Article

Can financial institutions monetize cash transactions?

What if banks could introduce a payments innovation that would raise consumers' estimation of them and add to the bottom line in the process? Maybe they can.

November 6, 2015

By Dan Glessner

Since the Great Recession, banks have been challenged to improve their brand admiration and win back consumer respect — especially in the area of innovation.

This article describes an opportunity for payments innovation that banks could undertake to help change consumer perceptions for the better and add to their bottom line in the process.

Realizing this opportunity involves three steps:

1. Acknowledge that banks are not known for innovation

Going back to the financial crisis of 2008, in a Wall Street Journal article titled "Think More Broadly," Paul Volcker, former chairman of the U.S. Federal Reserve, was quoted as saying:

I made a wiseacre remark that the most important financial innovation I have seen the past 20 years is the automatic teller machine. That really helps people and prevents visits to the bank and is a real convenience. How many other innovations can you tell me that have been as important to the individual as the ATM?

Unfortunately, banks today are not known to be innovators. And given given the magnitude of government regulations that are integral to the business, one can see why innovation might present a challenge.

Within the U.S., for example, the Durbin Amendment to the Dodd-Frank legislation is interpreted as requiring that the merchant be able to choose the network over which transactions ride to the processor — ostensibly to foster competition, but with the unintended consequence of making bank innovation more challenging.

As Quisk has written before, millennials, in particular, do not have high regard for banks or consider them are relevant to their lives, as "71 percent would rather go to a dentist than listen to what a bank has to say."

2. Investigate and leverage relevant FinTech

The core of what banks do is to run the payments system, which touches the lives of many, many people. However, the last significant innovation in this area was card-based payments, introduced about 50 years ago.

Banks traditionally have issued new credit and debit cards to consumers in order to minimize the customer's need for cash and to participate in the transaction. As a result of these investments over decades, card-based payments have grown into a significant profit generator for most retail banks.

However, with 85 percent of all retail transactions around the world still conducted in cash, banks have an opportunity to leverage modern technologies — i.e., mobile phones and cloud-based digital payments platforms — to reimagine core payments systems and appeal to the many millions of people who still use cash.

A more innovative path forward for banks would be to investigate and leverage relevant FinTech firms to help them develop a bank-led ecosystem for digital cash or mobile money.

Plastic cards — and their considerable administration expense — would not be required. And banks could dispense with the relatively high expense of legacy card-based payment networks. They could participate in and monetize these new, more affordable digital cash transactions while complying with all relevant central bank regulations.

3. Add value for consumers by digitizing cash payments

Does this sound like "Mission Impossible" for banks? We would suggest that the answer is "no." New cloud-based platforms can integrate with back-end core banking platforms (as well as POS terminal networks) to enable banks to create a new digital cash — or mobile money — ecosystem.

Banks could then leverage this modern, highly efficient cloud-based payment network to offer a new type of bank account that a consumer can access and use with just their mobile phone number and secure PIN.

When the consumer makes a retail transaction using this new digitized cash, the bank can participate in and monetize this transaction. In this manner, banks can offer that 85 percent of consumers who still pay with cash a more convenient and secure solution.

This innovative bank solution would add value for consumers and help change their current perceptions of banks, while enabling banks to add profits to their bottom line.