Sometimes, payment industry news is first ferreted out and then re-assembled, in order to reveal an important trend.
Liking this article to a poker hand seems plausible when you look at your own cards and consider your next move. Read on…
What is regulation with regard to banking?
One thing US banks have in common is that they are all financial institutions regulated by the government—at both the state and federal level.
The optimum word here is regulation. A verb, which by itself, without a preceding noun, means “to adjust by rule, method, or established mode, as to put in good order, as to regulate the disordered state of a nation or its finances; to subject to rules or restrictions—as to regulate trade.” (Webster Dictionary, 1828).
If you find it interesting to do some of your own research on banking regulations, click on this link. The Federal Reserve Bank of Minneapolis has put up a “regulatory cost calculator,” which you can use to get your own stats.
What is banking with regard to payments?
If you consider banking systems, starting at their front door– ATMs, direct deposit, pay-by-phone, debit card and credit card purchases, all card payment transactions, electronic checks, and wallets–banks have been the central hub for the payments industry.
Banks are often the merchant service provider for a credit card issuer (EMV, MC, Visa), or for their own credit card. We present here, a possibly oversimplified version of a payment transaction:
- A purchase takes place with a merchant.
- The merchant runs the transaction through their point of sale gateway, which electronically reads the strip or chip on the purchaser’s card.
- An acquiring bank receives the transactions from the merchant’s gateway.
- The acquiring bank communicates with the card issuer, and they approve the transaction with an interchange bank.
- The interchange bank now bills the cardholder.
- When the cardholder pays the bill–the interchange bank sends the money to the acquiring bank.
- The acquiring bank pays the merchant.
Traditionally, banks made their money on products. Conversely, in recent years, banks are heavily invested in distribution channels. The goal is, nevertheless, still customer satisfaction–regardless of how it takes place.
In other words, one way banks can get some relief is to focus more on electronically, streamlined products, which complement payments and make customer access easier.
Who is Dodd-Frank with regard to regulations?
The Dodd-Frank Wall Street Reform and Consumer Protection Act is, in a word, the Whitehouse-assigned Pitbull–guarding the financial system of the US. (Opinion noted).
If you want to know just how vast are the powers of The Dodd-Frank Act, you can check it out at on Wikipedia, just to name one place.
Heretofore, the banking system in the US prevailed in regulations by various agencies, which evolved over the years.
Technology has put its demands on the system faster than the roadrunner, and change is now the order of the day.
From stage left, The Dodd-Frank Act began working to force the US banking system to consolidate–which was always the intent.
At the same time, in an opinion deviating from this goal–a recent New York Times article during April 2016 reported Dodd-Frank is Hurting Community Banks, stating that “The number of community banks (those with less than $10 billion in assets) shrank 14 percent between Dodd-Frank’s passage in 2010 and late 2014.”
Further, the article stated, “When regulations–not consumers –drive consolidation, banking systems risk increases. Dodd-Frank’s ‘Wall Street’ focuses snares community banks in an increasingly complex web of rules designed for larger banks. As such, the law forces well-managed institutions to unnecessarily divert resources to compliance.” Read more here…
To help put things in a more succinct perspective, the Harvard Kennedy School, M-RCBG Associate Working Paper Series | No. 37, recently quoted a Wall Street Journal article as saying that A North Carolina lender, who is from a small bank in that state, declared that “When they create ‘too big to fail,’ they also create ‘too small to succeed.’”
At this juncture, the point for us is to focus on that part of Dodd-Frank which has begun to pay very close attention to banking–and therefore–to the payments industry.
How does the Fintech prophesy–no more banks–affect payments?
Without banks—there would be no payment industry–unless, of course–you put all of your future bets on Fintech!
Of special note is how the increased industry awareness–through all of the Fintech publicity in recent months—strongly relates to the demise of banks in general.
