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Don’t ignore alternative paymentsBy
When one thinks of innovation in the retail payments space, alternative payments are definitely top of mind.
Over the last several years, products such as PayPal, Google Checkout and eBillme have established the need and niche that alternative payments cater to from the perspective of both consumers and merchants.
Until recently, startups and non-traditional players have been the most active in the alternative payments space.
However, factors such as the burgeoning regulatory compliance costs, technology advancements and changing consumer buying patterns have forced banks to also think beyond the traditional payment modes.
The reasons why it is prudent for banks to not ignore alternative payments are quite evident, but worth reiterating:
• Attract and retain consumers who are migrating away from cards
• Strengthen relationships with existing demand-deposit account customers
• Retain or regain control over the front-end transaction instead of just being the backend processor
• Provide additional revenue opportunities
• If banks do not offer alternative payments, someone else will – and many are
Moving forward, there are two important decisions that financial institutions need to consider.
What alternative payment products to offer
Banks have a wide gamut of alternative payment options to choose from, including variations in existing payment methods to totally new payment products.
These range from in-person to online or mobile payments and from deferred payments to P2P and mobile wallets.
Categories and alternative payment solutions
1. Online payments: Direct players (PayPal, Google Checkout, Amazon Payments), deferred payments (eLayaway), third party (eBillme, Secure Vault Payments)
2. Mobile payments: Payments to businesses or consumers, charged to credit card or bank account, or to mobile bills such as purchase of digital content. These could be based on SMS, Near Field Communication (NFC) or WAP
3. Physical payments: Based on SMS or NFC chip, or prepaid models (pay cash for a temporary debit card)
4. P2P payments: Social transfers (friend to friend) and remittances without sharing financial information
5. Mobile or electronic wallet: Not just a payment mechanism, but contains other value-added services such as gaming currency, third-party offers and discounts, e-coupons and layaway
How to build and deliver the capabilities
Once a financial institution determines which alternative payments products to offer, the next important decision is how to build and deliver the capabilities in a timely manner.
• The Inorganic route
To gain a foothold in the alternative payments space, banks can look at acquiring smaller niche players.
This brings a tested product along with established technology and delivery infrastructure into the bank’s existing product set.
For instance, American Express catapulted into the e-payment space by acquiring Revolution Money. Initial focus areas included payment alternatives for social media sites, mobile, prepaid products and alternatives for card members.
• Alliance with existing third-party payment vendors
Many smaller players have designed their products to be white-labeled by banks rather than to compete with them.
For instance, SunTrust uses Moneta’s online payment service for Internet payments. It also uses eBillme for merchants to submit bills for online sales directly to the consumer’s bank.
EBillme itself uses MasterCard RPPS for its backend processing.
Many community banks are offering tap-and-go mobile payments through Bling Nation.
There are several smaller players in loyalty, rewards and gaming currency that banks can partner with for additional e-wallet offerings around payment transactions.
For example, Regions and several other banks have tied up with Cardlytics for contextual offers based on purchase history.
• Build products – either on their own or in partnership with other non-bank players
Financial Institutions are partnering with non-bank players to launch new products.
For instance, by partnering with telecom players, banks get access to their subscriber base and infrastructure.
AT&T, Verizon, T-Mobile with Discover and Barclays announced the formation of Isis, their mobile payments system joint venture.
In Britain, Orange and BarclayCard have announced the launch of their contactless mobile payment system this summer.
Also, some banks are developing alternative payment products by building their own closed or semi-closed loop networks, thereby taking advantage of the ACH and other payment infrastructure that they already own. Or large financial services players are collaborating with each other, including Visa with several banks.
Similarly, Secure Vault Payments is sponsored by NACHA, and leverages existing financial institutions infrastructure.
WHILE SOME BIG financial services players have launched alternative payments or at least announced their plans, they still have a long way to go in implementing these multi-generational plans. Many others are still waiting by the sidelines.
Financial institutions must take advantage of the various options available while leveraging their consumer and merchant relationships, existing payment infrastructure and strong fraud or risk-operational processes.
Alternative payments are here to stay, so financial institutions have no alternative but to play in the game or to lose out big time.
Sujata Banerjee is New York-based principal for banking and capital markets at Infosys Consulting Inc. and Kiran Kalmadi is Chennai, India-based senior consultant for banking and capital markets at Infosys Technologies. Reach them at firstname.lastname@example.org and email@example.com.
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