Once upon a (very recent) time, if customers needed financial services of any kind, they went to their bank. From investing to storing funds to making payments, the bank offered the total financial services bundle. And that was by design, as Ingo Money CEO Drew Edwards told PYMNTS in a recent conversation. The banks designed their systems, so it was easy to move money into their coffers, but not so easy for customers to move money out or around. It’s sticky, he noted, but in the same way that a fly trap is.
However, the rise of FinTechs over the last decade or so has changed the game — because collectively, they’ve broken the bundle.
“It started with all the [peer-to-peer] P2P guys who unbundled how we pay each other,” Edwards said. “Then the online lenders rose up and said they could do lending better and faster than the banks. Then came the robo-advisers, which meant you didn’t need an adviser to be an investor. And we came along with ubiquitous mobile remote deposit capture, so now consumers can put their checks into any account they want from a single app in minutes.”
As everything has dispersed and unbundled, banks (and the rest of the financial services industry) have had to change. Banks trying to control their consumer relationships by adding friction to the process of moving money between touchpoints in an increasingly diverse ecosystem are, quite simply, pursuing a losing strategy, Edwards said. That’s not sticky service in the modern sense of the term — it’s the bad kind of sticky that consumers want to wash off.
“What we are now seeing is that flexibility is the new sticky,” he noted. “The notion of instant payments in that environment becomes critical. Flexibility and instant payments are synonymous in this context because the customer needs to be able to move their money around how they want and when they want.”
That means financial service providers will have to realize the best way to keep customers is to offer what they want, said Edwards, instead of making it easier for them to get it elsewhere.
Think of it as a "Me2Me" type financial payments flexibility between FIs that customers are seeking.
The Lessons of Lending
The evolution of online lending, Edwards noted, serves as a good microcosm of how instant payments are changing and raising the level of financial services across the ecosystem.
The big change in lending, he said, has been the banishment of the time-consuming, paperwork-heavy model of bank-based underwriting, which was supplanted by an automated process that a consumer could complete end-to-end in a few minutes to get a loan decision almost instantly. Instant payments didn’t start the shift in online lending, said Edwards, but it some ways, it has completed it.
“The problem was, the customer could be approved instantly for a loan, but they didn’t get the money for another week because of the friction around setting up an ACH transfer and doing trial deposits,” said Edwards. “Instant payments has fulfilled the promise of online lending, making the entire process efficient from end to end. The customer is approved and voila! The money is in their bank account and ready to use however they want.”
To the FinTechs Ingo worked with, that sounded like something they were eager to adopt. Online lenders are experts at underwriting, Edwards noted, but generally aren’t experts in payment card industry (PCI)-compliant payments. Nor were they interested in becoming experts in that area, when they could work with Ingo and gain access to an entire marketplace of instant payout options for their customers.
But a couple of years ago, when Ingo Money tried to make the same pitch at big banks, it mostly got a hard pass. The banks didn’t want to build that capability because they didn’t want to offer flexibility in where loaned funds were deposited. If the bank’s customer wanted a loan, the bank felt they should store it in their credit or savings accounts. Recently, Edwards said, Ingo had to work with a top-five bank that summarily rejected instant payments to consumer accounts from online lenders. Digging into the issue, Ingo found that “someone in that big bank’s lending group decided they weren’t taking loan proceeds from other lenders.”
That is against the rules of using Visa Direct to accept instant payments, Edwards noted — and with some help from Visa, they explained that banks couldn’t pick and choose which instant payments they prefer.
But they are having to do less of that kind of educational exercise as of late 2019, as banks are starting to understand that forced bundling solutions won’t satisfy modern consumers who have other options.
“For the first time about two weeks ago, one of those big banks called us and said, ‘OK, we want to talk about routing loans to accounts outside of our bank,” Edwards noted. “The old-school bankers are starting to understand that just because I borrowed from you doesn’t mean I want to leave the money with you.”
Meeting the Challenges
As the new economy is crashing into the old one, said Edwards, the old-school players are coming around to the idea that consumers want flexibility in managing their money. They are also recognizing that instant payments are the key to that flexibility — and that sitting either thing out is not an option. Knowing that is critical, he said — but it’s still only half the battle.
Payments, as a rule, are hard — and instant payments are even harder. Much harder than any outsider can envision until they’ve actually done it. And in many cases, it’s much harder than many players are led to believe.
"Instant payments are no more risky than any other transaction, and, in fact, probably less risky." Find out why with CPO @lisagmcf in our next #howtoinstant podcast. #disbursementsmarketplace https://t.co/AgsNnEkUNZ pic.twitter.com/9HlQaxh8KU
— Ingo Money (@IngoMoneyNews) October 31, 2019
Between the regulations, the compliance issues and the myriad security concerns, offering instant payments in a useful fashion isn’t about flipping a single switch to enable a single method of use. It’s about flipping many switches — or working with a partner like Ingo that essentially flips all the switches at once, enabling consumers to not only choose an instant payment, but to choose the one they want.
On top of all that, there are also security concerns, because instant payments are also irrevocable. Once the funds are pushed, they are gone — so it’s critical for payors to be certain they are pushing funds to the payee’s account, said Edwards.
It’s a strong case for collaboration, he added, since big players who think they can do it all on their own often learn their lesson the hard, painful way.
“But we are seeing that attitudes are changing,” said Edwards, “and now, the question we are hearing is, ‘How can we get instant payments up and online faster?’ Everyone working in financial services knows they need this now or will need it very soon. The question is how to turn this embrace of fluidity into more fluid financial services.”