The Balkanization of Payments

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Balkanization is a pejorative, geopolitical term, typically used to describe the process of fragmentation or division of a region or state into smaller regions or states that are often hostile or non-cooperative with one another.   Bruce J. Summers, who consults with the financial markets group of the Federal Reserve Bank of Chicago,  recently used it to describe the impact of vested interests on the future of payments and money movement in the United States.

Summers’ comments appeared in a Bank Technology News article entitled “Imagining a Real Time Payments System.”  This BTN article is one of many published on real time payments since the Federal Reserve kicked off a nationwide debate by releasing a paper that challenged the status quo of the U.S. payments system.  Many have weighed in on why modernization of this type must or must not go forward.  Anyone following the dialogue or, in some cases the diatribe, can easily grow cynical of the arguments on both sides but nowhere is the voice for self-interest more visible than among those who want the payments ecosystem in the U.S. to stay just as it is.

Of all the voices involved, banks and credit unions should be shouting the loudest for change in the way money is moved.  Today, these institutions offer customers several ways to move their money including account-to-account transfers, person-to-person payments and bill pay.  In most cases, FIs use single sign on to send customers to the third parties FIs use to provide these services.  In an age where the digital banking customer is king, this model hamstrings banks and credit unions in material ways impacting their top and bottom lines. 

Earlier this year at FinovateSpring, Mark Vipond – our CEO – highlighted the specific impacts of this approach: “The harsh reality is that many financial institutions have lost control of their customer’s digital experience.  They’ve outsourced control of the user’s interactions, limited access to the digital data needed to deepen their customer relationships and diluted their brand.  And, all the while, they’ve driven up the cost and complexity of their digital operations.” 

When this statement was first written to be part of the script, some of us worried that it might be too controversial.  It turned out to be not even provocative for most of the FIs we met with after Mark finished speaking.  Repeatedly they confirmed the fragmentation, division, cost and complexity he had described in his presentation.  None seemed surprised when we told them about a bank that did take a close look at the data associated with the money movement activities of their customers and discovered not only that they were their own largest bill pay recipient but also that those payments were being made by paper check.  That single piece of data will save that bank over a million dollars in the next twelve months with less costly routing options.

As with the geopolitical landscape, the divisions and conflicts of interest that have arisen in money movement have emerged over time as complexity was introduced into the environment.  The consumers’ increasing use of digital devices to gain access to the products and services offered by banks and credit unions has been a catalyst for accelerating that complexity. 

Most FIs have struggled to react to the pace of this adoption.  Few could foresee the coming wave of new digital devices and access points.  Now, the continuing proliferation of these devices has awakened many organizations to the fact that a reactive mode is not a long-term strategy.  And as they look at options, many are realizing they have fractured their brands across digital channels and across the services they provide digitally such as account-to-account transfers, person-to-person payments and bill pay. 

There is a replacement cycle that has just begun in digital banking especially, among the large CUs and middle-tier banks.  This replacement cycle will address the limitations of legacy online and first gen mobile banking tech that FIs have in place.  However, the choices made by banks and credit unions during this replacement cycle will need to be about more than modernizing their technology.  FIs must regain control of the user experience beyond the UI and that means capturing, consolidating and analyzing data about how their customers manage and move money. 

Once they have that data, they will be able to save themselves money through least costly routing options and provide their customers with valuable services such as predictive cash flow.  Being able to help customers in this and other ways will require that banks and credit unions take the lead in consolidating the Balkanized landscape of payments that exists today before it gets any worse.