How Banks Should Respond to the New Players in Payments

New entrants can’t kick banks out of the payments system, but they could create a disconnect between banks and their customers if banks don’t catch on to the wave of digital disruption transforming payments, Reekita Grewal, Silicon Valley Bank’s head of payments strategy solutions, said at a session on new payments entrants at BAI Payments Connect 2014 today.

Even Bitcoin eventually has to be settled through a bank account, Grewal pointed out. But the threat of the new payments players is that they will take away “mind share,” turning banks into a back-office function with less sticky customer relationships, she explained.

And the growing importance of mobile devices both in payments and in consumers’ daily lives will provide a path for that disintermediation, Julie Conroy, a senior analyst at Aite Group and one of the other panelists, said during the discussion.

“The mobile device will take more and more of that ‘mind share’ as we relate to more of our lives through that device and its apps,” she noted during the session, titled “Who’s Afraid of a Paradigm Change?”

[For More On Competition with Non-Banks: How Apple and Amazon Will Shape Mobile Payments]

This means banks can’t sit back and allow themselves to only play a part in the back office processing of payments, Conroy said. Banks that want to participate in the new payments ecosystem that is evolving have to find ways to leverage the innovation happening in this space and grab customers’ attention. But how best to go about that will differ for each bank.

U.S. Bank has both partnered with new players and also built it’s own innovation lab to help stay ahead of the market, Dominic Venturo, the bank’s Chief Innovation Officer, told the panel.

“We do partnerships and also a lot of internal development. Partnering is becoming increasingly tricky with the regulatory framework today,” Venturo remarked. “Banks can’t do the same things as startups. We have lots of processes to follow, and there are probably more people trying to stop new things within the organization than encouraging them… that’s why we have our own innovation lab.”

Silicon Valley Bank has taken a different approach to new payments players, by using its unique position in the “cradle of innovation” to incubate payments startups in partnership with MasterCard, Reekita Grewal shared. Rather than seeing the startups as potential competitors, the bank takes the view that these startups will create new digital transactions that will benefit the whole payments ecosystem.

“They’re driving new transactions and creating a bigger pie instead of taking a bigger share of the pie. Uber has done that for car shares… Airbnb has created a whole new kind of transaction that didn’t exist before,” she explained.

Another option is to acquire a startup and use it as an innovation incubator, Julie Conroy suggested. “If you’re looking to get into this new payment ecosystem, then acquiring [one of these companies] makes sense… We’ve seen some successful and some non-successful examples of that,” she noted.

And some startups begin with the end goal of being acquired, Grewal added.

Another important response for banks in the fast-changing payments world is to build closer relationships with their merchant partners, Mark Horwedel, CEO of the Merchant Advisory Group, a retail trade association said. Merchants have great sense of what works on the front-end of retail commerce (including payments) and could be potential partners and customers for the banks, he related.

Each bank will have to pick a strategy that plays to its strengths and supports its business goals, but these players and the change they are creating are a fact of life that banks have to strategize for. “No economic model sustains itself over time without disruption… it’s just the nature of business,” Dominic Venturo commented. That could be good or bad news for banks depending on how well they’re prepared.

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Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio