Payments 3.0: Deep Trends in Banking And Payments

As this is my last Payments 3.0 column, I thought I’d share some of what I call deep trends that will, I expect, affect the banking and payments industry in the coming years.

Banking and payments will always be more about trust than technology. Most people aren’t paying for things with their mobile phones. And the majority of those who are do it via a debit card or bank account. Even Apple has had to seek the embrace of Goldman Sachs and issue a credit card with reward points to generate volume for Apple Pay. Nor are more than a fraction of us borrowing from a loan-bot, except where a bank uses one for initial screening or for routing inquiries.

Most consumers get involved with new payments technologies when a known bank or card scheme adds one to its existing payments platform, not when a technology company decides to try its hand at payments services. In the long run, the role of most fintech firms will be that of parts supplier to banks and payments companies—much as IBM and other technology firms are today.

If there is a lesson for banking and payments in all of this, it might consist of the following principles:

• Keep the bank or payments-scheme brand foremost, regardless of who makes the technology.
• Emphasize the safety consumers enjoy when they use a regulated entity for their payments rather than a company that prioritizes disruption and breaking things.
• Think deeply before filling senior-executive ranks with people who haven’t been through a banking crisis, even if they’ve done multiple tech startups. It’s a very different kind of risk management.
• Since what financial institutions sell is products that help people use their money, how well-off people are is as important to the banking industry as water is to the agriculture business.

The last point merits some discussion. If the economy defaults on its ability to provide stable employment at good wages, housing at reasonable prices, and affordable health care, it is the banking industry that will find out first that the country’s got a problem. Somewhere between 15% and 30% of purchases (e.g. payments) are discretionary. Unless individuals feel that their income is both sufficient and dependable—and also feel a major illness in the family won’t wipe them out financially— there will be a noticeable drop in discretionary payment transactions, as well as in new mortgages and other lending. It won’t matter how clever our financial technology becomes if there won’t be enough people with enough income to use it.

This means politics matters more for the financial industry than it does for other types of businesses. Supporting political decisions that will result in dependable jobs at decent wages is far more important to a financial institution’s success than getting the branches so automated we don’t need any employees, or teaming up with whatever startup seems to have the slickest gizmo for sharing the cost of a pizza.

If, as I expect will happen, we make the necessary political and governmental adjustments to foster a growing customer base that needs banking services, the coming advances in banking technology are going to give us the tools to serve these customers both better and more profitably. It is Moore’s law that enables how many new services can be provided via the ever-increasing amount of work a silicon chip can do as its cost continuously declines. This principle of practical engineering will continue to allow technologists and bankers to provide new banking and payments services that will make A.I. mortgage machines and sub-15-second worldwide payments very old hat. There is a lot more change to come than anything we’ve seen yet.

A few thank-yous as I step out the door: To John Stewart at Digital Transactions, who first approached me with the idea of the column; to Dick Fletcher of Beneficial State Bank, who has been both a client and a co-worker over much of our careers and has provided an example of how much good a well-run bank can do in the world; to Gordon Werkema of the Federal Reserve Bank of Chicago and Marie Gooding of FRB Atlanta, who have kept me involved on the leading edge of payments from Check 21 to faster payments. And to all of you who read the column and have e-mailed me or called with your comments and suggestions.

—George Warfel • GWarfel@haddonhillgroup.com