Keeping Payments Relevant

In his 23 years at Pittsburgh-based PNC Financial Services Group ($93 billion in assets), SVP Thomas Kunz relates, the pace of change has never been as rapid as it is today -- not even when he was in charge of the bank's e-business initiatives during the Internet boom. As SVP and director of payments strategies, Kunz says it is his responsibility to deliver relevant technology solutions to customers in that rapidly changing environment.

BS&T: What is your role at PNC Financial Services? What is the reporting structure?

Kunz: We call it director of payments strategies. The other top 20 banks have created similar positions. But we're all wrestling with how to be effective in these roles and make a difference for our institutions. I report to our CIO, Timothy Shack, and I also have dotted-line responsibility to PNC's president, Joseph Guyaux. I have a small centralized staff that reports to me. In my e-business role, the online channel reports through me.

BS&T: What are the key payments challenges facing PNC?

Kunz: We're all challenged to stay relevant for our customers in a rapidly evolving technology environment. We're also seeing increased competition from new entrants using innovation to find a way into the payments business or into the banking space through payments. Understanding the pace of change and investing in the right technologies and delivering those to the customer are challenges.

BS&T: Do these new entrants present a real threat?

Kunz: We're well positioned in our role as trusted provider, and if we continue to stay relevant for our customers, we'll be fine. I can go industry by industry and name the top players encroaching on a piece of the payments business. Some of these players are encroaching deliberately, and sometimes they are just supporting their core businesses, such as Wal-Mart [Bentonville, Ark.] and PayPal [San Jose, Calif.]. But also having an impact is the convergence of healthcare and financial services, and the convergence of mobile telecom capabilities and financial services.

While there is no one entity that keeps us awake at night, it's the collective impact of all these players that will make a difference. As the incumbent, we have to both protect and grow our franchise, and that can mean making changes in how we do business.

BS&T: What impact will the healthcare convergence have on payments?

Kunz: As consumer-directed healthcare continues to evolve in the U.S., we've got to make the payments piece more real time and enable customers to save for their healthcare. Roughly 15 percent of healthcare costs are in administration, claims and payments processes. Consumer-directed healthcare means deposits will be up for grabs as consumers take deposits out of their retail accounts or employee-funded plans. We're a large enabler of that change among health insurance providers and large hospitals and healthcare providers.

BS&T: What are some of the key technology initiatives at PNC that will keep the institution relevant for its customers?

Kunz: PNC recently reentered the credit card business, and we view that as a vital component of our customers' payments relationship. To support our business customers that need to accept plastic, we've restructured our merchant services business with First Data Corp. [Denver].

The bridge between paper and electronic in the check world is image. We've been investing in imaging, including image exchange, online statements and remote deposit capture (RDC) for our business customers. We view RDC as a disruptive technology in the small-business market.

Customers moving from paper to electronic often are increasingly willing to do more and more online, so we have very large initiatives around authentication and increasing self-service capabilities in the online space.

BS&T: What do you mean when you say remote deposit capture is a "disruptive" technology?

Kunz: Disruptive to us means that a customer may be willing to switch providers over a technology. Customers in the midmarket segment especially pick a bank based on where they can make deposits and the bank's willingness to lend. Creating new ways of doing either of those can be disruptive.

BS&T: Doesn't remote deposit capture level the playing field between small and large banks?

Kunz: There is a bit of a paradox going on. You could argue that it levels the playing field, but we are finding that the customer is saying it's still important to have that physical location. Third-party research also suggests that smaller banks are finding it a little more difficult to compete in the electronic space, especially in the small-business market. BAI [Bank Administration Institute; Chicago] published research that small businesses are willing to switch banks over payments services. All of this is changing the game.

BS&T: Is it true that the financial services industry is unable, or perhaps even unwilling, to make the leap to fully electronic processes?

Kunz: I would say that it's not true. Financial institutions are dealing with the investments we need to make to convert paper to electronic, as well as with investments in innovative electronic services, in a fairly disciplined manner. You can't afford to do it all at one time.

There may be a perception that the industry is unwilling because of the debates around how to convert the check world to the image world. We are less effective as an industry in converging to a single image platform and now have different networks. I have to ask why we are doing that with the payments system that is declining the fastest.

BS&T: How far are we from achieving straight-through processing of payments?

Kunz: At PNC, we are well on our way to full electronification by payment type, but it's still mostly by silo. We are skeptical that any of us will get to the point where there is one railroad that routes payments by least cost.

Equally important, though, is straight-through processing by customer. We are far away from that, although we do see increasing willingness by our business customers to integrate payments with their payables and receivables processes. I see increasing evidence that the consumer/small-business market would like more integration with its business processes.

We have to stay centered not only on what technology can do, but also on customer needs. If the business case for payments electronification across businesses can be supported by more efficiency, or by helping customers reduce their costs or by providing them with enhanced payment information, then we'll move there. But I'm not sure we're seeing that.

BS&T: Where will the payments industry be in the next two to five years?

Kunz: We're obviously in the very mature stages of electronic consumer-to-business payments. Debit cards are the proof point on that. I also see a continued maturing and acceleration of the consumer-to-consumer payments space with emerging conveniences, such as mobile commerce, becoming more important. Account-to-account payments will enable consumer-to-consumer electronification and will reduce the barriers to switching banks because we are allowing customers to open accounts and make deposits in real time.

The competitive environment will mean that it won't be good enough just to be better than the other bank because our competitors include innovative technology companies that know how to market. Our challenge is to leverage the great parts of being a bank -- the trusted brand and the payments franchise -- but become better at technology and marketing than the new entrants. Our business models are being tested. Standing still is losing. **--Lisa Valentine