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Banks have a Choice: Facilitate Frictionless Commerce or Prepare for Disintermediation

By Carl Rutstein, Partner, A.T. Kearney

Carl Rutstein, Partner, A.T. Kearney

Technology-injected grease is being squirted into the gears of the payments process to remove friction that historically had been purposely embedded into commerce to serve various business purposes. That sand in the gears and speed bumps were by design.

One central business cause of friction was the need for merchants to validate a customer’s payment credentials to complete a transaction and ensure they’d be paid after purchase. Another source of friction was that the only way a customer could see product and price information was to physically visit a store. Technology is streamlining and often circumventing these functions—leading to what we call frictionless commerce.

Payments are increasingly being embedded within the customer shopping process, often automatically with little notice of the actual payment form factor, and increasingly online and mobile.

Taking an Uber ride couldn’t happen if the driver could not be paid, but when you order your car and are taken to your destination the actual payment transaction happens behind the scenes and the transaction is “frictionless”. When you log on to Amazon (or use your Amazon Dash button) to make a purchase, your credentials and shipping information are already there. The same goes when using masterpass and Visa Checkout.

“So as grease is being injected into the payment engine, leading to slicker, faster, frictionless transactions, banks will need to lead”

As the graph below shows, frictionless commerce will account for almost half of all consumer purchases in 10 years.

Why does this matter? It’s important to remember that the friction was there for a purpose, and from a bank’s perspective it was an incredibly important purpose: fraud prevention. Banks are on the hook for fraud losses and some of the friction in the payments process was to validate the identity of the consumer making the purchase and to ensure that the banks will be paid back. But the growth of e-commerce, mobile, and in-application purchases is eliminating that step and opening up new avenues for fraud. Worse for the banks is that there are hundreds of companies with thousands of employees working 24 hours a day, 7 days a week on one thing—getting between the banks and their customers. 

This disintermediation is bad for business, as central to all banks’ retail banking strategy is deepening their customer relationships—more products and more revenue per household. Incidentally, this need has not changed since branch-level sales incentives have become toxic. Despite this, there is strong business logic and customer experience improvement if a bank can better serve customers across their compete set of needs. So these competitors disintermediating the bank present a strategic, customer deepening issue as well as a fraud issue, as allowing customers to throw around their payments and banking credentials in any application that asks for them are accidents waiting to happen.

The need for privacy and providing customer protection will only increase in a greasy world with less friction. Privacy-as-a-Service, where banks allow customers to inject sand or speed bumps, will grow and many more tools and products like Discover’s Freeze It will be rolled out.

Banks need to appreciate that they don’t have to “get in the game” because they are already the owner of the bat and the ball. They have the customers, extend the credit, provide the deposit insurance, and provide the payment liability protection. Further, the government and customers expect them to protect the safety and soundness of the payment system. So they helped write the rulebook and are expected to be not only the referee but also the team captain and leader. Too many banks are taking a “wait-and-see” and “fast-follower” approach, not quite realizing that they are already playing and can take a strong leadership role.

So, from a defensive standpoint (protect customer relationships and manage fraud) or an offensive standpoint (grow share of revenue and stay relevant to the customer), banks need to get in the game. The chart below lays out some examples of what banks need to do.

Finally, banks need a compass to help chart their course in an ever-changing world. Where should they hit the brakes and where should they punch the accelerator? The graphic below illustrates this across two dimensions—relationship and safety. Those things that are good for customers and increase security should be encouraged (for example, replacing ACH with debit transactions, which are credentials that can be tokenized with mature fraud management procedures and offer a revenue stream rather than a cost). Likewise, there are things that cut against the bank’s business and weaken the system; those should be thwarted based on safety and soundness grounds.

So as grease is being injected into the payment engine, leading to slicker, faster, frictionless transactions, banks will need to lead. They are already in the game, but entities are working diligently to weaken their position. If they don’t want to get run over in this new frictionless world, they need to start playing both defense and offense while making sure they are continually progressing to the “upper right”—better customer experience in a safer payment ecosystem.

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