designed the bank from scratch to specifically meet the needs of customers here.”

In a bid to ensure that the move into UK markets goes smoothly, JPMorgan Chase appointed Sanoke Viswanathan to the role of CEO of the digital bank, having previously been Chief Administrative Officer and Head of Strategy at JP Morgan’s Corporate & Investment Bank. 

The digital bank has been headquartered in London’s Canary Wharf, and customers will be capable of communicating with the company’s purpose-built customer contact centre in Edinburgh. JPMorgan has a considerable presence in the UK already – with some 400 jobs created domestically and more in place for the future. 

News of the strategic expansion saw shares in JPMorgan climb from around $152.96 to $167.35 per share at the time of writing, with the banking giants already enjoying some 32.95% growth in the 2021 calendar year. 

The transition towards UK markets would see JPMorgan come into direct competition with some huge players across the financial ecosystem – as well as some successful and scaling fintechs. With this in mind, is it possible that the banking giants may come unstuck in the United Kingdom? 

Weighing into the crowded UK financial ecosystem

JPMorgan’s move into the UK’s market follows in the footsteps of the company’s major US rival, Goldman Sachs – which crossed the Atlantic to offer savings accounts in the UK in 2018. 

However, JPMorgan is the latest in a range of US banking leaders looking to generate significant returns in investment banking with steadier retail revenues. However, the path to market dominance in the United Kingdom will be far from easy, with the industry already gridlocked with key institutions like Barclays, NatWest, Lloyds and HSBC among many more popular entities. 

So, can JPMorgan capitalize on UK markets despite such intense levels of competition domestically? Maxim Manturov, head of investment research at Freedom Finance Europe believes the company has an excellent chance to assert itself in Britain: 

“The decision to launch a digital retail bank in the UK marks a significant step forward in introducing retail products to UK consumers for the first time,” Manturov said. “It will undoubtedly provide the company with the opportunity to compete for market share in a competitive environment, but thanks to its name and strong reputation, the company has a strong chance of success in this direction. While digital banking has become more common, JPM discovered that the stability and reliability of a banking service provider remains a key factor for consumers.”

“Chase has a one-of-a-kind opportunity to make a difference for British consumers by combining the trust of a respected and trusted bank with exceptional customer service. Starting with a new approach to current accounts, the bank wants to provide a variety of products. The Chase UK Customer Support Centre will play a key part in the offering, giving quick access and personalized service 24 hours a day, seven days a week.”

There’s some optimism that the arrival of JPMorgan will be good news for the UK in terms of the quality of new financial products that the banking giants are likely to bring to the table. It’s also likely to bolster the level of competition among existing institutions across the landscape. However, for emerging fintechs like Revolut, Starling and PayPal, the emergence of another globally renowned name may eat into their growing user base. 

However, Financial Times data suggests that JPMorgan is arriving at a time when the existing banking hegemony is already growing to steal the market share from smaller organizations. The data above, which charts the share of gross mortgage lending for properties in the UK, shows that industry leaders like HSBC, Lloyds, NatWest and Barclays are all showing varying degrees of growth between 2015 and 2020. 

This indicates that the arrival of JPMorgan may, in fact, help to break the dominance of domestic banks and to pave the way for better financial products and services due to the fiercer competition. In this regard, JPMorgan’s bid to break Britain may well be a timely one for the industry across the UK. 

The post Closing in on UK Banking: JPMorgan Chase Takes on UK Financial Institutions with its own Digital Bank appeared first on PaymentsJournal.

We’ve all experienced the skills gap that the Digital Age has brought about, but perhaps in no industry is it as starkly felt as in banking. With more and more fintech start-ups disrupting the space, the need to be technologically innovative is stronger than ever, yet getting people with right skills in place continues to be a challenge.

Competition for talent is fierce, and every bank is battling to find ways to recruit and retain the staff they need to be at the forefront of the industry. In fact, PwC’s 22^nd Annual Global CEO Survey found almost 80% of banking CEOs saw skills and talent shortages as a threat to their growth prospects. It’s a pinch financial institutions (FIs) are feeling around the world – so how do we fix it?

There is no silver bullet that will solve every talent gap in any industry, but we can begin to identify the major ones and address them. What has become apparent is that data – the collection and use of it – is a key area of focus for FIs looking to the future, but talent isn’t keeping up.

Gartner found that over 80% of finance organizations forecast increased use of advanced analytics in 2021. A study by Cognizant found that by 2022 1 in 3 jobs in financial services globally will be technology roles such as data scientists. Without a doubt this means investing in more technology, which 81% of banks are. Alarmingly, however, 72% of banks also agree that their firm is more likely to prioritize investment in technology than in the talent and skills necessary to utilize that tech.

If your existing talent isn’t being upskilled in data or trained on the technology being implemented, how can any organization hope to succeed in becoming a leading bank of the future?

The answer is you can’t. Instead, it is imperative to find a way to get talent both more data literate and more efficient by using a technology that is accessible. That’s where a customer insights platform comes in.

Investing in consumer insight automation better enables your talent to connect with consumers and power innovation in order to become a leading bank of the future.

When done right, customer experience transformations deliver tangible revenue and cost improvements for banks. As banks stare down potentially several more years of a low interest rate environment—and a possible wave of credit losses—many are looking to fortify their income statements. Some will be tightening their belts. Others will focus on top-line growth to offset lower margins and losses. In either case, many banks globally are realizing that more efficiently and effectively delivering for their customers can both reduce costs and improve sales. With these objectives in mind, many banks are seeking to transform their customer experience delivery.

A well-designed customer insights platform can enable users without any research expertise to execute high-quality projects quickly and easily, and also to understand the results once they come in. But to truly succeed will require organizational support – this means spending the time educating staff on how to use the new technology. This doesn’t have to be extensive. A small amount of training with a consumer insights provider can easily improve the research skills of existing staff and in turn accelerate transformation within the organization.

An automated customer insights platform isn’t just beneficial to team members who aren’t trained in research. It’s an attractive tool for those who already possess the skills and are looking to contribute to an organization in meaningful ways.

The platform enables them to make their research process more agile by automating many of the mundane, tedious tasks required for their jobs. This allows them to focus on the analytical, creative, and strategic activities they find most fulfilling.

If an FI invests in the talent and skills needed to make the most of their new data-oriented technology, they’ll already be steps ahead of most of their competition. They’ll be able to easily access customer insights to make decisions of all kinds, creating the kind of data-driven environment required to lead innovation in a competitive space.

A customer insights platform bridges that pervasive talent gap by making it easier for people of all skill levels to collect, access, and use market research at every turn. It’s a simple yet powerful step in driving innovation at any organization. Because when staff feel empowered rather than overwhelmed by data, it enables their organization to change, grow, and ultimately shape the future of banking.

The post The Future of Payments is in Consumer Insight Automation: A Secret Weapon in Banking’s Battle for Talent appeared first on PaymentsJournal.

The U.S. Bank Secrecy Act (BSA) of 1970 was one of the first Anti-Money Laundering (AML) and Know Your Customer (KYC) laws. It required companies and financial institutions to establish and report on internal controls and other measures put in place to prevent the facilitation of financial crimes. Other similar laws exist in countries around the world, creating a complex web of potential compliance issues for financial services companies.

The projected total cost of compliance with financial crime regulations is expected to reach $214 billion in 2021, surpassing the $181 billion recorded in 2020, according to LexisNexis Risk Solutions. The results were derived from the firm’s global survey of 1,015 financial crime compliance decision-makers at financial institutions including banks and investment, asset management and insurance firms. The cost of compliance increases, however, when you consider that financial institutions worldwide have paid an estimated $26 billion in fines and penalties in the last decade for AML/KYC non-compliance. That’s an average of $2.6 billion per year and the trend continues in 2021.

It is increasingly clear that compliance with these regulations is critical to the sustainability of every financial institution. Unfortunately, the traditional means of transforming your BSA/AML processes are woefully inadequate. But there are new technologies helping accelerate and increase the success of BSA/AML transformation.

Does Your AML/KYC Process Add Risk?

