The True Value in Payments Lies Within the Data
By Caroline Vahrenkamp and Lynne Cornelison
The payments landscape is changing dramatically as new channels and entrants are transforming how consumers pay for goods and services. For years, financial institutions have relied on the non-interest income payments generate, and they face the risk of losing that much-needed revenue as margins become increasingly thin.
The real opportunity in payments lies not in the fee revenue, but in the payments information itself. That information about accountholders’ buying habits is the gold that new entrants seek, and financial institutions must retain and monetize it. Knowing what accountholders are buying enables institutions to target and message their products and services with more precision than their competition.
The New Payments Battlefield
How consumers pay for things is changing rapidly. And they have more options than ever, from new ways to use existing payment cards, such as virtual assistants and contactless payments, to entirely new methods of payment, such as Buy Now, Pay Later (BNPL) and person-to-person payments (P2P). As the latest Raddon Research Insights report, Moving Money Around: The New Payments Revolution, finds, 61 percent of consumers have used P2P payments in the past two years, while 28 percent have used BNPL. Millennials, born between 1980 and 1999, are far more likely to have used these new methods of payments.
Additionally, technology companies have made their play into this space, such as Apple’s Apple Card credit card, Square’s purchase of Afterpay, and Amazon’s use of stored value accounts. These entrants arrive at a time when checking accounts are becoming increasingly less profitable for banks and credit unions.
Diminishing Economic Value of Checking
The low-rate environment ushered in by the COVID-19 pandemic has reduced the economic value of low-interest checking dollars; however, the rate environment is not the only threat to profitability that checking is facing.
Federal regulators are looking at limiting the fees financial institutions can charge consumers for overdrawing their checking accounts. Several major banks have recently announced they are voluntarily curtailing what they charge consumers. Regardless, the Consumer Financial Protection Bureau (CFPB), once the new leadership is confirmed, is expected to evaluate closely overdraft programs. With tightened regulation, that revenue stream is anticipated to dry up.
Financial institutions also are seeing a threat to interchange income. The latest Raddon payment research found that P2P services have reached universal levels of adoption across segments, particularly with millennials. Sixty-five percent of P2P users have said they are using one or more traditional payment methods less frequently. As shown in Figure 2, cash is most impacted by the P2P service. More detrimental to financial institutions, almost a third of P2P users (32 percent) are using credit and debit cards less often, putting pressure on the interchange income they likely would have received from card usage.
BNPL programs have entered the scene with a splash. Programs such as Klarna and Afterpay are offering consumers the option to avoid using a credit card altogether and pay for their purchases in installments. The latest Raddon research shows that those who are most likely to carry a balance (identified in credit card activity segmentation as Balance Rollers and Heavy Users in Figure 3 below) are also most likely to use BNPL. This obviously poses a significant threat to credit card balances and finance charges overall.
The Real Value of Payments
If payments are likely to be less profitable for institutions, either through reduced overdraft and interchange income or diminished finance charges and tighter margins, why then are Google, Amazon and others looking to get into the business of offering transaction accounts?
The answer lies in the information that payments data provides. Knowing where a consumer spends their money, how much they spend and how often they spend it gives companies like this the edge in offering products and services that fit seamlessly into the consumer’s needs.
Financial institutions holding this gold mine of data have been loath to use this information to cross-sell the services their accountholders require. For example, transaction data can tell an institution if the accountholder is making payments for mortgages, consumer loans or credit cards held elsewhere. Data can tell an institution if the accountholder is transferring money into investment or deposit accounts elsewhere. It can tell an institution if the accountholder is experiencing a life change that would require anything from equity lines to financial planning.
Financial institutions could lose this valuable information even before they could act on it, particularly with the younger generations. As Figure 5 shows, millennials are far more likely to consider tech companies for their transactions and, perhaps even more concerning, for savings and borrowing needs. Banks and credit unions can ill afford to lose their deposit and loan business to technology companies on top of the payment streams.
As consumers have more payment options available, financial institutions will feel threats from all directions on their stream of non-interest income and their ability to cross-sell accountholders. How banks and credit unions navigate all the consumer options in the payments landscape will be crucial. Using (and more importantly, understanding) transaction data to determine consumer payment trends and buying behaviors will enable financial institutions to effectively target and market their accountholders.