The Electronic Payments Series: No. 1 – A Challenge for Banks
Much like the dramatic changes impacting the taxi industry driven by ride sharing “brokers” such as Uber, Lyft, Sidecar and others; financial institutions (e.g., commercial banks, credit card companies, savings and loans and credit unions) are under attack from alternative financial businesses, re-writing, even skirting in some cases, the rules long established to oversee the banking industry and protect consumers. These new players are often completely free of traditional banking costs, able to outsource, automate or even fully eliminate labor, and maintain that they are not subject to existing regulations that govern the behavior of financial institutions.
While this is an interesting example of capitalism’s creative destruction, it is also going to have a cost in terms of security and customer impact on every financial system, report and process in your business. And, in our opinion from serving CFOs for over 25 years, and being experts in dozens of new technologies, there are some changes you should avoid, while others will be the foundation of your future success. In a series of posts we will be issuing over the next several weeks we will explore the phenomenon of alternative payments systems and comment on how they will affect financial processes in your business and what you should be doing to prepare for them.
Electronic payments are payments and receipts that are made directly to/from a payee from a consumer or business bank account using security features over the internet. What is especially appealing about this is the efficiency aspect that it brings to the payments world. What tends to drive the use of any process in business, especially a small business, is efficiency. When efficiency is achievable at minimal cost then a compelling value proposition has been created which will attract business users. This value proposition will fuel the move to alternative payment systems away from the traditional service offerings of banks. If banks fail to respond quickly enough then their domination of payments will be jeopardized.
PayPal, founded in 1998, has been a pioneer in the electronic payments world. PayPal has been instrumental in the success of EBay. More recently firms like Apple (ApplePay), Google (Wallet) and others have entered the market driven largely by the capability of smart phones to facilitate customer ease of use. In fact “ease of use” is the key aspect of these market participants.
Young people especially, who are smart phone savvy, exhibit habits that make the customer experience different from those of previous generations of consumers. From a large format smart phone screen they can pull up a website, review merchandise offerings, see feedback on the product from other buyers, place an order and pay for it with an electronic wallet. It is truly an example of customer ease of use. Yes, there is a checking account underlying this transaction but what is not prominent is a check, a debit or credit card or other evidence of a bank’s participation in the transaction. This “ease of use” phenomenon is what presents the challenge to banks and jeopardizes their domination of the payments landscape. This isn’t going to happen overnight but it is going to be, we think, a relentless trend of innovation that will alter the payments landscape.
So where do we go from here and what will be the impact on your emerging/small business? The most immediate impact will be on transactions involving retailers. By October 15, 2015 the so-called “smart card” or EMV (Europay Mastercard Visa) cards will be mandatory to be accepted by retailers. If merchants don’t have EMV card compliant readers at point of sale then the liability for fraud shifts from the financial institution (who issued the card) to the retailer.
The next most likely contact point between your business and electronic payments will be in the area of expense reports. This will require more sophisticated back office systems to process the reports, an update of employee policies for business versus personal use of credit with major suppliers and different processes to enable you to satisfy yourself that fraud has not been committed by those submitting expense reports.
In our next blog post in this series we will continue our discussion of the electronic payments phenomena and how it will continue to affect your business.
In 1986, Mr. Weis became a pioneer in the contingent management movement as the founder of CFOs2GO. As “the original CFO”, he served as Chief Financial Officer for more than 100 companies developing the proven practices that make “as needed” support valuable.
Bob leads the International Practice Group helping companies set up and maintain foreign operations inside and outside of the U.S. as well as attract top talent for their US team. He also co-leads the M&A Practice Group.
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