How to create an effective digital payments strategy

Faster payments. p2p. It would be easy to feel overwhelmed at the speed of change. The key, say experts, is to ensure your payments strategy aligns with your corporate strategy.

By Colleen Morrison

Here’s a surprising number: $14.2 billion. That’s the amount U.S. fintech companies received in investment in the first half of 2018, according to KPMG’s The Pulse of Fintech 2018. What’s more, two of the top three U.S. fintech deals in the first half of last year were payments companies.

These trends point to an evolution in payments that should grab community banks’ attention. Once considered a supportive product, payments have become a critical component of a bank’s organizational strategy.

Quick stat

$14.2 billion

in funding was invested in U.S. fintech companies in the first half of 2018

Source: KPMG

“A number of nontraditional providers are putting pressure on financial institutions to create that more interconnected relationship with their customer,” says Kevin Morrison, senior analyst of retail banking and payments at Aite Group. “The customer is now probably struggling a little bit to understand what their new relationship with the bank is. If they can use Venmo to send money to a friend, the bank isn’t involved in that, at least not the way the bank would like to be involved.”

From p2p solutions to faster payments, the industry is facing a new paradigm. As community banks align themselves with the evolving needs of their customers, a payments strategy can help to illuminate the road ahead.

Driving the vision

As payments heat up, advice trickles in from all facets of the industry, and community banks can be inundated with cries for a faster payments strategy, a digital strategy and a fintech strategy, to name just a few. How can a community bank align all of these disparate components in a way that creates a cohesive approach? Experts say the answer lies in the institution’s strategic plan.

“Once a bank has their corporate strategy as an organization, their digital payments strategy really should complement what their objectives are,” says Tina Giorgio, president and CEO of ICBA Bancard. “When you talk about target segments, when you talk about different solutions to take to market, all of those become components of that strategy as opposed to separate and independent initiatives.”

Think of the digital payments strategy as a supporting gear that advances the organization’s strategic plan. The bank’s core strategy points in the direction of the finish line, but the payments strategy fuels the engine and propels it forward. In short, having a payments strategy that feeds into the strategic plan expedites its execution.

“Payments need to be part of your strategic planning,” says John Buhrmaster, president and CEO of $475 million-asset 1st National Bank of Scotia in Scotia, N.Y. “Payments are a part of a bank’s DNA, and without it being part of your strategy, you’re forgetting about one of the key components of why you are a bank.”

Powering the payments strategy

Recognizing how the payments strategy supports the corporate plan is important, but how do you ensure that connection plays out?

First, the corporate strategic plan acts as a guide. This resource, already developed by an institution’s leadership and board, serves as due north as a digital payments strategy is formed. The same environmental elements, bank goals, existing customer base and target customers all factor into how digital payments support a bank’s strategy. Starting with these elements and vetting digital payments solutions through that lens will enable the bank to remain focused on its mission.

For example, 1st National Bank of Scotia establishes building blocks in its corporate strategy. These blocks serve as the tenets that support its customer base and mission as an organization. Objectives like delivering excellent customer service or offering speed and efficiency help it establish where payments fit into the mix.

“Your payments strategy is very intertwined with your bank’s strategy, so knowing who you are is really important,” Buhrmaster says. “You don’t use technology to become something that’s out of your character. You use it to enhance your core strengths.”

Next up: Which payments are right for you?

This is the first in a series of articles about building a smart and effective payments strategy for your community bank. In our June issue, we’ll look at how to decide which new payments technologies are right for your bank—and your customers.

But what if a bank has a corporate strategic plan that’s lacking an emphasis on payments? How does it retroactively fit one in?

It’s not a dissimilar approach. A bank evaluates how payments support established objectives and creates a digital payments strategy that bolsters the work outlined in the strategic plan. The bank may also want to evaluate its data to better understand its customers’ behaviors and how those affect digital payments. And the financial institution may recognize there’s no need to race forward at full throttle. Banks can take an incremental approach to easing their digital payments strategy into their organizational efforts.

“When I put together a strategy, the main thing I focus on is what would I consider table stakes: what I absolutely have to deliver to market to remain competitive,” Giorgio explains. “And then, what are the new innovative things that are coming? What are some of the enhancements to my existing solutions that I can deliver to market?”

Answering these questions leads back to the bank’s corporate strategy, naturally driving connections between the two. And that link engenders another benefit: it helps achieve buy-in. By dovetailing the payments strategy with the strategic plan, all members of the executive committee see how payments factor into the bigger picture, which is crucial for successful execution.

“I have seen it time and again to where a department gets a strategy approved, and they need to work across other departments. Those other departments don’t deem that particular project as high priority. That’s what kills most of these, that you don’t have buy-in across the board,” Morrison says. “At the end of the day, you have to have the executive team and all of the other key players completely in on the digital payments strategy to get it done and get it done on time.”

Gearing up for the future

And now is the time. Today’s market demonstrates that community banks need to prioritize, establish and update payments strategies to remain competitive in the space. In fact, Aite Group’s January report, Top 10 Trends in Retail Banking & Payments, 2019: Disruption Is the Norm, cautions that this is the year where faster payments will become table stakes and alternative payments will overtake cards, among other shake-ups. This expediting evolution makes it all the more imperative that banks are grounded in their payments vision.

“I think the most important thing is coming up with a strategy that’s realistic and putting together a roadmap.”
—Tina Giorgio, ICBA Bancard

“I think the most important thing is coming up with a strategy that’s realistic and putting together a roadmap,” Giorgio concludes.

“There are going to be things that come along from time to time where you have to shift gears, but for the most part, if you can develop your strategy and stick to it, that’s where you’re going to have the most success.”

Your payments strategy roadmap

ICBA is partnering with Aite Group to develop an interactive tool to help all ICBA members create custom payments strategies. Grounded in a thorough market overview, this resource will offer a responsive Q&A format that provides a custom approach to support community banks’ digital payments efforts. It will cover four main steps:

  1. Evaluate your position in the market. Questions will identify key environmental factors like the size of institution and the number of customers and branches.
  2. Take stock of your existing offerings and identify gaps. After this initial appraisal, the tool will walk you through a series of questions that ask about your digital payments products and plan near-term changes.
  3. Assess your current and future customer needs. Once current offerings are evaluated, you will share more about your clients and target audiences.
  4. Create a realistic roadmap to take you into the future. Based on this input, the tool will offer a model and identify where you fall on the digital payments development spectrum. A corresponding report will offer recommendations on next steps as you continue to build your bank’s digital payments infrastructure.

“Community banks recognize the need for a payments strategy, but some don’t know where to begin,” says Tina Giorgio of ICBA Bancard. “We’re hoping this tool will help bring some clarity to the whole payments strategy.”

ICBA will release the tool online soon.

Colleen Morrison is a writer in Virginia.