Payments 3.0: For Banks, New Threats, New Opportunities

Banks’ position at the center of the U.S. payments system is under siege.

New business arrangements, new regulations, and even new legislation seem to be looking to push financial institutions to the sidelines. Before now, banks and credit unions seemed to have a comfortable spot where they were needed to make payments operate smoothly. However, the rise of fintechs and cryptocurrency has challenged that position.

Banks were challenged on the regulatory front by the Consumer Financial Protection Bureau’s open-banking rule, which was required under section 1033 of the Dodd Frank Act and positioned as a consumer-rights measure. The rule essentially required banks to pay for giving data on their customers to competitors.

The rule, finalized in October, required banks to build the infrastructure to provide their customer data to fintechs and any other company that asked. The rule required banks to foot the bill for these new systems and prohibited them from charging the companies that wanted to use the system. The rule also left open a number of questions about who would be liable if there were problems.

Under the new administration, the Bureau decided to pull the rule. But the Financial Technology Association has won the right to defend it in court. Where it goes from here is uncertain.

Also challenging banks is the rise of new kinds of charters. Industrial Loan Company charters have been used in the past by companies that wanted a banking-type charter, and last year payments processor Fiserv got a merchant-acquiring charter.

Now, fintechs are making a renewed effort to get their own charter. Companies like Plaid, Shopify, and Stripe, along with the Financial Technology Association, have come together under the umbrella of a new Alliance for Secure and Accessible Payments, to ask Congress to create a new charter that would give fintechs access to the federal payments systems. This would give them the ability to offer more payments services without the need to partner with a bank or to get a charter of their own.

A third vector of pressure comes from the federal government’s interest in stablecoins. Two bills working their way through Congress would define digital assets for payments and settlements and create rules by which both banks and nonbanks could issue stablecoins. The Office of the Comptroller of the Currency would regulate larger issuers.

While many banking rules, such as the Bank Secrecy Act, would apply to stablecoin issuers, these bills have the potential to create competing payments for both transactions and settlements.

The largest banks will no doubt be able to manage these threats. Community and regional banks will need to develop strategies to compete in the new payments environment.

Financial institutions will need to identify where their core skills and product offerings can work effectively in a new environment. They will be faced with the traditional question of build, buy, or partner to compete with these new types of financial services.

Setting a new strategy will require a balancing act to recognize where institutions need to improve on their current offerings and avoid getting caught up in the hype. For example, stablecoins might look like the

future, but a bank might be able to compete with a real-time payments offering.

With open banking, institutions were viewed as data providers, but there was nothing in the rule, or in the fundamental concept of open banking, preventing banks from requesting data from third parties to help their customers improve their financial health.

The first step for financial institutions in their new landscape will be to broaden their thinking to match core strengths and new opportunities.

—Ben Jackson bjackson@ipa.org