While it is the responsibility of all employees, partners, and suppliers to prevent an organization from facilitating financial crimes, Client Lifecycle Management (CLM) and Compliance are the two departments playing key roles in defining and implementing the required internal controls. CLM is the first line of defense within any organization. Compliance acts as the second line of defense, responsible for policy making, escalation, and resolution, as well as performing independent risk management. Auditors, the third line of defense, ensure any risk governance framework complies with regulatory guidance.

Before taking on a new client, a due diligence process is generally conducted to evaluate the client’s risk rating. It begins with a basic understanding of the client’s identity, the risk involved, and an understanding of their financial habits. Onboarding high-risk customers and politically-exposed persons requires enhanced due diligence with additional assessments of the client’s geographic location, source of funds, and purpose of the transaction, and may require ongoing monitoring.

This is an important task that typically happens as follows:

1. Pre-onboarding checks are conducted by working with Sales, Risk Management, Legal, Compliance, and others to collect and review relevant client data, product information, and documents as mandated by the regulatory authorities.
2. Teams then update multiple systems of record to ensure a client’s readiness to transact.
3. Post-onboarding processes then include on-going client reviews and continuous monitoring, managing client and counterparty data and records, and potentially, client off-boarding.

This process can quickly become complex, especially at global organizations spanning multiple geographies with various policy interpretations, competing rules and regulations, and related data housed in multiple and disconnected software applications. That last point adds risk, especially when data is not integrated, thereby forcing considerable amounts of manual, repetitive, error-prone work. The result is increased operational, reputational, and financial risk.

Additional risks arise from policy interpretations and potentially incorrect execution of processes, which both depend on the experience of KYC analysts. It is indeed demanding for analysts to make critical decisions that require focused thinking while concurrently performing important yet mundane manual data-entry tasks.

Add it all up and your AML/KYC process is exposing you to more risk, which is exactly the opposite of what it is supposed to do!

Transforming BSA/AML with Success

Transforming any enterprise process can be daunting, for good reason. A study by McKinsey & Company indicates that a staggering 70% of large transformation projects fail to deliver expected results. Reasons may include unclear objectives, lack of leadership, and lack of commitment. But looking deeper, transformation projects are frequently derailed when teams underestimate process complexity. It’s a huge undertaking to identify the appropriate processes, perform detailed current state assessments, develop business requirements, and keep an eye on budgets. Then, for any transformed process, adequate training is required, and even minimal employee turnover can add to the challenges.

When focused on AML/KYC processes, the need for a successful transformation can be critical to your organization’s survival.

But help is available from point solutions such as Microsoft Power Automate, which uses robotic process automation (RPA) and artificial intelligence (AI) to help organizations streamline, standardize, and automate routine tasks. Many financial institutions are also leveraging cognitive natural language processing (NLP) to accelerate processes such as transaction monitoring and adverse media and sanctions screenings.

AML/KYC platform providers can help streamline end-to-end processes. But successful implementation of these types of platforms largely depends on the quality of the business requirements and clearly defined compliance policies. It’s also dependent on the prevailing regulatory rules, final user acceptance testing, and training. In reality, it takes many months for organizations to fully understand and effectively leverage these platforms, which adds further delays to already complex transformation projects.

Effectively managing your AML/KYC risk is critical to the success and reputation of your organization. Process intelligence and emerging technologies can help mitigate these risks, speed up the transformation journey, and enhance the customer and employee experience. It could also prevent a AML/KYC violation, which is becoming an increasingly expensive prospect.

The post Transforming BSA/AML and KYC with Process Intelligence Technologies appeared first on PaymentsJournal.

Almost half (47%) of banking IT executives told The Economist Intelligence Unit that incorporating the cloud into their organization’s products and services will help them achieve their business priorities “to a great extent,” while 72% indicated the cloud will help them achieve their business priorities in some way. Mercator predicted cloud’s penetration of financial institutions in our 2021 Outlook. This year we identified cloud and six other issues that will drive major changes in the payments market in the years ahead:

“Cost is the biggest driver of cloud adoption (43%), followed by the adoption of AI (34%) and improving customer experience (21%). Business agility, elasticity and scalability are together cited by 40% of respondents as top drivers.

The report ‘Capturing value in the cloud’ finds banks have generally been slower to take to cloud computing than other sectors. But the adoption of software as a service (SaaS) and cloud infrastructure has accelerated since the start of the pandemic, as banks seize an opportunity to cut costs and ramp up their digital transformation projects, with 82% of banking IT executives saying they now have a clear strategy for adopting cloud. This comes as established banks figure out how to use incumbency to fend off fintechs and challenger banks, while the newer entrants use the cloud to advance quickly into new market opportunities.

According to the report, banks are tapping into the cloud to speed up their ability to gain insights from data, and in turn to be able to innovate faster. Yet barriers stand in the way of a wholehearted embrace of the cloud—including security, privacy, compliance and governance concerns. These challenges are leading firms to invest in both technology and talent.”

Overview by Tim Sloane, VP, Payments Innovation at Mercator Advisory Group

The post Banking Deployed in the Cloud Has Arrived appeared first on PaymentsJournal.

Over the past year, the pandemic has created a sense of urgency for innovation of all kinds. Restaurants have enabled contactless ordering and payments, QR code menus, and curbside pickup. Schools have adopted virtual learning to allow students to study from home. The wellness sector has embraced fitness apps, livestreaming, and on-demand workouts. Healthcare saw not only the rapid development of COVID-19 vaccines, but also innovations in data collection apps and the rapid shift to telehealth appointments.

The financial services industry has also been a part of this change. Digital payments, which include account-to-account (A2A) transfers, gained a new level of appeal in a Covid-conscious world. Anything that can be done digitally, will be.

To learn more about why digital account-to-account (A2A) transfers are growing and why that matters, PaymentsJournal sat down with Derek Swords, VP of Product Management at Fiserv, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group.

Necessity is the mother of innovation

Driven in part by the pandemic, consumers are increasingly moving toward online and mobile payments. While this trend was in evidence prior to COVID-19, the pandemic influenced further consumer adoption of digital services. “As they say, innovation is often driven by situations and solving real-world problems. This is no different,” explained Swords.

The pandemic added what Swords referred to as an “exclamation point” to digital payments growth.

The growth of A2A transfers 

Over the past 12 months, Fiserv has seen overall A2A transfer transactions increase by 19%. “We’ve seen ongoing growth in the leveraging of digital methods of moving money from one account to another year-over-year. That’s been a consistent story, and we have certainly seen some spikes along the way,” Swords added. This growth is illustrated in the graphic below, provided by Fiserv:

“Clearly, people have needed to move money in the past and… we’ve had maybe less efficient ways of doing that. So now we want this to be a more digital experience,” said Grotta.

Now, the ability to transfer funds between accounts at different institutions is quickly becoming a must-have offering for the online-banking experience. Many consumers bank with both a primary and secondary institution, and the interfirm moving of funds should be a seamless process.

“More and more, it’s what consumers are expecting and increasingly what financial institutions are offering and realizing that it’s just a necessary part of the overall set of value that they’ve given their consumers,” said Swords.

Stimulus checks and volatility in the stock market that caused consumers to move money into and out of investment firms were two factors contributing to the increase in A2A transfers in the last year.

Every age cohort utilizes A2A transfers

While Gen Zers, Millennials, Gen Xers, and Baby Boomers all account for a portion of A2A transfers, Gen Z and Millennial consumers are moving money at a more rapid pace. “They’ve got more transactions. [Gen Zers and millennials] are about 48% of the transaction volume and 45% of the dollar volume, and that’s 666 million transactions valued at about $1.6 trillion,” explained Swords.

In comparison, Baby Boomers and seniors account for approximately one-quarter of transaction volume and dollar value of interfirm A2A transfers for a total of 337 million transactions valued at $901 billion. And while Gen Xers represent a smaller share of the U.S. population than Millennials and Baby Boomers, they generate a sizable $1.1 trillion in interfirm A2A transfers per year.

Gen Xers are at the peak of their earning years and are largely focused on asset accumulation for retirement, which makes it crucial for institutions looking to manage retirement accounts to understand how this generation moves money across financial institutions.

