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The financial industry and the Federal Reserve are finally on the same page about the U.S. payment system's need for speed. But achieving consensus about what the new system should look like remains a tall order.
March 30 -
JPMorgan Chase has announced it will begin allowing employees to expense rides from the mobile-app powered black car service Uber.
July 7 -
A call to improve customers' digital-banking experience was the top theme during SourceMedia's Digital Banking Summit. Banks should imitate the Apples and Googles of the world, not each other, experts said.
June 12
One of the areas where Uber has raised the bar for customer experiences is in payments.
Users upload their cards into the app and then the payment occurs automatically in the background whenever they take a ride. No need to take out their phone or wallet. This pain-free process has made Uber a model for seamless payments.
On one hand this is a good thing for banks. More "invisible" payments means more card transactions instead of cash. Think of how GrubHub and Seamless have eliminated the tradition (or hassle) of giving the deliveryman cash for a restaurant delivery.
However, it will also likely lead to consolidation of consumers' spending on fewer cards. Uber allows users to upload multiple cards in its app, as do GrubHub and Seamless, but users' purchases automatically go to a pre-selected primary card unless they take the extra step of selecting another card during checkout.
Few people will take that step since it adds friction to the purchase experience. So where as consumers may have previously paid for their cab rides and restaurant orders in a variety of ways, those purchases will be increasingly consolidated on the cards that they've pre-selected in these apps.
For banks, this will increase the importance of being their customers' primary card so they can capture those transactions, while decreasing the value in being the customer's second card of choice. Many younger customers don't even have a credit card: a 2014 survey found that 63% of millennials don't have one.
Banks might be competing to be the only card in their wallet, not the top card in it. This will make building strong customer relationships more vital than ever, and that could be a challenge for smaller banks that don't have the name recognition of larger institutions.
We can expect that other companies built on the model of the sharing economy to create similarly seamless payment experiences. These companies can invest in creating great customer experiences in a way that traditional competitors can't because they don't have to invest in expensive infrastructure.
They simply use existing infrastructure and build a better experience for connecting it to customers. This means they have more resources to invest in building that better experience than more established companies. That better experience will likely include making the payment as "invisible" as possible like Uber has done. After all, nobody enjoys the act of making a payment.
The same phenomenon can also hurt other bank products. As mentioned above, millennials' preferences for access and convenience over ownership are driving the new sharing economy. But few industries are as invested in consumer ownership as banking. Banks' lending enables consumers to buy cars and houses. If consumers don't want to (or can't) own those things, it's bad for banks. And that's exactly what has been happening in recent years, as new car purchases and mortgages among young consumers have fallen.
Some of these millennials will eventually buy houses and cars, but some will not. Their preference for access and convenience is pulling them to urban centers, where they take public transportation and rent because real estate costs are higher. And companies that play in the sharing economy aim to make it even more convenient in the future for consumers to share or rent rather than buy. Uber's long-term goal is to make cab rides a cheaper transportation option than owning a car.
Banks need to be prepared for the possibility that these factors will make the auto loan and mortgage markets less robust in the future. They will need to find other ways to reach consumers and gain revenue. Younger cost-conscious consumers want help investing in their futures, so banks can build relationships with them by providing financial advice and investment services. That will help banks be top-of-mind when consumers do need credit, which they will, even if it's not for cars and houses.
But these digitally native customers will search online for the best loan rates they can get, and they'll likely find that at peer-to-peer lending sites, which typically offer lower rates than traditional lenders. So banks would be wise to partner with them and join this new sharing economy.
Paul Schaus is president, chief executive and founder of CCG Catalyst.
