By Anita Hawser
Banks are struggling to keep up with nonbank rivals in the race to create the next generation of payment systems.
It may have been unfettered innovation that got banks into hot water during the financial crisis, but they are now under more pressure than ever to find creative new solutions to help corporations better manage their finances. This time, however, it is not increasingly complex and sophisticated financial instruments that they are focused on but a different kind of innovation. "In order for financial services firms to prosper, they need to innovate in the way they deliver services, considering such options as collaboration and "coopetition" with other industry participants," said analyst firm TowerGroup in its summary of SWIFT's 2009 Sibos conference in Hong Kong.
Banks are collaborating with mobile-phone operators and IT solution providers to develop new payment channels. But if you look back over the past 10 years, most of the major innovations in payments, such as PayPal, peer-to-peer payments and mobile wallets, were led by nonbank providers, says David Sear, divisional managing director of Travelex Global Business Payments. The banks, however, maintain that they have been innovating. Last year at Sibos, Citi announced its next-generation cash management portal, CitiDirect Banking Evolution (BE), which featured the latest in social networking and collaborative technologies for corporate treasurers and banks. "CitiDirect BE is still one of the leading examples out there of banks that are looking to offer capabilities to a new range of customers," says Colin Kerr, industry manager for payments and core banking at Microsoft. "It is innovation in the sense that it provides Citi with the ability to white-label discrete components of functionality to other banks."
Citi is not the only bank that places so much emphasis on technology and innovation. Wells Fargo enjoys a reputation for behaving more like a technology company than a bank, as demonstrated by its award-winning Commercial Electronic Office portal, which was one of the first online banking portals in the corporate banking space. As Steve Ellis, head of Wells Fargo Wholesale Services, points out, being physically close to Silicon Valley helps, but he also says that innovation is part of the bank's lifeblood. And despite having gone through one of the biggest bank mergers thus far—with Wachovia Bank—the bank, he says, is spending as much money this year on innovation as it has in previous years.
Ellis acknowledges that it is hard for banks to lead when it comes to innovation, but Wells Fargo's secret, he says, is that it doesn't manage by committee. So when it came to developing mobile-phone applications, Ellis says he simply went to his boss four years ago and said, "Everyone's got a cell phone, it's going to be really big." His boss, says Ellis, "let me do things like get a small team together to come up with some high level ideas and spend a lot of time with customers looking at what they use. It is not easy for a lot of banks to do that."
Although there is rapid development under way in new customer-facing technologies, such as voice recognition, tablet PCs, the iPad and smartphones, approximately 80% of payments are still cash-based. "There is a large opportunity to move payments into the electronic space," Ellis says. And while it is easy to get distracted by all the emerging payment channels, Ellis says the real opportunity for banks is not peer-to-peer payments, which may be cool but will not fundamentally change banking. He says it is more about migrating manual paper-based processes onto electronic channels.
"In the US we are going to have invoices go through the ACH network," he explains. "That kind of stuff obviously needs to happen." However, Ellis says, we won't suddenly see all companies using electronic trade finance because the workflows are not easy to automate. He does believe, though, that customers are becoming more comfortable with using new tools.
Instead of focusing so much on evolving payment channels, Diane Reyes, global head of payments at Citi Global Transaction Services, says banks still need to innovate around existing payment channels. "Banks do a pretty good job of getting [a payment] to its destination next day or same day, but it is not as close to real-time as clients would like to see." Citi is bent on solving inherent challenges to make instantaneous payments a reality across its global network for correspondent and corporate clients.
Van Wezel: “Banks should position themselves to tap the new flows”
"Just asking clients what they want gives us the opportunity to innovate," asserts Ray Zabarte, global head, payables in transaction banking at Standard Chartered. "It doesn't have to be massive industry change." However, Sear of Travelex says companies like his are capitalizing on areas where the banks have failed to innovate. As an example he cites Travelex's international payment solution, which provides richer data (e-invoices) with the payment so it can be more easily reconciled.
Ron van Wezel, head of emerging payment streams for global transaction banking at Deutsche Bank, says all payment providers, big or small, bank or nonbank, are thinking about payments innovation. Deutsche Bank GTB is developing a number of emerging payment streams, including mobile payments, e-payments, cross-border ACH payments, and remittances. However, he says, emerging payment options cover only part of a client's payment needs. "Therefore, successful innovations will have to be complementary to legacy payments," he explains. "For example, mobile payments are a promising innovation to facilitate payments at the point-of-sale, but merchants require the provider to also support their card and cash payments."
Kerr says banks are also looking at e-wallets for social networking sites such as Facebook or Xbox gaming networks. "It is an opportunity for the banks to get a step ahead and stay connected to their customers, rather than being disintermediated," he says. The banks say they can add value to mobile operators' offerings by providing risk management capabilities such as Know Your Customer. Zabarte says banks can provide a trust service that helps to safeguard the value held in collective mobile wallets. "So hypothetically, if there is $1 billion worth of balances in mobile wallets, there would be an equivalent amount sitting in a trust account held at a bank, so mobile wallet owners can rest easy that their money is always intact," he explains.
Other banks are also looking to add value in the corporate-to-bank aspect of mobile payments. "Deutsche Bank GTB's mobile strategy is focused on providing clients with solutions to optimize their cash collection and corporate disbursements processes and to support merchants with new payment options in both e-commerce and point-of-sale environments," van Wezel explains. Arguably, however, the corporate space still lags the consumer space when it comes to uptake of mobile payments. Sear believes corporate appetite for electronic payments must become better established before mobile applications can take off, while van Wezel believes new payment options like mobile will speed up the process of going electronic, providing alternatives to checks and cash. "Introduction of Near Field Communication–based mobile payments and contactless cards will allow merchants and banks to cheaply substitute low-value payments," he says. "So, although 'cashless' is not yet on the horizon, 'less cash' is definitely in the works."
But can the banks innovate quickly enough, or will a PayPal of the mobile world beat them? "I'd like to think that we can come up with good ideas," says Zabarte. Van Wezel says the global interoperability that banks have achieved through standardization and linkage of networks is a significant asset. He says emerging networks, including PayPal, will have to interconnect to offer a similar ubiquity of service and global reach. "At the same time," he says, "banks should position themselves to tap the new flows in the emerging payments space—otherwise, they will be reduced to settling the net payments without direct customer payment interaction."