What does the future of payments look like at your institution? It’s a question every financial institution should be asking.
The payment ecosystem is increasingly digital. Cash and checks are out. Real-time payments networks like Zelle are in. Even credit cards can seem as quaint as consumers embrace buy now, pay later (BNPL) shopping through companies like Affirm and Klarna.
Financial institutions that want to stay relevant and keep pace with customers who expect easy, frictionless payments, need to assess their payments strategy—and they need to do it quickly.
Over half (54 percent) of financial institutions have plans to explore faster payments by the end of next year, according to Cornerstone Advisors’ What’s Going On in Banking 2022 report. Seventeen percent of disbursements were made in real time in 2021—up from 5.7 percent from 2020, according to research from PYMNTS.
Institutions need to decide: Adapt now or wait it out?
Assessing payments strategies
Making a decision about faster or instant payments isn’t as simple as signing up for FedNow Service. It requires a deeper discussion about how different payment strategies align with the institution’s mission, vision, and values.
For example, adopting faster or real-time payments could be a smart move for an organization that values innovation, with the vision to become a fintech leader and a mission to provide customers with innovative services.
Adopting real-time payments might not make strategic sense for an institution that values stability and aims to be the market leader for mortgage originations. Why? An organization that values efficiency would have to determine whether providing customers the efficiency of faster payments is worth the expenditure of resources that could raise overhead costs.
Before any decision can be made an institution needs to understand risk and how failing to align strategy and strategic objectives with mission, vision, and values introduces risk. Let’s say that the financial institution that values stability and wants to be the market leader for mortgage origination decides to go ahead with the faster payments strategy even though it doesn’t appear to support its mission, vision, and values.
The idea of faster payments is exciting and supports evolving customer expectations, but it will require resources. That means there will be fewer resources available to market, originate, close, and service mortgages while ensuring compliance. If a core update is necessary, the driving force behind that update may be faster payments instead of how it will support mortgages. Also, the newer technology is more likely to face hiccups than one that has been around for a decade, which could impact reliability.
On the other hand, it may give the bank a competitive advantage if it can shave time off closing.
The only way to predict the results with any certainty is to fully assess these risks and opportunities to determine if the potential cost makes sense considering the institution’s mission, vision, and values. The institution needs to know how much potential risk exists and whether it aligns with the institution’s risk tolerance, or the maximum amount of risk an institution is willing to expose itself to.
Want even more insights into risk and strategy? Our CEO wrote the book on it.
Not only that, but it must also measure those results against other potential strategies to see if a strategy with less risk is more appropriate.
Every strategy has risk, but not every risk is worth taking.
By aligning risk with strategic planning, a financial institution is not just ensuring that its strategic decisions align with its mission, vision, and values, it illuminates potential hazards and rewards so that an institution can make intentional decisions to get from Point A to Point B.
Is playing it safe with payments really playing it safe?
While some institutions don’t consider the risk of their actions, others don’t consider the risk of inaction. They fall short of their potential by passing up opportunities due to the perceived risk without ever delving into the details. They make strategic decisions based on snap assumptions and gut reactions instead of careful assessments.
Whether its marketplace lending or innovations in payments, these off-the-cuff assumptions about why a product or service won’t work can be just as dangerous as automatically assuming that they will.
How many institutions put off adopting mobile check deposit because the very idea scared them? Many of these institutions didn’t take the time to understand the potential risk and rewards of the technology, assuming that fraud would pose too much of a barrier. That gave other institutions a leg up in adopting the technology, wooing customers enchanted by the idea of depositing checks quickly and easily with the device that’s always in their pocket. It was a lost opportunity that likely resulted in losing customers lured away by convenience. Those customers aren’t coming back.
Learn more about the cost of doing nothing in our blog post
Why Inertia Creates Risk
It also proved to be a disadvantage when the COVID-19 pandemic caused widespread branch closures throughout the country. Institutions that didn’t offer mobile banking apps or those who had clunky outdated apps scrambled to catch up so that consumers stuck at home could manage their finances from their couches. Institutions had to quickly onboard a new vendor, implement the technology, and then market it to consumers. In some cases, they also had to train consumers on how to use it.
Had this technology been adopted in advance, these institutions would have had more time to think about long-term strategy when selecting a mobile banking vendor. This may include everything from growth to planned core upgrades. They would have had time to demonstrate the technology in-branch to consumers who needed assistance. Consumers would have had the ability to deposit a check from the safety of their own homes at the beginning of the pandemic when uncertainty was greatest.
Missed opportunities are deadly. But ignoring risk is worse.
Related: You Can’t Handle the Truth: Why Auditors Get a Bad Name When They Should Be Celebrated
Want to learn more about the most promising opportunities in payments—everything from embedded payments and cryptocurrency to digital wallets and cross-border payments—and how to assess the potential risks and benefits?
Register for our webinar Payments & Digital Transformation: What You Need to Know to Thrive on Thursday, August 18 at 1 p.m. CT.
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