The pandemic altered the financial services industry and subsequently impacted the behavior of consumers, from the way they interact to how they conduct transactions. Merchants also incorporated numerous changes, updating their business models to keep up with emerging technology and the demands of customers.
Additionally, fintechs and big techs caused unprecedented disruptions for banks and credit unions. Innovation, the reinvention of financial services, and appealing solutions all contributed to disenfranchising these more traditional institutions.
In a white paper titled Eight Trends Shaping the Payments Industry, Jack Henry Payments highlights the developments that are transforming payments and some of them are covered here.
Caution: Interchange income at risk
Debit interchange currently accounts for substantial and recurring revenue, but this source of income may be in trouble.
Illinois senator Dick Durbin believes that Visa and Mastercard are discriminating against small merchants by making the routing of transactions to debit networks more challenging. He has put forth a proposal to reduce transaction fees for those merchants.
The proposed legislation sheds light on the routing inconsistencies with debit transactions that are not regulated, particularly the ones that demand PIN-less routing and tokenization. One of the requirements of the new law is dual routing on all transactions. It would also cap revenue for payments processed by fintechs and big techs, which include powerhouse companies like PayPal and Amazon.
Additionally, neobanks and fintechs that depend on unregulated debit interchange would be pushed to replace the lost revenue.
Congress is expected to pass the new legislation. Banks and credit unions (CUs) are encouraged to begin diversifying their business and revenue models to accommodate the proposed changes.
P2P gets innovative
In 2020 alone, 125 million people in the U.S. made P2P payments, and 70% used a new digital payment for the first time during COVID-19. Sixty-five percent of banks and credit unions say they plan to invest more in digital payments in 2021, with a focus on P2P transactions, and 85% believe these changes will be permanent.
With convenient apps such as Venmo, PayPal, and Google Pay, the bar has been set for P2P payments to occur in real time. If CUs and banks plan to provide this service and meet the demands of their customers, a modern payments infrastructure that enables frictionless real-time payments is unquestionably necessary. Partnering with a payments hub provider will deliver significant benefits, including but not limited to getting access to required network-specific data feeds and less expensive, more efficient ready-built conduits to instant networks like Zelle® and the RTP® Network.
Banks and CUs can’t compete with fintechs and big techs unless they offer real-time payments. Alternative payment options are now considered the norm, no longer an, but an expected feature. To remain a power player on the payments field, the ability to provide money at the exact moment of need is a necessity.
POS is new and improved
The pandemic seemed to give consumers more power. Consumer demand, inspired by the rapidly evolving digital experience, has driven many of the recent changes in the payments field, and this includes the POS landscape. These changes are being enabled by card networks, big techs, fintechs, and bank powerhouses.
Eighty percent of consumers changed their payment methods based on an elevated expectation of convenience and COVID-19 safety concerns. In response to these changes, 67% of businesses started accepting new payment methods.
The technology used for POS has changed rapidly and continues to evolve. Contactless payments are being joined by in-app payments, digital assistant payments, voice-driven options, and biometric cards.
Some card issuing companies are introducing dual-interface biometric credit and debit cards. These cards are both chip- and contactless-enabled, and cardholders will securely store their fingerprints on the card. Much like the iPhone Touch ID model, the customer will place their finger on the card sensor during a transaction, and the card can sense if the fingerprint matches the one stored. Based on this decision, the card accepts or denies the transaction.
Banks and CUs are once again being alienated by digital innovation. The reinvention of POS puts merchant relationships at risk because fintechs and big techs offer payment-forward options like Buy Now Pay Later (BNPL). To remain relevant in POS transactions, banks and CUs must continue to modernize their payments infrastructure so that it can support the ever-changing POS strategies and technologies.
To learn about the additional trends happening in the payments industry, you can download the Eight Trends Shaping the Payments Industry white paper here.