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Jonathan Camhi
Jonathan Camhi
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8 Big Stories Transforming The Payments Landscape

The payments market is emerging as the laboratory where some of the most innovative and disruptive developments in financial services are occurring. What can banks do to capitalize on this transformation?

Bryan Yurcan and Zarna Patel also contributed to this story.

1. Virtual Currency: Becoming Mainstream?

Virtual currencies have forced their way into the popular consciousness in 2013. But will governments seek to ban them?

Bitcoin and its fellow virtual currencies appear to be inching ever closer to the mainstream. Once the seemingly exclusive domain for off-the-grid libertarians, virtual currencies have forced their way into the popular consciousness in 2013.

First came news early in the year that a European Bitcoin exchange had secured a license to operate as a payments service provider. Bitcoin-Central was granted a license to operate as a payments service provider by the French government, which also declared that users' accounts will be protected by the Fonds de Garantie des Dépôts (the French equivalent of the American FDIC). Each account will get its own International Bank Account Number, thus allowing holders to use it as any other bank account, have their salaries and pensions sent there, and have them automatically converted to Bitcoin if they so wish.

In June, a chain of pubs in England, Individual Pubs Ltd., announced it would accept Bitcoins as payment at its establishments, conducting what's believed to be the first pub transaction using virtual currency in the U.K. Meanwhile, Amazon in May announced it was launching its own virtual currency for Kindle Fire users. The "Amazon Coins" can be used to purchase apps, games and in-app items.

Perhaps the most interesting development regarding virtual currency took place in August, when a U.S. federal judge ruled that Bitcoin is indeed real money, while presiding over a trial in which a man charged with running a Ponzi scheme using Bitcoin tried to get the case thrown out by claiming that Bitcoin isn't real money and therefore isn't subject to regulation by the U.S. government.

This ruling is interesting because it indicates potential efforts on the part of the U.S. -- and other governments -- to regulate, or possibly ban, virtual currencies in the future. — Bryan Yurcan

2. Cloud-Based Payments: Will Banks Bite?

PayPal and other nonbank payments providers have jumped at cloud-based payments. Will banks try to gain benefits in payments security and flexibility with the cloud?

The NFC-versus-cloud debate around mobile payments has been a hot topic over the last couple of years, but the debate is misguided, says John Lunn, PayPal's director of developer relations. While PayPal has very publicly pursued a cloud-based approach, the prize for PayPal isn't getting people to pay with their mobile devices at the point of sale.

"Just making a mobile payment at the point of sale is pointless. Cards work fine," Lunn states.

Instead, much like banks, PayPal's aim is to deepen its customer relationships by enabling customers to pay anywhere and however they wish, and that's where the value in cloud-based payments can be found, Lunn insists. That means looking beyond the mobile device to a payments environment where consumers each have numerous devices with which they can make payments.

"We believe that in the future consumers are going to shop from many devices: their smart TVs, their laptops, their PS3s. Our goal is to make payments easier by centralizing account info across those devices," Lunn says.

Moving to such a model enables certain benefits for payments companies and their customers, explains Matthew Friend, a managing director of Accenture Payments Services, North America. The cloud can help standardize security across different devices. For instance, customers can use their online login credentials to authenticate at the point of sale, he points out.

"It will be interesting to see if over the next couple of years financial institutions start to adopt a cloud-based payments model," Friend adds.

Friend may not have to wait long. In August, Royal Bank of Canada announced it will launch RBC Secure Cloud, a cloud-based mobile payments service for retail consumers, later this year. RBC noted that it will be better able to ensure security of customers' account information by keeping it with the bank in the cloud than if it were on a mobile device, and said the service is flexible enough to enable payments with near field communication, QR codes and offline transactions. Whether other banks are enticed to a cloud-based payments model by such benefits remains to be seen. — Jonathan Camhi

3. Vigilance And Cooperation Are Key In Payments Security

Cyber attacks targeting financial information are on the rise and are increasingly sophisticated. All participants in the payments value chain must cooperate to address these threats.

Losing a credit card -- for many years, the source of much financial fraud -- is the least of a consumer's problems today since attackers have been teaming up to target banks, payment processors and retailers to get direct access to account information. Similarly, the simple tactics of credit card skimming reap just pennies for fraudsters, compared with the millions of dollars they target when planning a cyber attack or a series of attacks.

In August, a cyber attack with losses reaching hundreds of millions of dollars garnered widespread media attention. The attacks involved a Russian gang, who stole 160 million credit card numbers from more than a dozen companies. The gang used SQL injections -- a code-injection technique that targets Web applications to allow hackers to retrieve data -- to send a code to specific servers, which would allow unauthorized users to manipulate the data in the victims' computer systems, according to media reports. After the credit card numbers were stolen, some were sold to resellers. They targeted mainly payment processors and retailers, such as Heartland Payment Systems and J.C. Penney.

