While bankers may be a bit fatigued this year by articles about payments, the more enlightened Gonzo bankers are paying close strategic attention to the single most impactful payments trend in our industry: the shift from a plastic card to a “card-not-present” world.
Quick level set: whenever credit card information is exchanged over the Internet, phone or mail, it is called a card-not-present or CNP transaction. Bankers only have to observe their own behavior and that of their children and family members to know the shift from plastic-focused cashier transactions to number typing card-not-present transactions is pretty monumental.
In fact, the Federal Reserve reports that while card-not-present transactions make up only 15% of total transactions today, these types of transactions are growing 3.5 times faster than card-based transactions. CNP is growing at 12% annually for debit cards and a rapid 24% for credit cards.
Understanding the New World
It is important that when bank executives picture the card business, they shouldn’t picture this:
But rather this:
Giving customers a number and encouraging them to virally spread it around the world in online payments from hundreds of merchants forces banks to develop a new strategic focus and a new set of management skills. Bottom line: this stuff is getting real very fast. In fact, bankers can sum up the main drivers of this shift in four words: Amazon, Apple, Google and PayPal – they are in effect the four horsemen of the CNP shift.
- Amazon is the most influential as it builds its digital “everything store.” The reason Amazon has a higher market cap than Walmart today is that investors are seeing the “last mile” of a new retailing model built via the Amazon Prime experience. RBC Capital Markets analyst Mark Mahaney recently estimated that U.S. Prime adoption has risen from 25% of Amazon customers in 2013 to 40% today. Mahaney says that Amazon may have as many as 50 million Prime customers and 60-80 million globally.
Prime members spend about three times the average Amazon customer and more than $800 annually through the service. These figures will continue to grow as Amazon shortens Prime delivery time performance and adds recently announced services like restaurant and liquor delivery. Given the tipping point that Amazon is reaching with Prime, it’s likely that most research shops are underestimating the growth of ecommerce sales as a percentage of total in the next five years.
- PayPal has historically been a strong influencer of CNP growth because its payments wallet allows credit, debit and ACH information to be registered for payments. Today PayPal has 165 million active payment accounts doing $235 billion of total purchase volume – of which two-thirds, or $150 billion, is credit or debit card based. With digital innovator acquisitions like Venmo, Braintree and Paydiant, PayPal is still squarely focused on becoming the world’s open payments network.
- The growth of the Apple and Google media and app stores has also driven consumers into the CNP world significantly. Apple has roughly $20 billion annually in purchase revenue through its store and Google has about $12 billion.These four companies alone now account for nearly $300 billion of annual digital purchase volume while consumers continue to add card information to airline, travel, niche and online media retailer sites in droves. In addition, the growth of mobile self-checkout and vehicles like Apple Pay will slowly begin to tip the scales away from plastic and more toward CNP.
Research from mobile vendor Retale indicates that millennials have a high aversion to dealing with store associates and more preference for self-checkout via mobile phones. Bank executives should plan on millennials leading mainstream consumers into the world of self-checkout over the next five to seven years.
So there is one big irony in the world of payments. Banks and credit unions are in the midst of an unavoidable and important shift from mag stripe to cards tricked out with EMV chips. The EMV cards will be flying through the mail for the remainder of 2015 and 2016 just in time for bankers to tackle the serious strategies around the new world of CNP. To give busy executives a head start, I offer up the following key playbook items for a CNP-driven payments strategy.
1. Acknowledge that the credit card is as important as checking in building relationships.
For decades, our industry has focused on checking (and connected debit card) as the lead primary financial institution (PFI) product. Many banks sold their credit card portfolios and went to lame remarketing relationships with this product, assessing that only the Top 10 players could compete in this scale market. But here’s the problem: this product is fast becoming the epicenter of the shift to a mobile economy, even more so than the debit card. This shift has been acknowledged by the large retail banks, especially after the Durbin amendment took the profit out of debit cards for big banks. Wells Fargo CEO John Stumpf recently quipped that 100% of Wells Fargo customers have credit cards, but only 35% with his bank. Even though Wells feels like it has room to grow, this 35% penetration is much stronger than the 10% to 20% Cornerstone typically sees at community institutions. Building a credit card base is an ugly ground war of product development, rewards management, sales alignment and customer experience design, but the future stakes make this battle worth fighting.
