By Brandes Elitch
CrossCheck Inc.
Here in Wine Country, Sonoma County, Calif. – where CrossCheck is located – we are beginning our annual grape harvest. The first grapes were picked in July, and the harvest will continue through October. Trucks and trailers carrying huge white plastic bins overflowing with grapes crisscross the county.
It is not entirely tranquil: some vineyards regularly shoot off cannons to disburse birds feeding on grapes; some use underground charges to blow up gophers; and in the spring, generators run giant airplane propellers to move the air in the early morning to prevent frost on buds. Thus, things may look tranquil on the surface, but there is a lot of unseen activity, and essential things aren't necessarily obvious.
We could say the same about activities in the payments system, a favored destination for venture capitalists and assorted hangers-on in the last year. You can't read an article on the web without seeing breathless commentary about how "disruptors are changing everything" in payments. However, just like the harvest, the most essential activities aren't so obvious. I'll touch on two such essentials in this article and two more in the second article in this two-part series.
Some commentary on fintech disruption is exaggerated – or just wrong. For example, here is a quote from an article written by Nancy Miller for Bank Innovation, which discusses an interview she conducted with Peter Olynick from NTT Data:
"The plumbing in the banking system stinks, but a new survey says banks would like to do something about it. But please, don't rush them. … It's time for banks to replace aging pipes, an ordeal only 15 percent said they were likely to take on in the next three years. … [T]his leads us to the current state of affairs in the backend of core banking functions – a rickety patchwork of superficial fixes. Olynick likens it to building a Tesla on top of a Model T frame."
To someone unfamiliar with bank core systems, this comment would be disturbing; fortunately, it bears little semblance to reality. Skeptics can read research reports or 10-K reports filed with the Securities and Exchange Commission on the three top providers of bank software: Jack Henry & Associates Inc., Fiserv Inc., and FIS. Each is a multibillion-dollar enterprise running core systems for thousands of banks.
A bank core system (which runs the demand deposit accounting, loan book of business, and accounting for deposits, collateral, reserves, investments, and cash, etc.) is roughly analogous to general ledger software a large enterprise uses to run its business, except in the case of a bank, the core system must be fully functional 100 percent of the time, as well as be impregnable to security breaches.
No single bank, even the very largest, has the resources to build and maintain such a system, which is why these three companies exist. The idea that any of these three would market a product to the 6,000 commercial banks in the country that is "a patchwork of superficial fixes" is not just wrong; it is irresponsible. Banks are, of course, the most highly regulated and inspected businesses in the country. This includes IT audits and stress tests.
Mobile payments have experienced a failure to launch for a variety of reasons. Most consumers are not ready, and most merchants are certainly not ready. Potential exists when wallets have integrated loyalty programs, and in-app, in-browser, and person-to-person payments, but we are not there yet.
No real incentive exists for consumers to adopt mobile wallets – they just store consumers' plastic cards electronically. Auriemma Consulting Group reported that less than 10 percent of smartphone owners have tried making a mobile payment; less than half of U.S. smartphones are mobile-payment capable. Consumers have to use a different app for each merchant. Some merchants, such as Wal-Mart, don't need a loyalty component; others need both loyalty and fringe benefits, such as couponing and special offers.
Consumers can use mobile phones to interact with their banks, and they can use them to make purchases at merchants. Only a fraction of people regularly make purchases with their phones, but about half of the smartphone users surveyed by the Federal Reserve reported using their phones for mobile banking in the previous year.
Banks don't want consumers coming into their branches; some banks even charge consumers for doing so. This is nothing new – it was the push behind building an ATM network in the 1970s. If banks can get a critical mass of clients using their phones to do their banking, and half is a critical mass, this is a success.
But it's not that simple. Javelin Strategy & Research reported that less than one third of smartphone users surveyed use mobile antivirus protection software or anti-malware software on their phones. Some consumers even tamper with their phone's operating system to run unauthorized apps. Thieves hack into consumer bank accounts via mobile phones with malicious software, such as Acecard or GMBot – malware that steals banking credentials when consumers log on to bank accounts via mobile phones. Acecard malware has customized overlays to imitate 50 financial services apps. The malware infects phones when users click on text messages from unknown sources, or tap certain ads on websites. It creates an overlay on the authentic banking app, which allows criminals to follow users' movements on their phones and grab credentials.
Data breaches could dramatically affect the growth of mobile wallets. The 2016 KPMG Consumer Loss Barometer stated that 40 percent of mobile wallet users would not feel comfortable using a mobile payment app that had been recently hacked. Consumers are consistently worried about mobile payment security, which is stopping them from using their wallets.
As many as 65 percent of consumers polled in the fourth quarter of 2015 by the Fed said they're concerned about the security of mobile payments; almost half don't even trust the technology. KPMG's data suggests a breach could negatively impact wallets' adoption. A future breach could not only dampen slow adoption rates to date, but also shrink the existing pool of users.
So there you have the first two of four not so obvious issues brewing in payments. Stay tuned for the other two in The Green Sheet's next issue.
Brandes Elitch is Director of Partner Acquisition for CrossCheck Inc. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at Brandese@cross-check.com.
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