Payments Disruption Is Happening Now

The payments sector is perhaps the easiest aspect of financial services for non-bank companies to get involved in and disintermediate the traditional players. While all institutions are vulnerable to outside competition in the payments space, perhaps none are more so than community banks, which do not have the resources larger banks do to keep up with the rapid pace of innovation.

According to Sam Kilmer, a senior director with consultants Cornerstone Advisors, community banks cannot look at disruption in the payments sector as something that will happen in the future. "The disruption is happening right now, we're in the middle of it," he said during a session at the D+H Connections 2014 conference last week in Orlando. "You shouldn't be just studying it or thinking about whether it could be a threat."

Kilmer said when Cornerstone meets with community bank clients, one major issue that typically arises is that they don't often have one person in charge of managing payments, and can't track their overall P&L when it comes to payments. He said this is often because different types of payments are handled by different departments of the bank. Kilmer contrasted this with lending, which most banks track very closely and have a much more accurate picture about.

"We usually ask our clients to build a payments P&L statement, and if you can’t answer how much you're making in payments easily, that’s bad," he said. "You have to go through the invoices and figure it out."

He also advised community banks to look at where resources can be redirected from some other areas of the business in order to fund payments innovation.

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Despite the threat of payments disruption, Kilmer said banks still have some advantages and still have time to push back against the rising tide of new entrants into the payments arena. He said that consumer surveys generally find that, while most people are aware of mobile wallets, they have still not been highly adopted by the general public. Those same surveys tend to find that consumers are more willing to trust their financial institution when it comes to making mobile payments than a technology company, such as Apple or Google.

Kilmer also noted that traditional payment operators like Visa and MasterCard "want to defend this payments network as much as you do," and advised banks to seek further partnerships or agreements with them.

According to Kilmer, all of this means now is the time for banks of all sizes to pursue payments innovation before the opportunity to defend their turf is gone. "For banks, it's time to defend, innovate, and adapt," he said.  

Bryan Yurcan is associate editor for Bank Systems and Technology. He has worked in various editorial capacities for newspapers and magazines for the past 8 years. After beginning his career as a municipal and courts reporter for daily newspapers in upstate New York, Bryan has ... View Full Bio