Banks have been challenged to improve their brand admiration and win back consumer respect—especially in the area of innovation—after the 2008-09 recession. This post describes an opportunity for payments innovation which banks could undertake to help change these consumer perceptions for the better… and to add to their bottom line in the process.
Step #1: Acknowledge that banks are not known for innovation
Going back to the financial crisis of 2008-09, in a Wall Street Journal article entitled “Think More Broadly,” Paul Volcker, former Chairman of the U.S. Federal Reserve, was quoted as saying:
“I made a wiseacre remark that the most important financial innovation I have seen the past 20 years is the automatic teller machine. That really helps people and prevents visits to the bank and is a real convenience. How many other innovations can you tell me that have been as important to the individual as the ATM?”
Yes, banks are not typically known to be innovators, which can be quite challenging given the magnitude of government regulations which are integral for their businesses. Within the U.S., for example, the Durbin Amendment to the Dodd-Frank legislation is often interpreted as requiring that the merchant be able to choose the network over which his transaction rides to the processor—ostensibly to foster competition, but this regulatory uncertainty can make bank innovation more challenging.
As Quisk has written before, Millennials, in particular, do not have high regard for banks and/or think banks are relevant to their lives as “71% would rather go to a dentist than listen to what a bank has to say.”
Step #2: Investigate and leverage relevant FinTech technology
The core of what banks do is run the payments system which touches the lives of many, many people. However, the last significant innovation in this area has been card-based payments, introduced about 50 years ago. Banks have traditionally been issuing new credit and/or debit cards to consumers—in order to minimize their need for cash and to participate in these transactions. As a result of these investments over decades, card-based payments has grown into a significant profit generator for most retail banks.
However, today, given that 85% of all retail transactions around the world are still conducted in cash, banks have an opportunity to leverage modern technologies—i.e., mobile phones and cloud-based digital payments platforms—to re-imagine core payments systems and appeal to these MANY more people still using cash.
A more innovative path forward for banks would be to investigate and leverage relevant FinTech firms to help them enable a bank-led ecosystem for digital cash or mobile money. No plastic cards would be needed, nor their considerable administration expense, nor the relatively high expense of legacy card-based payment networks. Banks would be able to participate and monetize these new, more affordable digital cash transactions while complying with all relevant central bank regulations.
Step #3: Add value to consumers by digitizing cash payments
Does this sound like “Mission Impossible” for banks? We would suggest the answer is “no.” New cloud-based platforms can integrate with back-end core banking platforms (as well as POS terminal networks) to enable banks to create a new digital cash, or mobile money, ecosystem. Banks could leverage this more modern, highly efficient cloud-based payment network to issue a new type of bank account which a consumer could access and use with their mobile phone number and secure PIN.
When the consumer makes a retail transaction using this new digitized cash (i.e., paying with the money in their new bank account), banks can participate and monetize this transaction. In this manner, banks can offer the 85% of consumers still paying with cash a more convenient and secure solution. This innovative bank solution would add value to consumers and help change their current perceptions of banks, while enabling banks to add money to their bottom line. Let us know what you think.