Law enforcement officials had a difficult time catching these attackers because there is no cooperative system for companies that handle customer account information and local law enforcement to work together, says Shirley Inscoe, senior analyst at Aite Group. The attack was highly sophisticated because of its coordination, she adds.

According to Inscoe, banks, payment processors and retailers can better protect themselves by upgrading their security systems and working together.

In a separate incident, eight men were arrested on suspicion of stealing nearly $3 million in just a few hours from thousands of ATMs all over New York City this year. The thieves obtained debit card information and eliminated withdrawal limits to rapidly withdraw money from ATMs.

Especially for attacks like these, in addition to bank efforts, customers can be more active in securing their personal information by frequently checking their accounts and quickly reporting transactions they did not approve, adds Inscoe. — Zarna Patel

4. Partnering On Mobile Payments?

Banks and nontraditional competitors teaming up may be the future of mobile payments.

Despite the hype, mobile wallets and mobile commerce haven't actually spread like wildfire among U.S. consumers. Though several wallet products have been released over the past two years, none has yet emerged from the pack to achieve widespread adoption. But with new partnerships popping up between banks and payments providers, that could soon change.

This summer, U.S. Bank took an interesting step by partnering with Square -- one of the notable "nonbank competitors" in the payments space -- and adding it to the bank's digital wallet options available to customers via their iOS and Android smartphones.

Dominic Venturo, chief innovation officer for U.S. Bank Payment Services, says that although Square competes with the bank in some areas, he believes this offering will ultimately provide convenience to its customers. "Square is a multifaceted company that, in some cases, does offer products that appear to compete with products we offer, and that's fine, we welcome competition," he says. "They also offer many consumers the convenience of the Square Wallet and the ability to pay with that wallet."

U.S. Bank views this as an extension of its payments infrastructure, Venturo adds, noting it will continue to "try new things" as customer preferences in payments shift.

Tom Kunz, senior VP of digital channels for PNC Bank, acknowledges that the hype outpaces actual usage of mobile wallets. But, like Venturo, Kunz says his bank believes it's important to be active in this space for customer convenience. PNC late last year made Visa's digital wallet scheme available to its existing 1.2 million PNC Virtual Wallet customer accounts, with a commitment to make available to more than 6.3 million accounts by the end of 2013. PNC was the first U.S. bank to integrate with Visa's new digital wallet service.

Kunz says mobile devices, specifically the tablet, "are drastically changing the way consumers shop." The fact that stores consumer payment and shipping information to a single account and login so it doesn't have to be re-entered when shopping multiple websites makes it highly appealing, he notes.

"Mobile is a catalyst in every industry to reinvent the way you do business with your customer," Kunz adds. — B.Y.

5. Striving For Ubiquity In Mobile Payments

The Merchant Customer Exchange aims to enable customers to make mobile payments at numerous retailer locations nationwide, but gaining widespread acceptance on the back end with banks and payments networks is just as important for the initiative's success.

The mobile wallet space only grows more competitive as Merchant Customer Exchange (MCX), a joint mobile wallet venture involving a number of the nation's top retail chains, including Best Buy, Wal-Mart and Target, is taking its first steps toward joining the mobile wallet race.

Many mobile wallet ventures have struggled because of the number of participants that must be brought in to make a system viable: merchants, payments processors, device manufacturers, card issuers and network carriers, among others. MCX has the retailer end covered, which the new company hopes will be a big draw for consumers. The retailers partnered in the venture combined have nearly 100,000 locations in the U.S. "What we will deliver on … is the opportunity for the consumer to get coffee, gas, groceries, prescriptions, clothes and hardware at retailers they already visit every day, and at every location along the way they can use the MCX solution," says Dodd Roberts, a member of MCX's executive team. "That ubiquity will enhance the consumers' lives."

But that ubiquity can't be achieved unless the back-office transaction processing side of the system can gain widespread acceptance among different financial institutions and payments processors. "There's been a lot of focus [in mobile payments] on providing offers for consumers. It's simple to do that," Roberts explains. "The back-end piece -- moving transactions quickly and securely -- that's the difficult part."

To that end, the initiative recently announced a partnership with FIS, which will build a payments switch for MCX that can move transactions through any financial institution. "We want to be just as ubiquitous on the back end, too," Roberts notes.

MCX also is partnering with Gemalto to design its mobile application and front-end user experience, and recently hired Dekkers Davidson, a former Barclaycard executive who helped launch the first cloud-based mobile wallet in the U.S., as CEO. These moves, along with the participation of more than 20 of the country's top 100 merchants, have MCX poised to pursue the kind of pervasiveness that Roberts talks about. — J.C.

