Social media, P2P, and mobile payments: disruptive for banks?

By Glenn Wheeler, president, Viewpointe Clearing, Settlement & Association Services

The payments landscape has been transforming. Jockeying for position are some major non-banking players – social networking sites, peer-to-peer payment services, mobile phone providers and credit card companies. As the competition heats up, the time horizon for establishing supremacy in the market will get shorter and shorter.

Some believe that banks, long the dominant facilitator of payments, will have problems reacting and adapting to this new paradigm. Certainly the evolving payments market presents new challenges for banks, but the situation might not be as dire as some have predicted.

There is no question customers are demanding convenience. According to a recent Bank Systems & Technology article, “Mobile Payment Users Expected to Surpass 375 Million by 2015,” market research firm In-Stat predicts that the number of mobile payment users globally will triple by 2015. Where will this demand be met? Well, there are a multitude of channels for customers to gain access to mobile payments; many do not require a financial institution. Consumers have many options: there is “virtual currency” offered by social networking mobile apps such as Facebook, "tap and pay" apps via smartphone using near-field communication (NFC) offered by Google and telecom providers, and mobile peer-to-peer services from PayPal, among others. Undoubtedly, there are additional mobile payment channels being innovated as I type this.

Banks are keenly aware of the risk mobile payments pose to a key part of their business. However, it is the security component of mobile payments that deserves a second look. Security is a differentiator and one in which non-bank providers may have a hard time competing with the banks. By developing capabilities for payment transactions that bypass financial institutions, thereby circumventing the advanced systems that help secure and oversee transactions, consumers could be at risk. Naive consumers might falsely believe that they have the same type of security and protection that they do with their bank. From an individual concern, payment data could wend its way without needed security and structure.

Certainly the mobile payment market is fascinating to watch. Who would have imagined 20 years ago that your wallet could very well be replaced by a mobile phone?

But will this technology disrupt or energize banks? While mobile payments pose some challenges, I believe banks will rise to the occasion, and many already have. Billions of dollars have been spent securing the existing payment ecosystem and new entrants have to play by the same rules. This is one area where banks clearly have a leg up, and are well-prepared for the challenges ahead. Banks, mobile payment providers and consumers should keep this in mind.

What do you think?

Top 10 reasons FIs have the advantage in payments

At NACHA’s Payments 2011 in Austin, Texas, today, Fiserv released its Top 10 reasons why financial institutions have the advantage in the battle for consumer payments, including Web and social media payments.

Those reasons are:

1. Consumers express a strong preference for a financial institution-centric new media payments system, according to Fiserv primary and sponsored research.

2. Customers already have an account relationship with their financial institution.

3. Financial institutions have payment systems that are robust, and secure.

4. Financial institutions have extensive fraud prevention, detection, and resolution operations in place.

5. Financial institutions are held to strict privacy practices which today are pervasive throughout their organizations.

6. Payment systems at financial institutions are strongly regulated, so even though banking regulations are currently in flux, consumers are best protected from fraud or abuse.

7. Financial institutions have laws, binding agreements and professional standards governing their payment-related activities.

8. Financial institutions can be held responsible, with known personnel and locations, which may contribute to a higher level of trust by consumers and businesses to handle transactions.

9. Financial institutions payment-pricing models depend on repeat business, not one-time payments, IPOs or collateral advertising revenues.

10. Financial institutions already have extensive, secure, bank-to-bank payment networks in place including ACH, credit card, check clearing and more.

There’s a lot at stake for financial institutions in the payments space. From a revenue perspective, the payments business is the most significant single line-of-business in U.S. banking. In fact, according to First Annapolis Consulting, payments in the U.S. represented more than $282 billion in total revenue.

“Now is the time for financial institutions to strongly defend the payments franchise, while the industry has the advantage,” said George Warfel, consulting director, Fiserv. “However, this will require opening up to new ways of doing business and offering new payments methods that people, merchants and corporations will want to use again and again, such as Internet or web payments, mobile phone and iPad payments, and soon, social media payments.”

What do you think?