More FIs are adopting digital A2A transfer solutions

An increasing number of financial institutions are recognizing the value of adopting digital A2A transfer solutions. “Talking to financial institutions, I think what a lot of advisors have found in the last 18 months are some of the gaps that they may have in some of their digital product capabilities… Given the pressure to develop more digital transaction capabilities, again, many found that their account-to-account solution may not be up to snuff,” said Grotta.

Swords agreed, adding that the ability for consumers to conduct A2A transfers between their institutions is increasingly becoming a table-stakes offering for banks. “In fact, [Fiserv] just had our 900th customer go live with TransferNow, which is our premier A2A service that allows consumers to move money quickly and safely across accounts that they own,” noted Swords.

But not all financial institutions have adopted A2A, and among those that have, some have yet to adopt a truly digital experience. “A number of financial institutions may offer basic capability, and they may offer that through the desk-top experience only, and they’re neglecting the mobile channel,” continued Swords.

But in the mobile-first world, that’s not enough. “That’s also something that we are emphasizing with our customers, and we see increasing adoption because if they don’t see it in mobile, they may not see it at all,” he warned. “And so TransferNow and the capabilities that we help deliver there makes [A2A] more widely available.”

Why financial institutions should care about A2A capabilities

Convenience and speed are at the center of what’s driving consumer adoption and innovation at financial institutions. Modern consumers are looking for and expecting expanded online and mobile options. The ability to transfer money digitally to and from their accounts is critical to serve customers in the ways they now expect.

With that come additional challenges, such as completing transfers quickly and safely while mitigating risk and ensuring identity management. Effective and efficient decision-making by financial institutions requires that they adopt a solution that increases revenue, reduces losses, meets regulatory requirements, and improves the customer experience through faster real-time approvals.

So what’s in it for financial institutions? Simply put, digital banking consumers are among a financial institution’s most valuable customers. Providing them with the services they crave drives revenue and contributes to lower expenses for financial institutions.

A Fiserv study conducted in partnership with a large credit union has proven this value. “In general, digitally engaged TransferNow users deliver 113% higher net profit than non-digitally engaged TransferNow users. They carry 16% more product holdings, they’ve got 39% higher deposits in general, and from a savings perspective, they’ve got a 75% higher rate of savings,” explained Swords.

These customers also use fewer checks and  ATMs than non-digitally engaged customers. “All of this means less expense for the financial institution, driving more engagement from a digital perspective, more loyalty, and really delivering services that customers want and need. So it offers a really clear value proposition for financial institutions,” he concluded.

The post Why Digital Account-to-Account Transfers are Growing—and Why Financial Institutions Should Care appeared first on PaymentsJournal.

For months in the early 1980s, I traveled from LaGuardia Airport in N.Y. to Minneapolis on either United or USAir, then from Minneapolis to Joe Foss Field in good old Sioux Falls. The downside of the plane change in MSP was that you’d have to get on a Beechcraft propeller plane flown by Mesaba Airlines.

Everyone loves a nice business trip to L.A. or SFO, but Sioux Falls was pretty radical at the time. And, yes, there are “falls” in Sioux Falls. The best hotel in town was the Holiday Inn in the center city, if you can call it that. If you were from New York and commuting to Sioux Falls, you’d know Minerva’s as the best restaurant in town. The Citi-joke was that the restaurant was so good, at least good enough to survive on 51^st and Lexington Avenue, that the owner must have gotten to FSD through the witness protection program. However, workers did not realize the crunch of an N.Y. bagel.

Maybe too much background here, but if you wanted to motivate technical people transferred from NYC, you’d know that you’d better bring authentic N.Y. bagels if you tried to negotiate your requirements for the programming rock.

Back to the Washington Post:

Last week, Washington Post reporters exposed how global elites have used opaque trusts to shield wealth from tax authorities and the critical public. The story’s surprising detail was not the overt tax avoidance — activity we have come to expect. Rather, it was the setting: Sioux Falls, S.D.

When did the Mount Rushmore State, better known for bike rallies than banking, become an “offshore” haven for laundering ill-gotten fortunes? And why do U.S. authorities tolerate it?

The answer to the first question begins with a surprise meeting between executives from New York-based Citibank and South Dakota Gov. William Janklow (R) in February 1980. The bankers were there to talk about credit cards. Janklow was all ears.

Here’s the background:

Following the 1929 depression, a series of banking regulations curtailed interstate banking. First, the McFadden Act established the right to govern banks within their state. Then, in 1956, the Douglas Act forbid acquisitions of an interstate bank.

In the nascent days of credit cards, it was difficult for banks to operate lending products outside of their state. Interest rates were set at the state level, creating a challenge for calculations. In addition, if you operated from N.Y., you were bound by the state usury laws. In NY, at the time, the Washington Post recalls:

Because Citibank was based in New York, state laws regulated all Citibank credit card accounts.

And New York capped the interest rate that banks could charge at 18 percent (and only 12 percent on balances above $500) — no matter where the cardholder happened to live.

But true to Citi-style, ambitions for a credit card business were much broader:

Instead, Citibank executives envisioned a nationwide consumer bank delivered through cards rather than traditional branches. Unfortunately, the move, while ambitious, was poorly timed.

When Citibank initiated its nationwide campaign, it could live with these rates. In October 1979, however, the world changed. Then-Federal Reserve Chairman Paul Volcker launched an aggressive monetary experiment to wring inflation out of the economy.

Market interest rates skyrocketed. So did Citibank’s cost of funds. Yet, the price the bank could charge its credit card customers remained fixed. So every time a cardholder used their card, the bank lost money.

And said Walter Wriston, the legendary CEO:

“If you are lending money at 12 percent and paying 20 percent,” Citibank chief executive Walter B. Wriston lamented, “you don’t have to be Einstein to realize you’re out of business.” Wriston appealed to New York politicians for help. The legislature refused to budge.

The bank was in a fix. It could only escape the rate cap by leaving New York for a less restrictive state. And it could only do that if that state’s legislature invited Citi in. And so, in February 1980, Citibank lawyers knocked on Janklow’s door. South Dakota was one of the few states without an interest rate cap. Moreover, the state’s legislature was in session. They could act fast.

What made this all possible was the Marquette Decision, a Supreme Court Case that permitted rate exportability. The usury rate prevailed based on the state of the card issuance. N.Y. had a cap; South Dakota quickly lifted the interest rate cap.

Citibank offered just what the state needed, new industry, good jobs, and tax revenue. In March 1980, South Dakota’s legislature passed the “Citibank bill” inviting the company to open a subsidiary in the state with nearly unanimous approval — allowing it to shift its card-issuing business to the Mount Rushmore State.

Once in South Dakota, Citibank’s first move was to raise its interest rates. Citi cardholder rates rose from between 12 percent and 18 percent, depending on the consumer’s balance, to 19.8 percent for all balances, plus a $20 annual fee.

This move reshaped the banking and credit card industry. Citibank and South Dakota undermined the ability of every other state to regulate credit card interest rates. As a result, banks could now either move to South Dakota or threaten to, forcing most states to raise or eliminate interest rate ceilings, ending a critical consumer protection against excessive interest and long-term debt.

Both Citibank, NA and Wells Fargo Bank, NA, find their home base in Sioux Falls. As a result, the firms offer a more robust career path than the other large employer, Morell’s Beef Packing.

One thing they rarely mention about Sioux Falls. In the winter, with the wind chill, the air temperature can be 80 degrees below zero. That’s why employee parking lots have engine block heater connections. But, in the land of no-corporate income tax, that’s just a detail.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post South Dakota: Credit Card Haven or the Cayman Islands for Banks? appeared first on PaymentsJournal.

Millennials, also known as Generation Y, and their younger Gen Z cohort demand flexibility and personalization when it comes to online banking options. In the U.S. population in 2020, millennials accounted for 21.93% and Gen Z comprised 20.35%. These are critical generations to reach.

With digital banking, customers want simplicity and they prefer to deal with businesses that understand their needs. Gen Y and Z customers have grown up with online tools, especially their smartphones. It therefore comes as no surprise that millennials and Gen Z are heavy users of mobile banking apps. In addition, the COVID-19 pandemic has increased the speed of digital banking adoption across several age groups as people reduced in-person visits to banks.

