The payments landscape is evolving, and customers’ needs are changing. Here’s how community banks can enhance their payments offerings.
By Colleen Morrison
of banks’ revenues come from payments.
Payments account for up to 30% of bank revenue, and that income stream is under attack. Increased competition signals that the payment relationship with the customer is up for grabs by a growing group of challengers.
CB Insights revealed that Q3 2022 fintech investments in payments continue to dominate financial services, with early-stage deals reaching a record high even as overall funding begins to cool.
“What’s interesting to me is the macro environment,” says Marilena Lakoumentas, senior vice president and chief digital officer at $3.3 billion-asset Bank of Tampa in Tampa, Fla. “We’ve got capital market resets that are potentially happening, technology advancements and continued heightened digital expectations. People are looking at Amazon and how they’re transacting and how they’re making payments, and it just raises the bar for everyone.”
Top trends in payments
As 2023 kicks off, community banks can respond to today’s payments landscape by addressing five key trends.
1. Adopt faster payments.
Federal Reserve research shows that upwards of 60% of consumers want a real-time view of their account balance and immediate posting of payments they initiate. In addition, 70% equate some level of bank satisfaction with access to enhanced faster payment capabilities.
With FedNow, the Federal Reserve’s new instant payments rail, set to launch in mid-2023, community banks can link up to the system, monitor its volume and identify use cases to meet customer demands.
“Payments is not only the biggest challenge for banks but also brings the greatest value to our franchise.”
—Chris Doyle, Texas First Bank
“FedNow is obviously going to change the landscape for us, and I think it’s going to accelerate [digital development] for community banks,” Lakoumentas says.
“The trend to watch will be how quickly adoption and implementation start to scale in the marketplace throughout 2023,” shares Nick Denning, senior vice president of payments industry relations at ICBA Bancard.“The time to act is now, and banks should be in the process of defining their plans for instant payments.”
2. Embrace digital transformation.
The industry has discussed digital transformation for years, but 2023 will give way to actionable shifts. From core infrastructure modernization to plug-and-play solutions via application programming interfaces (APIs), community banks will become more assertive in identifying ways to implement solutions that fill customer voids.
“When it comes to payments, there are opportunities out in the market to partner with fintechs,” says Chris Doyle, president and CEO of $2.1 billion-asset Texas First Bank in Texas City, Texas. “You can ramp up a revenue source that you’ve not had in the past and offset some of the losses in revenue that we’ve experienced or may experience. If you’re not exploring those types of partnerships, it may be a good idea to start doing so.”
3. Create frictionless customer experiences.
A recent Salesforce study indicates that 88% of customers say the experience a company provides is as important as its product or services.
That means personalized, seamless digital capabilities will elevate community banks in their customers’ eyes.
“If I talk about Bank of Tampa’s vision, we want to be great at our personal relationships and upgrade our digital capabilities so that we get as close as we can to being a best-in-class digital bank,” Lakoumentas says. “The combination of the two could be something really powerful.”
Products like contactless payments, QR codes, tap-to-pay, virtual cards and other streamlined solutions increasingly will be deployed by community banks because they support the goal of simplifying payments for the customer, while keeping the bank central to the payment.
“A QR code can be converted to an ACH, a card or FedNow [payment],” says Tina Giorgio, president and CEO of ICBA Bancard. “I think the whole point is going back to the mantra we’ve been saying for years: Frictionless is key to success. The more frictionless the ability to pay becomes, the more consumers are going to migrate to those channels.”
4. Evaluate payments at the point of sale.
Emerging and traditional offerings are mixing at the point of sale, introducing both choice for the customer and opportunity for the community bank. “You have some interesting dynamics to keep an eye on with respect to legacy payments and emerging payment types: emerging inclusivity of instant payments as well as paying with buy now, pay later [BNPL] or other products,” Denning says.
For its part, BNPL has already had repercussions on the industry. According to a Lending Tree survey, 43% of Americans have used BNPL, up from 31% year-over-year. The same survey found that 42% have made a late payment and 70% have admitted to overspending. The growing unease with BNPL solutions provides an opening for post-purchase plans that support the end goal, but without added concerns.
“Post-purchase is more responsible to offer to cardholders,” says Rebecca Kruse, executive vice president and chief operating officer at ICBA Bancard. “It offers a payment plan based on a purchase they’ve made on an already approved line of credit, instead of these one-off loans.”
5. Address fraud and security.
According to “The State of Fraud and Financial Crime in the U.S.,” a report from Featurespace and PYMNTS on fraud and financial crime, 62% of financial institutions reported an increase in fraud volumes from 2021 to 2022. Across the board, nearly all payment types saw an increase in losses.
“If community banks aren’t highly focused on fraud, they should be,” Doyle advises. “Fraud is running rampant. Whether you’re talking about P2P, wires or washing of checks, every payment rail is getting pounded on when it comes to fraud. You really need to build a strategy on how to combat that, not just for the customers but for the bank as well.”
In 2023, experts agree that advanced screening technologies will be more widely deployed by community banks to help identify troublesome transactions before they are executed.
“Real-time behavior-based fraud detection before a payment is sent—it has to happen,” Kruse says. “If you’re going to implement instant payments, you have to have fraud detection before you send the payment.”
While these five trends offer individual concepts, they are deeply intertwined, and that’s precisely where payments strategies excel.
“I grew up hearing this from my father at the bank: Payments is not only the biggest challenge for banks but also brings the greatest value to our franchise,” says Doyle. “So, at our bank, we developed a payments strategy years ago and continue to develop that as things change.”
Yet, with today’s rapidly shifting industry, it can be hard to see the forest for the trees. For Texas First Bank, that meant engaging outside expertise for a neutral assessment of its options. “There’s a lot of really smart consultants out there who can help community banks with that strategy,” Doyle says.
“At the heart of every account you have in your bank is a payment,” says Giorgio. “When you think about it, if you have a new account, the first thing they do is make a payment via a deposit into that account. If I have a loan, what do I do? I make a payment every month. If I have a credit card, I make a payment every month. I get paid; there’s a payment going into my account every month.
“How easy it is for your customers to be able to respond to those required actions is going to drive their behavior as to how they facilitate those payments.”
In short, payments matter, and as the new year rolls on, their prestige and impact will grow. Experts advise getting a payments strategy in place to ensure preparedness for whatever comes next.
Payments resources for community banks
ICBA Bancard has created a Digital Payments Transformation Report and a soon-to-launch workbook that will help community banks solidify the next steps in their payment journeys. These resources aid community banks in putting actionable, integrated plans in place, which will be vital as payments play a central role in shaping what’s next for community banking. Visit ICBA Bancard for more information.
Colleen Morrison is a writer in Maryland.