How mid-sized banks can compete in the rapidly-evolving payments industry

As anyone who spends money knows, the way we pay for goods and services is shifting rapidly – many consumers are overwhelmed by the variety of options coming from financial institutions, merchants, fintechs, and even smartphone providers. 

To capture this lucrative market, the payments industry keeps sweetening the pot for consumers, and what were groundbreaking perks and features just two to three years ago (like free FICO scores and real time fraud/spend alerts) are now considered table stakes. Competition is fierce. 

So how do banks – particularly mid-sized, regional banks – compete in this market?

Last week, I was joined by local financial services leader Deanna Oppenheimer in hosting a group of digital and financial services professionals in Seattle to discuss this very topic. Our dialogue centered around four key areas banks and merchants must consider when creating a winning payments program strategy: a compelling value proposition, a differentiated customer experience, breadth of customer base, and innovation. 

Compelling Value Proposition

A value proposition war is being waged, with some of the richest rewards offers ever seen currently in the market. An oft-cited example is the Chase Sapphire Reserve card, which launched with a jaw-dropping 100,000 point sign-up bonus, a travel credit and all the expected benefits of a premium travel card such as airport lounge access and rental car insurance. However, not all payments players can offer such a rich value proposition in hopes of acquiring new customers (Chase took a $200M-300M write-down on the Sapphire Reserve, though that may well be a worthwhile investment, and has rolled back its offer to a more in-market 50,000 point bonus). It’s important to consider what unique benefits you can offer to your customers—for example, Cabela’s and L.L. Bean offer card benefits related to outdoor experiences, which shows they know their audience. This benefit is more targeted, and will be more valuable to outdoor enthusiasts who find themselves in the mountains more frequently than on a plane. 

Differentiated Customer Experience

Customer expectations, along with technologies, have shifted enormously in the past few years. New capabilities and technologies that were once viewed as innovative – real-time fraud alerts, enhanced security, always-on customer service, and free FICO scores – are now seen as “table stakes.” The mid-market bank should focus on what they do really well, and partner or outsource the rest. For example, regional banks have a huge opportunity to differentiate themselves with personalized, human customer service that builds long-lasting trusted relationships. A fintech company might offer convenience, but when a card is compromised, an empathetic and familiar-faced customer service representative is still extremely important. Cut through the noise to fund initiatives that will really make a difference to your specific customer base. 

Breadth of Customer Base

Both merchants and banks can benefit from broadening their target audience for payments and penetrating a greater share of their customer base. For example, some banks are offering a range of products that appeal to different customers – from secured or prepaid cards to low APR cards to rewards cards. Affirm is a company underwriting on a per-transaction basis, rather than extending a line of credit. And the growing capability to capture and analyze customer data can enable not only more creative underwriting, but also greater personalization, effective human interaction, and targeted marketing outreach to help broaden and deepen customer engagement.

Innovation and Balancing Risk/Investment with First Mover Advantage

Is your company better off investing in innovation, or acting as a fast follower? Being first can generate excitement, earn lots of PR and help you acquire new customers, but can come with a cost. Starbucks has had incredible success with its mobile payment app,  but now must rethink in-store processes to cope with the volume of mobile orders. As mentioned earlier, Chase took a huge write-down on its Sapphire Reserve card, but the card went viral thanks, in part, to engaged millennials promoting the value proposition. Venmo has been a highly successful peer-to-peer payments platform that has likely attracted many new customers to PayPal, but has not been monetized on the consumer side (Pay With Venmo is a merchant-side offering that is being rolled out on a revenue-generating basis). And as an innovator, you must continue to innovate – it can’t be one-and-done. It’s critical to look at the cost and risk of a program along with the return you may get on client acquisition and retention.  Sometimes fast-following can provide a better return on investment.

When it comes to digital innovation or transformation, one key takeaway from the conversation last week, which my partner Kyle Hutchins appropriately called out, is that our clients don’t need a digital strategy, they need a business strategy for a digital world. That means breaking down the traditional silos within an organization and partnering across the bank to create holistic solutions, with a digital-first mindset.

As customer expectations around ease of payments evolve, the balance between value, functionality, and experience will be top-of-mind with consumers and institutions alike. As a consumer, what innovations do you want in payments? If you’re a banking professional, what innovations do you expect to crop up next? We’re interested to hear your ideas.