An example of this is found in a June 2016 article by CB Insights, titled, The Big Banks Are Becoming ‘Dumb Pipes As Fintech Takes Over. CB Insights offers a free report titled, The Future of Fintech, which focuses on the unbundling of many things–not just the banks, but you can opt-in for it on their site.
The aforementioned article opens with a large graphic, “Unbundling of a Bank.”
With a portal-to-bank breakdown–almost blotted out by the most recent, brightly colored, available apps—it is not difficult to see what is happening. The apps fill in on top of the legacy basics–proposing a declining need for banks.
Recently, FinTech startups have benefited from more than $5.5 billion of investments because they are more visionary in their approach to money handling and tend to make all processes easier for consumers.
Even so, Fintechs are not likely to replace the banks just yet, since they literally must rely on their existing bank accounts–creating a conundrum for both.
Is banking facing its Renaissance or a change in posture?
Bill Gates has recently been quoted as saying that, “The world needs banking, but it does not need banks.”
Steve Jobs was once quoted as saying that, “You have got to start with the customer experience and work back towards the technology – not the other way around.”
Between these two ideologies lie the birth and the future of a new banking industry.
Although this may be true, we do see that “Venture Capital (VC) funding trends for FinTech and the developments in large categories such as wealth management, blockchain, remittance tech, and insurance tech,” are already in the process of changing the face of payments and the contemporary relationship that the payments industry has with banks.
At the 2016, CB Insights Future of Fintech Conference held in New York back in June of this year, Dan Ciporin, general partner at Canaan Partners, said “The future of banking lies in the adoption of more advanced tech like open APIs and tech-enabled loan underwriting. If they don’t adapt, big banks are at risk of becoming utilities, ‘like Verizon … dumb pipes,’” he said.
It was most likely Wells Fargo!
It was once said that if there is a giant, vicious dog asleep on the hearth, and you need to get to the other side of the room, would you take a chance on making noise that would wake him? Or, on the other hand, would you just tiptoe on by and let him sleep?
Wells Fargo’s recent “no-no,” opening unauthorized accounts in the names of their customers in order to keep up with imposed sales goals, has woken the sleeping dog albeit he was stirring before that.
Now, however, he is awake and hungry. Dodd-Frank often lays the groundwork for new regulations through information obtained by whistleblowers and the likes. Nevertheless, after Dodd-Frank is in and sniffing around for meat–if it is there, it is not usually hard for them to find.
New regulations are the front line of a Dodd-Frank initial action–even though it has been proven time and again that more regulations on any business—especially banks–forces them to spend more in compliance dollars, hampers their ability to innovate and grow, and ends up hitting everyone in the pocketbook.
Fintech–if it’s anything—it is creative, innovative, and it is growing based on freedom.
How the pending elections could hold the key!
Remember that regulation means, “To regulate the disordered state of a nation or its finances.”
The two questions now are: “Who determines whether something is disordered?” And, “Is it one entity that is disordered, or is it perceived as all entities are disordered because of the wrongdoing of one entity?”
Who–in a country of free thinkers, movers, and shakers–decides the future of technology and its ability to impact the way we do our financial business?
Will it be the regulators? Or will it be the free thinkers?
So there you have it. The current, three-card-hand (Government regulations, Fintech, and a sleeping dog).
When you go to the linked site above (Unbundling of a Bank) and look at the graphic we discussed—what do you see?
Is the payments industry starting to look like the victim of Fintech, or does it excite you to think of the accelerated, changing landscape–lying directly in the path of your industry?
What about bank consolidation; and how do you think it could affect competition for merchant service providers and independent sales organizations across the country?
Do you see any way in which your job, as an ISO company agent, is about to improve? What can you do to get ahead of the game?
Make a list of how you envision the future of your business in the payments industry. Then, contact us to talk about the prodigious ways we have developed to keep you on track with your customers, make more sales—and do it with less effort.
Let us help you win this hand with a straight flush! If you have an interest in our approach—we want to talk to you!
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