2. Fight the good fight to build a kick-butt payments self-service experience.
As consumers begin to buy everything and tap card numbers into their smartphones in a constant frenetic fashion, managing this account becomes a critical moment of truth for the retail banking customer. With mobile by their side, consumers are viewing and managing their credit card accounts much more actively than in the old school monthly paper statement of even the boot-up-the-PC Web eras. Consumers will want fast ways to turn on and off their accounts, to receive alerts for fraud and to conduct maintenance and dispute transactions with a few easy clicks.
For most financial institutions, the card self-service experience is miserable today, and improvements are just starting. Bankers should not get discouraged if early implementations of card self-service do not get rapid adoption by customers. It will take iterations and proactive customer education, but building this type of customer experience will be worth the effort.
3. Shift your battle plan with the shift in fraud.
Bankers are beginning to acknowledge the fact that EMV adoption will NOT greatly reduce overall payments fraud. Rather, based upon experiences in Europe and Canada, it is likely that fraud will quickly shift and grow in the card-not-present areas.
Card-not-present fraud represents 45% of all card fraud today but it could move to as high as 75% of fraud in the years ahead. In fact, Aite recently projected that card-not-present fraud would jump a whopping $3 billion in the next three years.
Aite rightly urges banks to focus on building a more robust risk-based authentication infrastructure for card-not-present transactions that leverages tools like behavioral analytics and tokenization. Importantly, banks will need to heavily weight fraud tools and support in addition to price as they evaluate card processors and strategic partners.
4. Dammit we’re serious: elevate analytics.
While it’s become cliché in a very short time to encourage bankers to invest more in analytics, the sheer revenue at stake and strategic importance of payments should wake executives up to finally do something tangible with business intelligence. Banks should be developing dashboard reports that elevate debit and credit revenue, fraud costs and customer adoption trends to the senior management meeting. Because it’s vital that banks get as many of their credit and debit accounts as possible imbedded into Amazon, PayPal, Apple and Google, why don’t executives have an in-your-face report that provides this information monthly? Incentives for customers to embed credit accounts in these ready-to-launch mobile payment vehicles should be encouraged as well, and these types of payment activation campaigns should be monitored by senior management.
5. Get gritty and creative with the trusted brand experience around payments
Organizations like the American Bankers Association are right to promote the fact that banks are still the most trusted payment provider in the land, and, given trends in recent years, trust has become a much more critical factor for consumers. However, banks don’t seem to be jumping full force into leveraging this position of trust. Bank executives should ask themselves, “What has my bank done to bolster trust in our payment offerings since the high-profile Target and other retailer breaches and the growth of cybercrime?”
Whether it is through simple online pop-ups, well trained branch and contact center staff or short YouTube-like videos on fraud and cybercrime prevention practices, banks can do a better job at being the leader for consumers and small businesses in fighting payments fraud. Right now, our brand feels too much like protecting the bank’s institutional and financial backside versus passionately wanting to help keep individual consumers safe.
I am convinced that banks that bring passion to the game of protecting consumers will experience greater purchase volume and higher retention the years ahead. Building amazing payments knowledge and conversational skills in a bank’s contact center should be one of the highest near-term priorities for executives. Given the small incremental cost to create a visible presence around trust and security, any CEO would be wise to make this visible commitment in his or her payments business.
The trucks bringing Amazon goods to our porch every few hours and the beeping of new apps and media dowloading onto our smartphones illustrate that a mongo Gonzo shift in retailing and payments is reaching a tipping point. We grew up on plastics and now we are modernizing our cards with EMV chips. But take note, Gonzo bankers: for recent graduates entering the banking world like Benjamin Braddock, I have three words and only three words of advice: “Card Not Present.”
Payments revenue accounts for 25%-50% of your non-interest income.
A consistent, long-term focus on your Payments programs can have a huge impact on your bottom line.
Cornerstone Advisors’ Payments Growth Initiative can identify opportunities, close gaps and help make your Payments program more profitable.
Contact us today to learn more.