As I discussed in Part I, no shortage of innovations has exploded on the consumer payment scene in the past few years. While complex and potentially daunting for the uninitiated, this diversity of payments options gives consumers a wide range of choices. At the same time, the addition of payment channels makes the ability to separate legitimate consumer behavior more difficult.
Think about it – how many cards did you use 5 years ago? Two? Maybe three? Was prepaid even part of your vocabulary? And if so, was it as prominent in your or your financial institution’s portfolio? This proliferation of means to pay is affecting the financial industry in a number of ways.
The first that comes to mind is transaction fees. Many payment apps offer much lower cost per transaction without the need to set up a merchant account, allowing the merchant to keep more revenue. With the amount of available online and mobile payment apps out there, this lower revenue is being distributed among a much larger set of players, making the cost of each transaction higher for the traditional payment networks. A first world problem perhaps, but with lower profit levels come less innovation causing more new entrants and the cycle continues.
Another aspect of a fragmented payment landscape is managing funds in and out of the consumer’s bank account with the differing levels of security and modes of authentication that accompany varied payment methods and technologies. Combine this with multiple transactional streams from disparate platforms and you have a significant issue of reconstructing actual transaction behavior and separating a consumer’s actual from fraudulent behavior across multiple channels.
And this is not just hard for banks – regulators are equally challenged to keep up with and ensure the legitimacy of new payment methods, especially in the mobile space. While regulators decide if and how these newer forms of payment will be monitored, they will undoubtedly hold banks to a higher standard than the more nascent app makers, creating the need for banks to be aware of these new methods and associated challenges.
There is no easy answer here, but the direction in which payments is moving leaves no question: banks must adapt to this new world or risk being left behind, both in terms of opportunity cost and potential liability. While some believe banks have already missed the boat, there are multiple opportunities to not only stay relevant, but also to use their established position to innovate and create immediate market share.
One thing is clear – no matter who is handling the transaction, and who is getting the lion’s share of the fee, it is up to banks to be the last line of defense. Consumers do not operate in silos; if anything, the proliferation of payment methods has removed the ability for institutions to create artificial walls. Financial institutions should look for ways to quickly risk assess and adapt to these new applications, providing them a competitive advantage without risking exposure of consumer or firm data or assets. After all, when something goes wrong, who’s going to blame that poor little app.
*Content originally published by Ciaran Doyle.