The high expectations of millennials and Gen Z for a mobile experience have led them to seek less traditional “brick-and-mortar” banking partners. Personalized and easy-to-use financial services are giving nontraditional financial services providers an advantage.

Here are four strategies you can implement right now to help ensure your bank doesn’t miss the millennial and Gen Z opportunity.

1) Flexible communication options

We’re living in an on-demand world, and millennials and Gen Z banking customers are looking for flexible options with around-the-clock access to customer service. They should be able to communicate easily on several channels, including messaging apps such as WhatsApp, as well as other collaboration tools and digital assistants. Using messaging apps or social media channels lets customers avoid the long lines of brick-and-mortar locations and the wait times of phone support. Millennials want to interact with customer service in a way that is tailored to how they interact with people in other aspects of their lives. Choices for communication can include virtual assistants on wearable devices, smartphones and home smart speakers. Banks must provide multiple ways for customers to communicate with financial institutions in addition to visiting a branch, and virtual assistants help provide this flexibility.

2) Instant support

Banking customers can receive immediate help from virtual assistants. These tools are becoming more sophisticated by the day to allow customer service representatives to handle other matters. The immediate responses that come with a text or voice command can address a growing number of banking queries from millennials and Gen Z customers. These generations in particular also appreciate the ability to get quick help from services that simplify daily tasks like bill payments, deposits and transfers.

3) Personalization

To reach millennials and Gen Z — and any group, really — banks should offer customized services based on consumers’ transactions and expenses. Using transaction history lets financial institutions improve customer experience by recommending personalized offers. For example, a customer with a history of stock transactions may be more receptive to opening an IRA or speaking with a financial adviser to learn more. Marketing to millennials requires loyalty and personalization. Financial institutions use virtual assistants to share educational materials to receptive customers, including personalized financial guidance. The capabilities of conversational AI, or chatbots, help power this personalization. Carefully tailored experiences can differentiate your bank, helping you maintain profitability with new customers that become loyal, long-term fans.

4) An omnichannel user experience

Customers appreciate a consistent, user-friendly, experience across multiple channels. As part of an omnichannel experience, banks should offer easy logins to online banking accounts on multiple types of devices, whether it’s a tablet, smartphone or PC. Since millennials and Gen Z consumers are particularly tech savvy, giving them the ability to use financial services anywhere on multiple channels is essential. To keep the banking experience consistent and seamless, financial institutions can offer digital tools in tandem with visits to brick-and-mortar locations, particularly those that have cafes. Customers prefer to carry out complex transactions such as mortgages and auto loans in person.

Millennials have grown up with access to technology since their early years, and they demand a flexible customer experience from financial institutions that fits their lifestyle. Banks need to show that they understand what customers require from quick, easily accessible tools. With 86 percent of millennials concerned about their long-term financial outlook, easy-to-use tools and a user-friendly, yet educational, customer experience are more important than ever. A quick and intuitive customer experience can keep traditional banks ahead of the game against newer nontraditional rivals.

The post 4 Banking Experiences That Millennials and Gen Z Consumers Want appeared first on PaymentsJournal.

Back in 2019, as chairman of the Business Roundtable, Jamie Dimon mobilized the organization to change its definition of a corporation’s purpose to explicitly embrace ESG (environmental, social and governance) principles. As chairman and CEO of JPMorgan Chase, Dimon has steered his own company in a similar direction, most recently with the acquisition of an ESG-focused fintech startup. As a leading voice in global banking, meanwhile, he has consistently urged industry-wide engagement with the principles of ESG as not just a business imperative, but a social responsibility.

“We need good government and we need good business to solve these [ESG] issues,” Dimon said in an address at SIBOS 2020.

If he and other prominent voices in industries from banking to building materials to baby gear are correct, a company’s ESG profile — for banks, that’s expressed in their lending and investment decisions, as well as their actions with respect to climate change, sustainability, DEI and other issues — soon will carry as much weight in the eyes of investors, shareholders, regulators and the general public as the ratings they receive from credit agencies. Which means, to be sustainably profitable, banks have to figure out how to be profitably sustainable. With ESG scores inevitably moving from curiosity to core business concern, now is the time for banks to begin embedding ESG thinking and capabilities into their end-to-end processes.

Banks are in the business of managing risk. ESG confronts them with very real financial and reputational risks to manage. Lending to or investing in companies with a weak ESG profile, for example, increases a bank’s risk exposure on both fronts. What’s more, institutions can leverage a strong ESG performance as a differentiator in the eyes of the consumers, partners, investors, etc., who are inclined to weigh that performance in choosing a bank with which to align.

Already, we see banks putting the digital building blocks in place to fulfill these ESG-related responsibilities, and capitalize on opportunities to distinguish themselves from the competition, with an emphasis on these five areas:

1. Building robust and far-reaching capabilities to capture, process, analyze, and act upon huge amounts of data.

Just like manufacturers will be scored on the environmental impact of the products they make, from sourcing of materials right down to the carbon footprint of the end product when it’s in use, banks will be scored on the carbon footprint associated with the loans they make (and the borrowers they choose), the corporations whose bonds they buy, and, of course, their own corporate operations. All of which will require them to gather (within a single centralized data “warehouse”) and make sense of potentially expansive amounts of ESG data sourced internally as well as externally. Every dollar leaving and entering the company has an ESG impact attached to it, positive or negative. Armed with an enterprise-level digital platform with the power to handle huge volumes of data from disparate sources, plus analytics tools to accurately assess ESG impact based on that data, they can make decisions accordingly. Having seamless digital connectivity with external sources — clients, business partners and other parts of the value chain — will be critical to the process.

2. Establishing new KPIs across the business to reinforce ESG as a core risk-management priority.

As part of the process of integrating ESG at scale across their business and their value chain, banks need to establish KPIs to engage all the various segments and teams within their organization in ESG-related targets and risk thresholds, and to gauge where they stand relative to those targets and threshold. With a connected, network value chain, they also can measure their partners, vendors, etc., against the same standards.

3. Moving more of the business to the cloud.

Maintaining a physical, on-premises IT infrastructure, including data centers, servers, hardware, staffing, etc., consumes energy, which, unless that energy is wholly renewable, increases an organization’s carbon footprint. By moving more business processes to the cloud, banks can leverage the scaling effects of large cloud providers rather than taking on that risk themselves. Such a shift means they will need visibility into their cloud provider’s ESG scores.

4. Using analytic and modeling tools to illuminate the most efficient and impactful ESG pathways forward.

Machine learning- and artificial intelligence-driven simulation/modeling capabilities can help banks uncover the best approaches to strengthen their own ESG scores and reduce ESG-related risk in their investment and lending portfolios.

5. Developing and integrating ESG-specific disclosure and reporting capabilities.

As the regulatory and public scrutiny of banks’ ESG scores and sustainability-related activities grows, institutions must have the ability to standardize and tailor data to meet potentially widely varying disclosure and reporting requirements.

Ultimately, the more succinctly banks can measure and articulate a strong ESG performance using tools like these, the better positioned they will be to turn that performance into a risk-management advantage.

The post Risk, Reward and How Banks Can Thrive in an ESG-Focused World appeared first on PaymentsJournal.

This posting in Banking Dive is nothing new in reality, since we have been covering the subject of CBDCs and various statements from different folks in and around the Fed now for quite some time.  However, since Fed Chair Powell made a statement on Wednesday about CBDCs, it is worth spending a minute on it again for those readers not up to speed on the Fed’s less than enthusiastic stance on the subject.

In effect, Powell reiterated what has been stated by the Fed for the past year, which is the ’need to do it right, not fast’ line, while we await a paper from it on research findings that was supposed to have already been released.  Powell also said (again) that the Fed would not unilaterally move forward with a CBDC, but insisted that the Executive and Legislative branches would have to be involved.

‘The Fed will seek to build a consensus with the Biden administration and members of Congress before it makes any move on creating a central bank digital currency (CBDC), Federal Reserve Chairman Jerome Powell made clear at a Wednesday press conference following a two-day Federal Open Market Committee meeting….Powell said in May that the Fed would deliver a white paper on the topic this summer to kick off a public conversation. Later, he suggested the report might be released this month. In an update at the press conference, Powell said the CBDC report would arrive “soon.” ‘

Powell then went on to address questions around the lagging U.S. response to the CBDC question, as opposed to the BIS push for innovation in the space and multiple other sovereign governments giving it a go.  He also spoke to the FedNow project, which is not really a relevant thing but the press conference did cover several topics, including the expected tapering coming out of the FOMC meetings. The bottom line is we need to see whatever paper is coming out to get the real skinny on what the Fed might actually be planning to do in X timeframe.

