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