September 22, 2008

It has been some time now since banks first found themselves threatened by nonbank competitors. First it was other financial services providers, such as brokerages, and then came a slew of tech-heavy companies — both established and start-ups — that aggressively have been chipping away at banks' hold on traditional banking services, such as lending and payments.

This year's Elite 8, no strangers to the innovative use of technology for competitive advantage, definitely are keeping an eye on the potential competition, particularly in the payments space.

Banks need to understand the opportunities nonbank competitors hope to capitalize on; it is in payments that banks face the greatest threat from nonbank competitors."I wouldn't single out a particular company, like Wal-Mart or Google," says Anita Sands, managing director and head of transformation management at New York-based Citi. But when you look at PayPal and the way the telcos have gotten involved in payments, she adds, "The threat of disintermediation is very real and huge in mobile banking." This is evidenced in markets such as Japan where the telcos, including NTT Docomo, are dominant in mobile payments, Sands notes. "But in other areas, such as India or Africa," she continues, "there's such an opportunity for the mobile infrastructure to change the banking industry."

This sentiment is echoed by Steven Kietz, EVP, growth ventures and innovation, with Citi's Global Consumer Group and CEO of Citi start-up Mobile Money Ventures. Kietz sees payments as the primary battleground between banks and nonbanks, and, he says, mobile will add another dimension to the scuffle. "There's a business opportunity to take advantage of [mobile] technology," he explains. "The payment company will get a piece of the transaction that didn't exist before m-commerce."

Just who "the payment company" will be is still up for grabs. But rest assured, the banks will vie for the top spot, notes Kietz. "The banks, Visa and MasterCard all hope to be the payment company," he says. "Look at PayPal and the credit card business — banks lost out on the cash advanced fees here. PayPal came along and the card companies didn't know how to respond. So now PayPal and eBay dominate. The question is, how will we make sure this will not happen again?"

Nothing to Fear but Fear Itself

Hancock Bank's Shane Loper acknowledges that the disintermediation threat is real. But rather than fear new competitors, the COO and CIO of the Gulfport, Miss.-based financial institution says, banks need to understand the opportunities nonbank competitors hope to capitalize on; he adds that it is in payments that banks face the greatest threat from nonbank competitors.

"That's where the vulnerabilities are," he says. "There are many companies with payments tools being distributed on the Internet or mobile devices. As check volumes decline, payments are being transferred to many different vehicles. Some of these are efficient while others may generate less revenue. So banks need to be aware of [the competition] — not afraid — because we have the knowledge of the products and what customers want."

Payments also jumps to mind for James Yee, senior EVP and CIO with San Francisco-based Union Bank of California, when examining the growing competitive threats from nontraditional players to banks' value proposition. "Banks need to realize — and most do — that because of the technology available on the Internet and the convenience offered to consumers, the whole payments landscape has completely changed," Yee explains. "There are competitors coming in that we hadn't seen 10 to 15 years ago. There are start-ups coming into banking, there are direct banks like ING that are only on the Internet channel. Today, with the payment mechanisms, you can become a strong competitor. Look at prepaid debit and credit cards — start-ups can steal this business away, too."