Disintermediation in Payments - All Threat to Financial Institutions, or Are There Hidden Upside Opportunities?

By: Christopher Danvers, VP, Payments & Digital Services, American Airlines Federal Credit Union

Christopher Danvers, VP, Payments & Digital Services, American Airlines Federal Credit Union

It’s no secret that traditional banks and credit unions are on edge about the potential and cumulative impacts of disintermediation by new, and non-traditional providers of financial services and payment experiences. Fintech’s, challenger banks, retail giants, mainstream technology providers, and even those who traditionally served the industry behind the scenes all have their eyes on their corner of payment related lines of business.

Many of these new entrants not only benefit from lots of startup capital, but also by virtue of being a startup they are able to build their customer experiences from scratch on some of the newest technology platforms without the burden of technical debt. Incumbents however are more likely to be faced with the challenge of bolting on mobile-centric technology and customer-centric experiences to legacy systems, which were originally more likely to be designed around a business process rather than a mobile-centric customer experience.

But should any and all disintermediation be viewed as pure threat with no upside or opportunity for traditional financial services providers?

The short answer is—it’s complicated.

Redefining Relevance

Customers today will likely choose to use some kind of technology without your brand to complete some of their everyday transactions. It could be technology where you have the choice of your institution participating, like Apple/ Samsung/Google Pay, for example. It will likely also be technology where you can’t control participation because it connects back to your customer’s account through universally available payment rails P2P services such as Venmo or the Zelle stand-alone app, or online and/or physical retailer apps used to checkout with a default payment preference stored.

Traditionally, relevance has been defined as maintaining as many interactions with your own branded experiences; whether they were cards, apps or other payment experiences where your institution or card brand is prominently displayed. As payments become more embedded and an invisible part of our daily lives, can you pivot relevance from being focused on what app of experience the customer uses to initiate a transaction, and focused more on the transaction volume opportunities created? Or, if we recognize customers have more choices in how they transact from their accounts, then should the measure of relevance be more about securing and maintaining the money-in aspect of your account relationships—for instance, direct deposit or similar account services?

Evidence of Disintermediation

Some have gasped at the volumes of “disintermediated” payment volume they continue to see growing through their credit and debit card, and deposit account portfolios. But this may not necessarily be indicative of losing engagement with your customer, or losing ground and market share to an army of non-traditional providers who are trying to break the traditional financial services model.

"Should any and all disintermediation be viewed as pure threat with no upside or opportunity for traditional financial services providers"

But perhaps this growth should be viewed as continued and increasing engagement with your financial institution. If you’re benefiting from an upward new account, and/or transaction per account growth trend, then this may just be the case. It’s also important to understand the context of how a transaction is occurring.

For example, is an increase in withdrawals to a P2P app really putting your everyday Point of Sale card transaction volumes at risk? Maybe these are organic transactions not seen before, cash transactions converting to an electronic method, or perhaps these are ATM transactions acquired at an expense, migrating to a more convenient and channel. If you’re still seeing transaction volume—or if you’re seeing more transactions per account in totality— then you’re retaining and gaining relevance with your customer– regardless of how the transaction is initiated.

Crouching Tiger, Hidden Dragon

Redefining your definition of relevance, and counting that increasing volume of “disintermediated” transaction volume sounds great until something inevitable happens. A platform, service, or app pivots or evolves their service offering. This is the wildcard and is fairly hard to predict how and when it will happen.

Perhaps a P2P platform issued a prepaid or debit card so funds your customer’s friends send them can be used at retailers worldwide instead of needing to be deposited back into the primary account at your institution. Or perhaps a mobile payment scheme that once helped you digitize card transactions into a more secure and convenient form now adds their own prepaid card where funds can be stored offline from your account. And with all of these evolutions and pivots comes the risk of the disintermediation migrating from how customers transact from your account to how customers receive funds in the first place—the last frontier being the money-in side of financial services.

Even with this risk, can you really afford to not embrace these options if your customers feel they are convenient? And, if you had a way to not provide transactional support, could you afford to block or prevent transactions from reaching your customer’s account?

Like I said in the beginning of the article—it’s complicated.

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