‘Powell rejected the notion that the U.S. was not keeping up with other countries in considering a CBDC. “It’s more important to do this right, than to do it fast,” Powell said, echoing a stance he espoused last October and again in March. “We are the world’s reserve currency, and I think we’re I think we’re in a good place to, to make that analysis and make that decision.” …Part of the analysis includes the Federal Reserve Bank of Boston working with the Massachusetts Institute of Technology (MIT) on the technology aspects of creating a CBDC. With that input from MIT, the white paper “will be the basis for a period of public engagement — engagement with many different groups including elected officials around these issues,” Powell said…. “The ultimate test will apply when assessing the central bank digital currency and other digital innovations is: Are there clear and tangible benefits that outweigh costs and risks?” he said.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

The post Fed Won’t Go It Alone on CBDC appeared first on PaymentsJournal.

This piece is posted at Intelligent CIO and is basically a brief interview summary of a fintech CIO on the topic of tech transformation in today’s ever changing landscape. In this case the CIO represents a Luxembourg-based, fully licensed bank that provides BaaS services to other financial institutions and payments companies, with an emphasis on x-border.  We covered the need for banks to embrace digital transformation in recent member research as well. In an era of fintech innovation and various challenges on the revenue margin side, many FIs are reviewing their technology approaches to determine how best to fit into the picture during the next decade. This challenge generally applies to all industries, and CIOs are at the forefront of tackling the issue.

‘To be a CIO you must be curious and strive to learn new things about both technology and the business you are working for. This has always been a requirement for the role but as the world becomes increasingly dominated by tech, it can be difficult to stay on top of….A lot has changed in the past five years. Just take the pandemic as an example – it has undoubtedly accelerated Digital Transformation and changed the way we interact in business and society for good. From running a company, to keeping connected to friends and family, we have all been forced to adopt digital tools – and they aren’t going anywhere.’

The questions go on to discuss various things that CIOs are grappling with today and a clear need to shift infrastructure to the cloud in some way, shape or form.  We have also been pointing this out in various research, including the 2021 Outlook from Q4 2020. While larger institutions have the scale to deal with dramatic change, that is not always the case with smaller asset institutions, so they must look to creative approaches that allow for rapid employment of latest gen tech to satisfy the client base’s expectations.

‘Technology is constantly evolving which means so is the role of the CIO. Indeed, there is a whole host of new technology to learn about. For example, in financial services, Artificial Intelligence (AI) and Machine Learning (ML) have the power to totally transform the industry. We are already making major inroads, especially when it comes to fighting money laundering and fraud – whereby AI dramatically increases rules precision, highlighting patterns the naked human eye could never spot. It’s the job of the CIO to tap into new trends and stay ahead of the curve….Embracing emerging tech is one piece of the puzzle, another relates to navigating a permanent shift to hybrid working. With teams separated by geography at least some of the time, soft skills such as communication, mentoring and leadership will be even more critical than before. Not only do soft skills help manage a team effectively, but they also help instil a large degree of trust across the whole organisation, from board level to interns. This is crucial because as a CIO you’re making decisions that keep the company running and you need to reassure people that you’re making the right choices.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

The post Navigating the Technology Landscape through the Eyes of a CIO appeared first on PaymentsJournal.

Our global financial system, long dominated by government-issued fiat currency, is shifting to include digital currencies. Visa recently reported that more than $1B was spent on crypto-linked Visa cards in the first half of 2021. Morgan Stanley now offers wealth management clients Bitcoin exposure and JP Morgan recently became the first big bank to give retail clients access to Bitcoin investment vehicles.

However, the reasons why conducting transactions with digital currencies is so worthwhile may not be clear to many banking institutions and their customers.

Blockchain, or the platform where digital currency transactions are recorded and stored, is a big part of the appeal. Blockchain securely records and validates each transaction. This makes it uniquely suited to making direct payments, slashing fraud, lending and auditing. By putting dollars and other assets onto a blockchain, you add a layer of security and trust that cannot be replicated by traditional banking infrastructure and remove complexity and cost.

Financial institutions have spent more than $550M on blockchain-powered projects. However, with more than $700 trillion worth of assets in the world, this trend is just beginning. Here are a few examples of the benefits banks and their customers reap from adopting blockchain technology.

Payments

Current Reality: Payments of all forms typically take up to a week to clear. This includes payments to individuals, organizations, credit card companies, and cross-border payments. Funds flow through multiple financial intermediaries, including banks, credit card processors, or currency exchangers. These third-parties review, validate and authorize the payments. This system is cumbersome. It results in increased costs that often fall back on banks, merchants or customers.

Blockchain Reality: Blockchain is a shared, immutable ledger that provides a chronological history of transactions that connects peers, banks and companies that are domestic or overseas. It’s just about impossible to manipulate transactions or to add information that hasn’t been verified. That means payments can move twenty-four hours a day, seven days a week. They can also be settled almost instantly via smart contracts, or pieces of programmed code stored on a blockchain. Anyone can make or receive a payment as long as they’re on that blockchain.

Fraud

Current Reality: Financial transactions open opportunities for fraud. Time needed to settle payments, collateral requirements, currency differences and third-party review are just some of the vectors for fraud to occur. Bank-to-bank transactions are just as vulnerable to attacks, with banks losing an estimated $20 billion annually to fraudsters.

Blockchain Reality: Cyber-attacks and fraud are reduced by design. Transactions can only be initiated or changed by users with consent. At each stage of a transaction, permanent, time-stamped records are built and stored. Each person within the network receives a copy of the transaction in real-time. This makes fraudulent transactions easy to recognize and flag.

Lending

Current Reality: Making a loan available to an individual typically takes about three weeks. Lenders require third-party background checks, including a current credit score, to determine whether they want to enter into a loan agreement. This means time, manpower and money.

Blockchain Reality: Smart contracts enable lenders to validate transactions, confirm the legitimacy of borrowers and perform routine account maintenance. Such maintenance could be imposing late payment fees on borrowers who do not pay. Blockchain also eliminates geographic constraints, with lenders from any location bidding to provide loans to any borrower requesting them. 

Accounting and auditing

Current Reality: Managing all forms of banking and investment accounts and maintaining records of transactions means paperwork. Digitizing that paperwork securely is onerous. Banks need to meet regulatory standards to verify the authenticity of electronic files. 

Blockchain Reality: An automated record of account activity essentially enables real-time auditing. This is accessible whenever an institution is being investigated or needs to quickly produce records. The quick availability of information reduces time and stress involved in auditing procedures. Banks may even allow auditors and government officials to access the blockchain.

As with any innovation, the process of disrupting the way business gets done seems daunting. However, as finance grows increasingly automated and digitized, the dynamic security, savings and efficiency benefits blockchain offers make it an increasingly strategic choice for banks and their customers.

The post Banking and Blockchain: A Perfect Union appeared first on PaymentsJournal.

Slowly but surely, the world is moving away from cash toward electronic payments. This is a relatively easy transition … if you have a bank account.

But for the roughly 22% of Americans who are unbanked or underbanked – that’s 55 million people – the path to electronic payments is challenging, and tasks such as obtaining cash, storing value and making remittances, often are unattainable.

Many unbanked or underbanked people who live in rural and urban areas will often fall victim to predatory payday lenders and check cashing storefronts. Rollbacks in consumer protections have made this situation even more precarious, as an estimated $8 billion in fees and other charges are targeted against this community each year. And that’s just in the United States, not even taking into account citizens in developing countries who are feeling the effects of an increasingly cashless world.

In order to address these concerns, we expect to see a number of budding startups within the fintech space developing solutions as investors eagerly follow their progress. Savvy investors should keep an eye out for companies looking for innovative solutions aimed at the areas who need these resources most. When considering startups serving the unbanked and underbanked populations, keep an eye out for companies that prioritize the following areas.

