Banking and Payments Insights from Money20/20
“Don’t care how, I want customized financial products now” ~ Veruca Salt
Wharton FinTech Club, with support from the Stevens Center for Innovation in Finance, attended the Money20/20 Conference in Las Vegas from October 27–30. Money20/20 brings together leaders from the FinTech, Financial Services and Merchant communities for discussion on innovation and disruption in Payments, Banking, and Credit. Below is a recap of my biggest takeaways.
1) The Tech Companies Are Eating My Lunch
Uber’s announcement that it was partnering with GoBank to enter the banking space with an Uber Visa Debit offering came as little surprise to most industry experts. Incumbent banks are seeing their markets increasingly carved up by the likes of Google, Facebook, Apple, PayPal, and Amazon, who are creating a range of services that exploit their large customer base and natural network effects to generate further user activity.
Given the scale of Uber’s 4m driver and courier network, it seems only natural that Uber utilizes its distribution power to deliver relevant financial services and rewards to their drivers. Providing fuel discounts (~3%), cash flow financing ($100 cash advances) and Instant Payment access to drivers are niche differentiators that are expected to drive attractiveness and stickiness. However, going under the radar are large players like Amazon, which originated more than $1 billion in loans to US-based SMBs in 2018 and is actively reviving its Amazon Lending business. Most banks interviewed are conscious of the encroachment of Tech and social media companies into their playground, and some are proactively now seeking opportunities for partnership, to monetize their existing platforms. BBVA has taken a lead in the space, but more and more global banks are becoming Banking-as-a-Service providers, and most recently Australia’s Westpac has made a similar announcement in response to pressures from the Open Banking and neo banks movement.
So why are Big Tech and social media companies such a threat? Simply put, they have the trust of their large customer bases, enjoy global reach and brand recognition. Moreover, they are focussed on customer delivery and usability, and most importantly lack hard-wired legacy systems that incumbents are highly invested in.
2) Winter Is Coming
As the US pushed into its 10th consecutive year of economic growth, the concern of an impending global downturn and the need to be ‘recession ready’ was palpable at the Money20/20 conference this year. Many SMB and consumer lenders highlighted their risk strategies that were focused on debt servicing and collection efficiency. Notably, the Fed’s most recent survey of loan officers highlighted a tightening of standards for credit card loans in response to growing uncertainty over the economic outlook. Furthermore, lenders have expressed a desire to move away from traditional lagging indicators of credit ratings, such as FICO scores, towards API-enabled real-time working capital and cash flow data to inform lending decisions.
3) Peek-A-Boo, You Can’t See Me — Invisible Payments.
As any leading company in the US will tell you — it is all about the Customer Experience. Whilst payments were once viewed as a side piece in the experience, its centrality to customer conversion of purchases, both in-store and online, has been re-aligned. Understanding how to make the customer experience as seamless as possible and frictionless has become a top priority for most merchants.
Amazon was the original revolutionary introducing its 1-Click ordering that skipped the shopping cart. Other merchants followed with ‘BUY NOW’ buttons integrated into their online shopping journeys.
Uber upped the ante considerably launching a truly invisible payment experience — journey over, open the door and leave. Simple as that!
AmazonGo is attempting to commercialize its ‘BROWSE-SHOP-WALK’ technology at stores across the US, but there is a considerable way to go before it can be a ubiquitous experience for the everyday consumer. However, there is a clear progression from storing customer payment credentials online and in digital wallets, to finding smart ways of transacting without cardholder interaction in the physical environment.
4) Don’t You Know Who I Am?
What seems to be a big pain-point for merchants and card issuers, and a key concern for consumers is the escalation of fraudulent transactions. The conundrum for merchants and issuers is how to boost the number of electronic transactions whilst simultaneously controlling the security risks that lead to escalating chargeback costs. Improvements to the accuracy and security of customer authentication across digital channels are estimated to save banks up to 90% on onboarding costs and 70% on outlays for meeting regulatory requirements, such as KYC and AML.
Several FinTechs, such as Onfido, ID R&D and Jumio are focused on anti-fraud technology that enables the authentication of government-issued identification documents through a scan, and instant verification for digital on-boarding. The need to present government-issued ID has long been a pain-point for quick on-boarding of customers in the banking industry. Thus, overcoming this burden will reduce a process constraint and help to ease the provision of banking services. Whilst a next logical step would be a global repository of identification documents on which to instantly align all merchants and issuers, current restrictions on sensitive data being allowed global access was a noted restraint on these technology providers.
Another highly popular alternative method of fraud prevention showcased was the use of active and passive biometrics and behavioral analytics to reduce fraud risk at point-of-sale. Microsoft, Samsung, and Apple have all in-built face biometric recognition for payment authorization into their devices, which has become a global standard. However, as the average person can speak 125–150 words per minute, more than 3x the typing average, merchants and banks are integrating voice assistants into their offering. Could the integration of Voice be the magic bullet towards a seamless transaction experience? Amazon certainly is placing a massive bet on Voice for seamless payment authorization across its home and mobile smart devices. Whether banks and merchants will follow suit and invest in Voice communications is a “watch this space” for the new year.
Soon every payment transaction with Voice should be as easy as saying “Hey X, pay my utility bill/rent/accountant’s charges, etc.”, or so Amazon wishes.
5) No One Understands Me
The banking industry is being disrupted by a thousand cuts by irreverent new start-ups that have smelt the blood of high profit margins through segmented solutions. Hierarchy-driven, committees-led, toffy bankers are an endangered species — but please don’t call out their extinction just yet. It is going to be a slow process. Fintechs are focussed on agile variable cost structures and new streamlined technologies that will eventually clobber the mightiest high street banks, entrapped by high fixed costs and outdated technologies. These legacy, deeply structural, restrictions will limit the ability of incumbents to meet the changing consumer needs and increased regulatory scrutiny, whilst start-ups like BlueVine, GetCapital, Afterpay, and Kabbage, etc. will conquer markets through a focus on customer experiences, network effects, and small agile operating structures. The disdain shown by Fintechs and disruptors for the largest and most well-known financial services brands — largely absent surprisingly — was often palpable.
Consumer brands, utilities, technology companies, etc. are utilizing their stockpiles of data to identify the needs of their loyal customers and provide tailored financial products. Through this disruption, we can see an inevitable carve-up of the retail banking space as consumers get the personalized products that they need.
Uber’s recent move into banking highlights the scope of businesses to service a myriad of stakeholders — consumers, employees, and suppliers. With ~25% of households in America considered underbanked or unbanked, and +70% of SMB loan applications rejected annually, a large portion of the market is still up for grabs. However, as US consumers want customized financial solutions from their consumer-facing brands, understanding this megatrend is proving much harder for traditional banking players absorbed in their vested self-interests.
