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Payments Technology Expert Jim Marous Answers More Digital Payments Questions from Forum 2020

by Catalyst Corporate | Nov 03, 2020

Real-time payments, faster payments, instant payments…the financial services industry is buzzing with such terms, but what do they all mean? And how will this new payments paradigm impact credit union operations? Real-time digital payment solutions are the way of the future – that’s more evident now than ever before. The ongoing COVID-19 pandemic, and its impact on consumer banking behavior, has accelerated the nation’s shift toward instantaneous digital payments, making it a popular topic of discussion among credit union professionals.

At this year’s virtual Economic & Payments Forum, Payments Technology Expert Jim Marous discussed the evolution of financial services delivery during his keynote presentation. There were ample questions from the 300+ attendees who tuned in. Afterward, Marous agreed to follow up on questions he was unable to address. Here’s more from his Forum Q&A:

1. What are your thoughts on instant payments vs. “fast” ACH payments?

The terms “instant payments” and “faster payments” are converging into a very similar definition due to competitive pressure. Both are generally considered to be a form of payment in which the availability of “final” funds to the payee occurs in real time, or near-real time. The concept of a “closed loop” payment usually refers to a scenario in which both parties involved use the same platform (such as Square, Venmo, PayPal or a mutual financial institution), while an “open loop” payment involves multiple financial players.

More financial institutions will soon gain access to the real-time payments network (and the Federal Reserve’s FedNow Service℠ when it is released), increasing the awareness and demand for instant payments. The benefits include improved cash flow, simplified money management, reduced chance of fraud, and the peace of mind that comes with knowing that money transfers happen instantaneously.

2. Relative to other payment technology trends, do you foresee a significant impact from the Federal Reserve's faster payments initiative?

Having the Fed facilitate payments adds competition and provides choice, but there is anxiety within the banking community about the potential of a two-tiered system – one managed by the government and the other by The Clearing House, which is owned by big banks. I also believe the timing of the Fed initiative will be faster than currently planned due to competition in the marketplace for fast and instant payments.

3. If we move to real-time payments, what do you think will happen to today’s interchange income on debit cards?

Interchange, or some fee structure, will still be required to pay for the risk and fraud protection consumers and businesses have taken for granted. While the fees may change, and the application of fees may vary for different players (financial institutions vs. non-traditional payment providers), there still must be a way to cover the increasing risk. As a side note, one aspect of both the faster payments platform and instant payment platform will focus on the collection of additional data from transactions to assist with fraud and risk management. 

4. In your opinion, what is the most important digital banking tool to start building upon?

The process of digital banking transformation involves a number of important components, not just a single tool. Too many organizations are hoping for a single initiative that will open the door, but in reality, digital banking transformation can’t be viewed with a “check mark mentality.”

First and foremost, a financial institution needs to have the leadership mentality and culture to become a digital banking organization. This is not a tool or app, but an internal process of reengineering all back-office processes and procedures for a digital economy. For instance, implementing an online account activation process is not effective if it takes 5-10 minutes to complete (as the current industry average indicates). Institutions need to fix digital apps so they can compete with the tech solutions in the marketplace already.

After the necessary adjustments from a cultural and leadership perspective, the next step is to invest in data and analytics to provide personalized consumer solutions that are proactive, intuitive, contextual and instant. 

5. With so much focus on digital banking solutions due to the COVID-19 pandemic, what do you envision for branch locations in the future?

Customer/member volume in branches continues to drop, accelerated by the COVID-19 crisis. Branch traffic may rise some with re-openings, but the reduction of live engagement will continue. That said, branches are not dead; institutions just may not need as many of them. And since the potential for selling property may not be as advantageous in the near future, organizations could consider repurposing offices to support their community, as an alternative.

It is also important to note that while some studies show that in-branch openings have gone back to “normal,” many of these openings are occurring at financial institutions with poor digital account opening options (cumbersome or non-existent). Financial institutions that do not provide streamlined digital options may soon lose the majority of their new accounts to competitors with quick and easy online alternatives.

For more information on emerging real-time payments, and other digital banking trends, check out Marous’ presentation located within the on-demand section of the Forum Hub.