Mobile payment solutions

We are probably all familiar with the lack of physical cash that storefronts experienced in the early part of the national lockdown. Yet lack of access to cash is a regular struggle for certain populations and neighborhoods throughout the country. On a most basic level, a lot of these communities can even lack ATMs. And those that do have access to ATMs are often faced with unreasonably long lines or worse, empty machines. To tackle this problem, startups in the space are turning to both micro ATMs and digital first solutions.

Micro ATMs are a cost-effective solution to expensive, stationary ATM services. In combination with local agents, these portable, card swiping machines can provide vital cash withdrawal services for those who do not have access to a physical bank or traditional ATM. Moving beyond geographic concerns, solutions like these also benefit populations who may be restricted to their homes like the elderly. By focusing on mobile and digital solutions, startups can create increasingly accessible banking services.

Rural communities

Where many of us have become familiar with the term “food desert,” “banking deserts” have not drawn the same amount of attention. These deserts are particularly prominent in rural areas, where banks may be discouraged by the potential lack of profit returns due to smaller population size. As a result, many members of these communities often lack access to not only cash, but also basic banking services.

Without access to traditional financial institutions, residents are forced to use higher cost alternatives like using money orders, pawn shop loans or expensive check cashing services that can figuratively break the bank. In working with local communities, startups can leverage existing networks of neighborhood grocery stores, bodegas and the like to increase cash back options and access.

B2B inclusion

Investors should also be on the lookout for companies embracing B2B solutions, as well. For example, in communities where it is too costly or otherwise prohibitive to operate free-standing cash machines, startups can ensure cash access for local business through virtual ATMs. Startups can also work with businesses to empower them to address their day to day payment needs. For example, payment apps for delivery agents can significantly ease the burden of what may appear to be routine transactions.

How fast will the change occur? Maybe not as quickly as one might expect due to factors such as the custom of using cash, resistance to change, and distrust of “the system.”

“The underbanked and unbanked are adopting digital payments to replace tedious processes like check cashing. However, it would be unwise to underestimate the resilience of these consumers continuing to use cash or other traditional methods of payment, especially when considering the issues surrounding store of value for digital payments,” says D’Ontra Hughes, CEO of digital cash startup SPARE. “With the last year seeing a 9.4% increase in cash in circulation, 25% of the population is continuing to use physical tender for small transactions. Digital payments will one day become a preferred method of transacting, especially if that method avoids swipe fees and lowers transaction costs however, I don’t see that happening as expeditiously as some have assumed.”

Fintech startups addressing the ongoing financial needs of small business owners will continue to see growth. There are more than 31 million small businesses in the U.S. according to the SBA, yet many lack access to the necessary financial tools needed to maintain their cash flow and grow their business. The fintech startups bridging the gap to offer digital solutions to better manage sales data, review available funds, automate savings, and more will be a top priority for investors expanding their portfolio.

The post How Startups Are Solving the Unbanking Crisis appeared first on PaymentsJournal.

When New York governor Andrew Cuomo was preparing to leave office, one of his final actions was to sign into law the requirement that New York state chartered banks pay consumers’ checks in the order in which they are received, or from the smallest to largest dollar value on each business day. The opposite approach, meaning paying the largest value check first can create more overdraft transactions, typically creating more fee revenue for banks and more charges for consumers.   This anti-consumer approach was a strategy that some consultancies were promoting in the 1990’s and early 2000’s to financial institutions. The consultant would take a cut of the increased revenue generated. Most banks no longer use this tactic, plus the use of checks has plummeted, so the actual impact will be modest, but the topic of overdrafts is front and center with federal regulators and legislators. As an article in the American Banker outlined, check clearing order is a topic being pursued in Washington D.C. along with:

• The amount of overdraft fees charged
• The types of transactions permitted to overdraw an account
• The order of payment for all transaction types, not just checks.

Heres’ an excerpt from the article:

In Washington, pressure on overdraft fees from Democratic lawmakers has been mounting. In May, Sen. Elizabeth Warren, D-Mass., criticized JPMorgan Chase CEO Jamie Dimon for collecting overdraft fees during the pandemic. A month later, Rep. Carolyn Maloney, D-N.Y., reintroduced a bill that would prevent banks from reordering customers’ transactions, limit the number of times banks can collect overdraft fees and ensure that the fees charged are “reasonable and proportional” to the overdraft itself.

The Office of the Comptroller of the Currency is currently conducting a review of banks’ overdraft practices, acting Comptroller Michael Hsu told the Senate Banking Committee at a hearing this month.

Hsu also described an interagency effort to address what’s known as the “$35 coffee” problem, which refers to consumers who make small-dollar purchases that cause overdrafts and lead to large fees.

“Excessive fees on overdrafts, predatory lending, high-cost debt traps — all these things should be prohibited. They don’t have a place in the federal banking system,” Hsu said during the committee hearing on Aug. 3. “We are looking very closely at overdrafts right now.”

Meanwhile, the Consumer Financial Protection Bureau is “continuing to closely monitor developments” in the overdraft market, which “has the potential to be very costly to consumers,” a CFPB spokeswoman said.

The CFPB, which is currently being led by acting Director Dave Uejio, has made no changes yet. President Biden’s pick to lead the agency, Rohit Chopra, awaits confirmation.

The outcome of the OCC review has the potential to be a game-changer regarding overdraft fees, according to Pew’s Horowitz.

“That could be consequential,” he said. “In the near term, that’s something that could have a big impact because the largest banks in the country are OCC banks, and they have the most customers.”

What happens at the CFPB is also important, according to Horowitz. He said that meaningful CFPB action on the issue of reordering transactions would “accelerate the benefits to consumers and help households that are living paycheck to paycheck.”

Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group

The post Do Your Overdraft Policies Need Overhauling? appeared first on PaymentsJournal.

Threats from new market entrants and growing customer demand have created a perfect storm of change for the banking community.

From these challenges comes fresh opportunity. Specifically, the opportunity for traditional banks, to not only enhance their existing services but innovate their sector and stave off competition from digital counterparts.

The key to enabling this new era of growth lies in banks’ most valuable asset: customer data.

The truth is that data is a strategic asset in the banking industry. A new era of customer-centricity has spawned demand for services that take banks beyond the traditional ‘spend and save’ repository.

Neobanks have led the charge in making this change. Born digital, they have leveraged the customer data at their disposal to offer lower, or even zero fees, on some of their legacy counterparts’ most valuable revenue lines.

Consequently, many of the services that were once firmly the remit of large banks have been reclaimed by fintechs.

Herein lies the threat for the big banks: that these traditional lines of revenue are not just stolen by challengers. But, that this leads to wholesale customer churn, with the banks relegated to nothing more than a holding stop for money that is immediately moved to another account, where customers can reap the benefits of personalised service.

The irony is that the traditional banks have a legacy of customer trust upon which to capitalise, which the neobanks are yet to achieve. By virtue of their brands and longstanding presence across the industry, customers are far more likely to trust the traditional banks with their data over an unproven neobank.

With an enriched data set, banks can not only enhance their existing services to keep par with the challengers. They can in fact forge new revenue streams that reshape the traditional bank-customer relationship.

For instance, analytics-driven payment processors can arm big banks with the data to offer customers products at point of spend. By engaging with these processors, banks of the future could offer services they could not in the past. This could include offering insurance on small purchase items or Buy Now Pay Later. Or, even credit on large ticket items, where customers could buy a car using a debit card and immediately get an offer from their bank to their mobile device with appropriate leasing terms.

By offering services such as these, banks have literally a wealth of new opportunities through which they can grow. With the opportunity available to harness data in this way, banks should not be seeking to merely match what the neobanks offer customers. They should be looking at ways in which they can use customer data to displace the threat and set a new industry standard.

A recent report from research house Celent showed that 38% of banks stated data monetization as a key strategic priority. At the same time, the report showed that 73% of banks see an increasing competitive threat from niche and nonbank players. The threat is as clear as the opportunity. Which way the change will go is in the hands of the banking community.

The post How Banks Can Harness Customer Data at the Point of Spend to Enable a New Era of Payments appeared first on PaymentsJournal.

