The End of the Payments Business
Recently, the payments business has been moving as fast as ... well, a payment. As the time shrinks between the dispatch and receipt of funds, the legacy, batch-oriented processes from banking's history will make way, by necessity, for new infrastructures that resemble nothing more than telecom networks.
But the expanding speed and quality of payments channels means that banks will have to offer something more than just delivery mechanisms for moving messages from point to point. That's why leading firms have been bringing together experts from across the banking spectrum to forge new strategies.
In the new payments environment, scale matters. That's quite evident on the corporate side. "Clients want to get to a single solution," says Linda McLaughlin-Moore, senior vice president and global clearing business executive for JPMorgan. "They don't necessarily want to use only one bank in a global solution, but they certainly don't want to be dealing with 600 banks anymore."
The need for size has become equally evident in consumer-facing businesses, where convergence among consumer payment methods has created an entirely new competitive dynamic. Between check truncation at the point of purchase (POP) and the lockbox; legal maneuverings in the debit arena; and innovation in the online channels, banks have to stay prescient - and large - to stay ahead. "The cost of sustaining a shop can become prohibitive," says Marcie Haitema, senior vice president and global ACH business executive, JPMorgan. "If you don't have the scale, it may be hard to justify continuous investment."
Satisfying the increasingly fickle needs of the customer and improving customer service calls for innovation and new technology. "Our clients are not just choosing on price and price alone anymore," asserts McLaughlin-Moore. "They're mixing and matching based on the real needs that they have - risk, liquidity and information."
Furthermore, old revenue streams have a way of drying up. Corporations have found ways to migrate away from banks' established transaction networks to lower-cost alternatives. Take "payments clubs," for example. Typically established among common trading partners or companies along the value chain in a given industry, payments clubs essentially create "on-us" networks for exchanging funds and information among themselves.
Accordingly, banks are no longer indispensable for certain inter-company financial communications. "It could be through a proprietary network, it could be through SWIFT [an industry cooperative that provides a standard format for transmitting payments], it could be through anything," McLaughlin-Moore says. "Payment clubs are actually the result of a market need - to exchange information and to work with multilateral or bilateral counterparties in a safe environment, in which they can be assured that the money and information will flow very quickly," she adds.
Consequently, the value proposition offered by a bank has shifted toward the business of managing a corporation's risk tolerances, liquidity requirements and informational needs. "The informational components are critical, because you need to know what's there and what's moved so that you can position yourself at the end of the day," says McLaughlin-Moore. "Moving money is the easiest part here."
Moving Consumers' Money
On the consumer side, it's getting easier to move money as well. Innovations both online and at the point of purchase are helping merchants nudge transactions to least-cost channels. JPMorgan's response? Again, it is to bolster its offerings in terms of risk, liquidity and information.
Since the increased velocity of payments intrinsically leads to higher fraud risk, there's a growing need for better information about who's taking part in a transaction. "I see risk and information coming together in the form of better identity management, authenticating issuers of payments to make sure they are who they say they are," explains Haitema.
The need for authentication cuts across all payment forms, whether they are Web-based, point-of-purchase or checks. "Once a check file is submitted for exchange, what are the controls that need to be put in place so that the same file can't be resubmitted?" asks Haitema.
Another significant opportunity comes from truncating lockbox payments using accounts receivable conversion (ARC). Under the paper-based system, returning a check for insufficient funds takes anywhere from a week to 10 days. "That means you've gone seven to 10 days with providing the service when you may have a problem client," says Haitema. "In the ARC world, the returns come back in a day or two, so you're much better able to manage your risk," she adds.
None of these businesses exists in a vacuum. That's why both McLaughlin-Moore and Haitema contribute their payments expertise to committees spanning across all of the relevant business units affected by changes in the landscape. Reporting to vice-chairman Don Layton, these committees ensure that an initiative benefiting one part of the house that Morgan built doesn't take away from another. "We identify issues, we vet them, take a position for the firm, and then execute against that," says Haitema.