How Banks Can Prosper in the Age of Digital Payments

Banks are positioned well to be the trusted digital intermediaries, especially in the business-to-business segment, but only if they stay ahead of the innovation curve.

All of the services banks have developed to generate revenue to complement their balance sheets have given them the experience needed to be a services provider in the digital age, said Norm DeLuca, head of digital banking for Bottomline Technologies.

"Digitization has blown up the straightforward world of bank branches, relationship managers and one-to-one selling," DeLuca said. "It's really easy for businesses to turn to all types of third-party providers for cash management and payment services."

Rather than sit by idly in the face of rampant competition, banks this time are paying far more attention to the current digital innovation cycle, DeLuca said.

"Banks have been talking about threats for years and did not react, but there is this confluence now of real threats and lower costs of technology," he added. "Services are easier to access, there is mobile and cloud, so I think the banking industry knows it needs to innovate faster or face some serious repercussions."

New Hampshire-based Bottomline Technologies designs and develops digital payments software for banks and credit unions. The software integrates online banking and other financial solutions, as well as cash management and payments platforms, risk and fraud management, and analytics for sales and risk.

Cloud-based digital transaction providers generally view the banking industry in the U.S. as lacking standardization, common procedures and clearing times as B2B payments, particularly in the form of paper checks, move through the system. Some look to lure business away from banks, while others, like Bottomline Technologies, want to help banks adjust to modern payments technology.

Banks are currently "laser-focused" on digital innovation in the online and mobile channels, said Christine Barry, research director at Aite Group.

"Banks have historically been able to get away with outdated and clunky online cash management solutions because of the complexity of the [B2B] transactions," Barry said. "Customers no longer accept complexity as an excuse and now expect user experiences similar to what they experience on the retail side and in their personal lives."

Fintech companies have pushed banks into making changes and discussing technology such as open application interfaces and blockchain, a technology used by bitcoin and other cryptocurrencies, Barry added.

Indeed, Citi Ventures and Capital One have joined other investors in supporting Chain Inc., a provider of blockchain technology, which is used to document transactions and replace third parties with a secure network to quickly transfer financial assets.

Banks are increasingly sensitive to the notion that more threats could surface from nonbank startups, DeLuca said. In particular, banks dread repeating their failed attempts to compete with PayPal during the alternative payment company's early years.

Even though PayPal uses the traditional card network and bank rails, it has expanded services to help business owners manage their companies. Square has taken the same approach.

Meanwhile, Dwolla has started to gain momentum in the B2B space with options to help smaller banks, DeLuca added.

"We believe banks can win in this environment, and that doesn't mean they need the next breakthrough in the next few months," DeLuca said. "But they have to be more agile, try new things, and partner with innovators across payments and other areas."

Banks can thrive by retaining ownership of the primary customer relationship in the digital channels, DeLuca added. "That's how banks make money," he said. "It's not from taking excessive risk, but in providing services through deep-rooted relationships."