As Buy Now Pay Later (BNPL) becomes a mainstream lending product, new models will emerge.  The simple BNPL product, pay-in-four, was a non-bank solution that ran outside the payment card rails, but interestingly enough, settled through the branded card network.

In other words, a consumer would receive a small value loan.  Typically, the first of four payments would occur at the point of sale, and the remaining three payments would appear as transactions to the customer’s debit (or, in some cases, credit) card account.  The payment card became the way to settle the BNPL, with prescheduled, recurring payments through the loan term.  That meant that the loan would appear on the BNPL lender’s books, and the merchant would pay a discount fee instead of interchange.  In some markets, particularly outside the U.S., the merchant would pay a significantly higher cost.  In Australia, the standard credit card interchange rate is  0.80%, and debit is 0.20%, about two-thirds less than the U.S.  What is interesting here is that the promise of “no interchange” is a sleight of hand.  Instead of interchange, the merchant pays a discount.

Now comes the fun part, if you follow credit or debit cards.  When regular payments become due, the fintech automatically processes a payment against the consumer’s credit or debit card account.  When the amount settles, the fintech is responsible for paying interchange to the cardholder’s issuing bank. The fintech earned their fee (between 3% and 6%) for the merchant discount and effectively paid the interchange with the discount earnings. The BNPL is still ahead of the game, but now the card issuer enjoys a share of the acquiring cost.

Ironically, if the consumer settled the BNPL transaction to a credit card, they could extend the BNPL term by only paying the minimum due on their credit card account.  In Australia, similar to the United States, the minimum due is only 2% of the balance, or a minimum of $25, as Commonwealth Bank of Australia (CommBank) explains.

One of the most significant changes in the BNPL loan structure comes from innovation by financial institutions, as this recent CommBank announcement illustrates with its StepPay product. But, first, operate within the credit card rails.  Just about every business on the planet has access to Mastercard and Visa.  In CommBank’s case, Mastercard is the preferred brand.

• StepPay is a digital-only buy now, pay later product that can be added to your CommBank app or to the digital wallet on your smart phone, iPad or Android tablet. You can use StepPay to pay in-store, using tap and pay, or online anywhere MasterCard is accepted, up to your credit limit, without needing a physical card. We’ll automatically split your purchases of $100 or more into four equal, fortnightly repayments.
• For purchases under $100, the full amount will come out of your linked CommBank account in one go. This means you can use StepPay for both everyday spending and bigger purchases.
• There are no interest charges, no monthly or annual fees, and you’ll be able to access your repayment schedule anytime in the CommBank app. Late payment fees will apply, but we have limits in place so fees are capped. Fees and charges may apply to your linked CommBank account.
• To use StepPay, you’ll need to be eligible and a current customer, or if you’re a new customer, simply open an eligible CommBank account. For a complete list of eligible linked CommBank repayment accounts, refer to the FAQs section below.

Merchants may find the model less attractive because it operates at bank-grade loan standards.  Instead of approving just about every customer, which creates a credit quality nightmare, CommBank must answer regulators such as the Reserve Bank (RBA).  The model becomes more efficient because the BNPL fee is out of the picture.

Expect more change.  Visa Installments is undoubtedly an option; PayPal’s fee-free option is another.  But in any case, it is clear that bankers are back in the picture, and BNPL will soon become a mainstream lending function.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

The post BNPL Product Variations, Round III: CommBank Australia launches StepPay appeared first on PaymentsJournal.

Artificial intelligence and automation are quickly moving beyond being buzzwords and becoming an integral part of the digital transformation of our world. Banks too need to deploy these technologies at scale to remain relevant. AI and Automation has the potential to drastically transform front to back-office operations using a next generation workforce.

AI can help augment various human capabilities such as vision (read documents, images, etc.), listening (understand natural language and arrive at the intent), decisions (suggest decisions based on continuous learning), actions (understand and execute instructions), sense (sense and respond/adapt) and voice (recognize speech and voice). Using these capabilities, each banking process that involves bank staff can reviewed and re-wired to create “human ++” capabilities.

Currently, improving customer experience has been the primary focus for most banks’ AI implementation, and that is certainly an important area to address. However, expanding the focus to empower employees through AI and automation is equally important. This can help banks accrue greater benefits. Bank staff do spend considerable amount of time with the systems. The nature of task include mix of cognitive, repetitive, and trivial

Therefore, prioritising employee experience and providing them with the right tools to augment their capability is a good strategy. Tools that offer hyper automation and intervention by exception, and are flexible and user-friendly can help provide a frictionless experience of bank staff and translate into greater productivity. It can not only help improve process efficiency, but it also brings in greater effectiveness, thereby ensuring happier employees, but also happier customers. In addition, it can also support by making simple decisions independently and supporting complex decision-making.

Let’s take the example of Al Ahli Bank of Kuwait (ABK), which is among Kuwait’s leading banks. When the bank was using manual salary processing for its small business customers, the process would take up to a week. Apart from the sheer delay, the process was riddled with error and dependencies. With automation, the salary details provided by customers are digitized using a QR code and processed with the bank’s core banking platform. The solution executes 95% of requests and assigns only the remaining 5% exceptional cases to staff.

Not only has there been a 92% increase in productivity due to elimination of manual effort, but the time needed to process a request is down by an astounding 97%, allowing salaries to be credited into customer accounts within six minutes. Other gains include improvement in accuracy and high scalability to handle month end peak volumes with ease.

Augmenting employee capabilities at each stage

Irrespective of their job role, each bank employee’s tasks typically consist of a mix of some cognitive work and some trivial and repetitive tasks. Let’s break down the typical processes in banking into some generic steps and see how AI and automation can help augment each step.

Getting input

The input process – whether it is extracting information from scanned images , documents or reading emails and deciphering the intent or listening to a voice call etc., largely involves trivial work that can be performed via AI applications. For instance, AI can read documents, images, emails, voice inputs (listening to a phone call), process structured and unstructured inputs and translate them into structured inputs.

Enrichment

Before additional processing, bank staff requires a lot of augmented information to enrich the input data. Enrichment tasks, for example, include extracting profile information, gathering historical information etc. These tasks as well as others such as identifying patterns to determine Anti-Money Laundering, suggesting new products or services, and gathering market inputs relevant for decision making can be automated.

Decision making

While decision making involves cognitive skills, AI can certainly help augment the process. For simpler decisions, AI can be leveraged to make independent decisions without human intervention and approval. For more complex decisions, AI can make recommendations and leave the final review and approval to the employee. For example, AI can recommend if a certain loan application should be approved or rejected. It can suggest relevant new product or service options that can be marketed to a given customer. It can even provide cash flow projections for an organization based on historical performance and market data. In addition, AI can help highlight transactions that could be fraudulent or do not subscribe to AML requirements.

Let’s take the process of verification of documents presented under a Letter of Credit (LC) from foreign banks. When done manually, not only is there a longer transaction turnaround time, but the process suffers from high error rates, lack of standardization, and operational risk due to staff turnover. The AI solution extracts relevant information from trade documents and matches terms and conditions in the LC with actual data in the trade document. Based on the findings, discrepancy advise is triggered to the exporter’s bank if relevant. This can potentially result in 70% savings in average handling time.

Execution

Once a decision is made, execution, or the actual implementation of the decision is the last and most critical step. Digital workers, for instance, can be leveraged to execute steps such as reading inputs and decisions from various sources and capturing the request in the system, creating payments, reconciliation etc.  

By reimagining banking processes through AI and Automation, banks can benefit from a “human++” model, where employees’ can deliver greater value. AI can free up employees’ time drastically to perform more cognitive tasks and enable them to deliver greater value through cognitive tasks.

The post How a “Human++” Approach Can Empower Bank Employees and Drastically Improve Efficiency and Effectiveness appeared first on PaymentsJournal.

Since inauguration, Americans have been sitting with bated breath to see what President Joe Biden’s next move will be regarding student loan debt forgiveness. As of 2021, there are more than 44 million Americans in more than $1.71 trillion of student loan debt.