6. Mobile P2P: U.S. Lags Behind

Asian markets lead the way when it comes to mobile money movement.

The U.S. is in many ways an innovative and leading market for some technologies, but mobile payments -- especially mobile person-to-person (P2P) payments -- aren't among them.

"The U.S. is near the bottom," says Paul Schaus, president and CEO of CCG Catalyst Consulting Group. "You could almost pick any Third World country and they are ahead of us because their infrastructure is newer than ours."

Although Javelin Strategy and Research estimates that the total volume of mobile P2P payments in the U.S. this year will be $7 billion, this is small compared with other markets.

According to Schaus, the infrastructure issue is key. In the U.S., financial institutions have decades of legacy systems to deal with, while the vastness of the geography makes it difficult to create the wireless infrastructure necessary to facilitate widespread mobile payments.

While European countries by and large suffer from the same challenges, Schaus points to Asia as a leader in this area. He specifically mentions South Korea as a market where mobile money movement is a common way of life. Part of that, he says, may be due to the "tech influence" of the country, as it is home to Samsung and other major technology companies. Another factor is the relatively small size of South Korea, which makes it easier to build the technology infrastructure needed, he says. Australia and Singapore are other markets that Schaus points to as leaders in mobile and P2P payments.

"I'm always impressed by the adoption rate in the Asian markets," he says. "In places where the infrastructure is really new, it's much easier to do this." — B.Y.

7. Dodd-Frank 1073: Remittance Challenges Still Loom

The requirements for remittance providers have been relaxed thanks to the recent updates for Dodd-Frank 1073, but that doesn't mean compliance will be a walk in the park.

Despite updates that relaxed some of the original requirements of Section 1073 of the Dodd-Frank Act, which requires greater transparency for remittance providers, many smaller financial institutions are still struggling to prepare for when the law goes into effect later this year.

Some smaller institutions don't even know if the regulation will apply to them, as providers that process fewer than 100 consumer remittance payments a year are exempt from the regulation, says Tony Salamone, Fundtech's senior VP of U.S. payments product management. But many consumer remittances could be made through commercial accounts if, say, the consumer is also a small-business owner, making it hard for banks to record their consumer remittances, Salamone explains.

Many institutions are also faced with the challenge that compliance is largely out of their hands. The rule instructs banks to tell customers the cost of a transaction up front. "The originating bank doesn't control the cost. These transactions are going through correspondent banks, and the originating bank relies on them for the right information," Salamone says.

That information can be hard to get from the correspondent banks, as no central database exists with all of their fee and tax information for remittances, although Salamone says Fundtech is building such a database for its customers with partner correspondent banks.

And banks will need to change their processes for record retention and error resolution to comply with 1073's rules around transaction cancelations, says Karroll Searcy, the director of Viewpointe Association Services, which provides support on compliance for payments players. "The effort will be defining the workflow processes that meet the new requirement, including cancelations and error resolution processes that may be up to 180 days after the transaction." — J.C.

8. Mobile Helps Wells Fargo Displace Corporate Checks

Checks remain prevalent in commercial payments, but Wells Fargo has been able to help customers manage those checks and also adopt electronic payments through mobile.

Checks still play a significant part in the world of corporate payments, even as their use is gradually phased out to irrelevance in consumer payments. Last year more than half (57%) of business-to-business payments were made by check, according to an electronic payment survey by the Association for Financial Professionals.

Although that percentage has declined in recent years, it's still important for banks to find ways to help commercial clients better manage their checks, while also working to move them toward electronic payments to replace the cost of check processing.

Wells Fargo has been able to leverage mobile capabilities and services to further both of those ends for its corporate clients, says Secil Watson, executive VP and head of Wells Fargo's Wholesale Internet Solutions.

The number of mobile check deposits by the bank's commercial clients increased 1,293% from the second quarter of 2012 to the second quarter of this year, according to Wells' statistics. And those checks cost less for the bank to process than branch deposits. That's a big bonus as some of these clients are depositing hundreds of checks at a time, Watson notes.

"They use mobile check deposit in their personal lives, and now they realize they can use it in the office as well," she relates.

While mobile check deposit helps Wells Fargo and its clients manage and process a large number of checks, it also supports electronic payments types, such as wire transfers and commercial cards, that are slowly replacing checks, Watson adds. Commercial wire transfers from the mobile channel increased 150% from 2011 to 2012, and more than 30% of Wells' commercial card customers use mobile to manage their credit accounts. — J.C.

[The Promise Of Payments]


Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio

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