Recently, the Department of Education approved $500 million in total loan forgiveness for the 18,000 students affected by ITT Educational Services scam, and it reignited the conversation on not just student loan forgiveness, but how consumers approach the cost of college overall. With college being one of the largest investments made in a person’s lifetime, the process to secure financial aid and a manageable loan and repayment plan have become increasingly more complicated.

Every day, borrowers continue to be overwhelmed on the topic of student loan forgiveness, and college-bound families are at a loss on where to start in the financial aid process. Banking and payments professionals can better serve these families by understanding how the process works behind the scenes, and where the points of inflection occur. Ensuring your clients are also well educated and planning ahead will lead to optimal success for those expanding into college payment services.

College is a business, and high-pressure sales tactics aren’t unique to ITT

While most colleges are non-profit entities, many of these institutions essentially operate like billion-dollar corporations that don’t pay taxes. When tuition prices rise, it benefits not only colleges/universities, but Wall Street as well.

Though we like to think colleges serve as an entity to educate and prepare students for their careers, they are businesses designed to make money. The biggest difference between private schools like ITT and “traditional” colleges is that one pays taxes (for profit) while the others do not (non-profit). While not all schools are just focused on money, many colleges have high pressure sales and marketing tactics that are not much different from ITT’s. Oftentimes, their graduation rates and job placements are not much better either. When families are considering colleges, many are not considering which schools are the most cost effective because they’re leaning into the sales pitch from the school. Looking at location, the degree that will be pursued, and the total cost after the four years are complete will help break through the marketing facade and enable families with college-bound students to choose the best fit.

Biden’s plan for widespread student loan forgiveness? Let’s not hold our breath

In April, the White House released a press release on the American Families Plan, and shared details on $300 billion in financial support for higher ed, but failed to address the $1.8 trillion in debt relief many borrowers had been waiting for. The omission of these details is the tell-tale sign that student debt forgiveness of any kind is likely not happening, and the White House has done a great job at burying the news.

While hashtags like #CancelStudetLoans is popular on social media, it isn’t as popular of a topic in Congress. With Democrats and Republicans at opposition, no headway has been made in the form of legislation. With many families having unrealistic expectations that student loan debt will be completely forgiven, it can lead to choosing the wrong financial aid packages and student loan terms. Preparing families for the more realistic expectations around college costs and the fact that Government assistance is not going to arrive, will allow finance professionals to ensure better decision-making takes place in navigating the roadmap to pay for college.

A better way forward is with proper planning + guidance is key

When it comes to paying for college, students, families, and the finance professionals assisting should focus on four key areas of success. This includes identifying the right college for the lowest cost, which requires looking at where families can maximize their financial aid packages and who is handing out the most money for your student.

Next, ensuring FAFSA & CSS/PROFILE are completed on time and all information is correct. The U.S. Department of Education reports 28% of postsecondary students do not complete the FAFSA, and roughly 45 million Americans collectively owe $1.7 trillion in student loan debt. While this number is alarming, there is the opportunity for financial experts to step in and offer guidance needed to complete FAFSA applications and receive the necessary funding to attend a four year institution. 

The third focus area is negotiation. Many students and families don’t know they can negotiate with their top school to decide on a financial aid package that best suits their family and financial needs. And lastly, paying/borrowing, educates students and families to know when to use resources & how to borrow at the lowest rate.

Now more than ever, finance professionals have the opportunity to better serve families going through the college application process to ensure success, rather than mounting unmanageable debt that many are experiencing now post-graduation. Approaching the process with understanding these colleges operate like a business and no Government forgiveness will be planned for the future, payment professionals can guide families to success through each part of the process – from choosing a college, completing the financial aid process, negotiations, and student loan selections.

Matthew Carpenter is the founder of  The College Aid Pro™, a software application that shows every family their affordable path to college.

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If you are going to monitor economic health, consumer confidence, and the long-range perspective on retail payments, the credit card industry is undoubtedly the place to start.  The business was headed on a terrific course as we entered 2020, and no credit card policy manager, or economic expert, could foretell that a global pandemic would disrupt economies around the world.

In a Mercator Viewpoint published today, we talk about how some top players reacted to the economic uncertainty.  One interesting point is that although fintechs might call financial institutions obsolete, insensitive to consumer wants, or slow to move, top issuers like American Express, Bank of America, Capital One, Chase, Citi, Discover, and Wells Fargo were nimble as could be.

There are many good examples of how well and how quickly both small banks and credit unions, regional banks, and global banks reacted.  Top banks were lucky enough to be under Dodd-Frank directives to build up their loan loss reserves under CECL requirements.  What seemed to be an onerous regulatory demand was instead a backstop that averted a credit crisis.  The U.S. market was not alone- the rest of the world had similar requirements under IFRS-9.

But think for a moment about the people that make the industry work. For example, I’d guess that 70,000 people work in the U.S. credit card business and would expect close to 50,000 of them to work in back-office functions like call center operations, plastics rendition, statement processing, and risk management.  

With trillions of transactions processing yearly and half a billion active cards, you must rely on technology and the people that use and support it.  In comes the unexpected global event.  It wasn’t a dirty bomb bringing down an electric grid or a national defense issue.  Of all things, it was a health crisis.

Out came contingency plans.  Numerous regulations, including Sarbanes-Oxley  (SOX), require an effective strategy.  In a near instant, call center people had to shift homeward with stockpiled laptops—policies for payment deferments needed to be adapted to the moment.  Inbound applications had to be serviced, and card issuers had to balance risk management with customer compassion.

In any event, as you can tell from 1Q and 2Q21 revenues, the proof is in the pudding.  The industry survived.  So the credit card industry deserves a pat-on-the-back, so there it is, and here comes 2H21.

Watch out for 2022.  There are some positive factors but expect some headwinds.  Our view follows below.

German philosopher Friedrich Nietzsche said in 1888: “Out of life’s school of war—what doesn’t kill me, makes me stronger,” which is fitting in today’s financial services environment.  It is time to start preparing for 2022, and this time, the card industry is stronger, but the risks are higher.

Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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Central Bank Digital Currency (CBDC) is gaining momentum in the world of finance. As a new form of digital money, decoupled from the traditional banking system, CBDC offers an alternate way to experience and interact within the economy. Many experts consider it a possible precursor to a cashless society and it could potentially revolutionize global finance, as data analytics and automated processes would become even more integrated with payment systems.

The CBDC efforts in southeast Asia continue with the latest announcement at Ledger Insights, whereby the National Bank of Cambodia and Malaysia’s Maybank launched a mobile cross-border remittance service. It seems that Cambodian users of Bakong, which the article refers to as the Cambodian payment system that uses a ‘quasi-central bank digital currency’ (we don’t know what that means exactly) can receive up to USD 2,500 in real-time from a Maybank MAE app. 

We have been pointing out all the CBDC and cross-border activity over in Asia Pacific, particularly among ASEAN nations. It is interesting that the Fed (or certain parties within it) remains a major skeptic of CBDC activity, but we assume we’ll get a better picture with the expected Fed report in September around the subject.

‘When it comes to researching CBDCs, improving cross-border transactions is a key motivation for many central banks. This is because a large proportion of international remittances is made from people sending money back home….In 2020, the total value of remittances across the world totaled $702 billion, of which $540 billion was to low and middle-income countries, according to figures from the World Bank….Yet despite the high demand, remittances are typically slow, expensive and subject to variable fees, depending on the region, provider or corridor.’

So the cross-border utility of these digital currencies remains a large appeal, and we’ll see where it goes from here. This is just remittance, not a B2B use case.  Readers keeping up with the subject may want to dig in a bit more.

“One of the main reasons for Bakong is to make usage of the local currency easier for the people, more convenient. And so ultimately what we want to see is direct conversion from (Malaysia’s) Ringgit to (Cambodia’s) Riel,” said Dr. Chea Serey, Assistant Governor of the National Bank of Cambodia (NBC)….Strictly speaking, Bakong is a blockchain-based central bank payment system that uses digital currency. Some label it as a ‘quasi-CBDC’. It’s not a conventional CBDC because many payments are not in local Riel and the wallets are linked to bank accounts….Meanwhile, this week, it was revealed that the Bank of Korea will also be advancing its cross-border CBDC trials with participation from Samsung, which will research cross-border payments to other mobile phones or connected bank accounts.’

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

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