Commercial banks and integrated finance: engine of growth or existential threat? It’s a matter of timing

Commercial banking is evolving. Yet not all bankers recognize the changes to come. In-app payments are a tremendous opportunity to unlock new revenue growth for banks that embrace this technology – and can also prove to be an existential threat via the continued erosion of direct payment volumes.

Going forward, the vast majority of payments will begin and end with software. In his Annual payments 2021 report, McKinsey writes:

“As payments fit into broader customer journeys [i.e., software], the boundaries of the industry have naturally expanded…payments as a discrete experience are disappearing. The payments industry now encompasses the end-to-end money transfer process, including the services and platforms that enable this business journey.

Already, in-app payments are ubiquitous. For example, consider how we travel: to pay for transportation, we rely on software companies like Uber and Lyft. We book accommodation with software platforms such as Airbnb or VRBO. We order delivery through Postmates and Doordash and takeout through Toast or LevelUp. In each case, payments are so tightly integrated into a software workflow that we often forget the technology is even there.

In-vehicle payments are the result of two converging Internet trends: the evolution of software and the digitalization of financial services. It is the fastest growing sector in the payments industry as industries and workflows digitize. Global Payments noted that 60% – 70% of new customers come from software channels. The industry is expected to grow nearly 1000% from 2020 to $230 billion in new revenue by 2025. It’s a $7 trillion opportunity.

How we got here

In 2011, Marc Andreessen wrote in the WSJ that “software eats the world”.

He argued that we have reached a turning point in software innovation. Internet adoption had reached critical mass; the digital infrastructure and programming tools had reached a level of maturity conducive to widespread innovation.

In the years that followed, software growth exploded, providing new experiences and replacing manual workflows. Beneath the surface, entire industries were being reshaped by software. Restaurants use software to manage operations and improve margins. Property management companies use software to engage tenants and manage properties. Hospitals use software to manage interactions with patients. Even construction, freight and logistics companies are now using software to aid coordination and efficiency.

Quick advances on payments accompanied this software innovation. While Andreessen was writing his essay in 2011, payment facilitators (payfacs) had emerged to help businesses seamlessly accept credit card payments. Payfacs has created the infrastructure for marketplaces and software applications to integrate payments into their products. The adoption of software marketplaces (e.g. Uber, Lyft, Airbnb, Etsy) has significantly advanced this model.

Software Solves Difficult Problems

In 2020, Credit Suisse echoed Marc Andreessen when he said, “Software is eating the world and payments are taking a bite out of it.”

For developers, the integration of software and payments opens up opportunities to create apps that are attractive, compelling, and ultimately far more valuable. To give some examples:

  • Toast, a software platform for restaurants, integrates payments to help family restaurants manage all of their business operations.
  • TripActions, a business travel portal, integrates payments (TripActions Liquid) to give businesses control and visibility over their spending.
  • Coupa, an expense management software platform, has added payments (CoupaPay) to help customers pay suppliers directly in their app.

Historically, integrated payments have focused on card rails because the inherent alignment of card networks (eg, rules, standardization, shared incentives) has fostered innovation and joint investment. Nevertheless, this innovation is in full expansion. As software development continues across the economy – areas such as insurance, real estate, education, logistics, lending, healthcare and financial services – businesses now also integrate bank payment rails (e.g. RTP, ACH, wire transfer, etc.).

Software enables better banking experiences

As a new payment flow, in-app payments have distinct characteristics and needs. And these needs are simply not well served by the banking infrastructure available today.

My co-founders and I felt these shortcomings firsthand at LendingHome, creating a software marketplace for home borrowers. We connected our platform to the plumbing of the banking system. And we were quickly overwhelmed with the tooling and infrastructure needed to make this translation work.

In particular, we saw that payments, while important, were only one part of the digital experience. We also needed:

  • Application Programming Interfaces (APIs): Easy software integration points to allow our software to communicate with the bank’s software as needed.
  • Software workflows: to ensure user compliance, collect counterparty information and create payment orders via ACH, wire transfer, check and RTP. We also needed a powerful software reconciliation engine (with webhooks) to track and attribute every payment throughout the banking system.
  • Dashboards: for reporting activity, monitoring platform activity, tracking payment failures, and collecting approvals. We needed dashboards for our customer support team to answer questions, for example“Hey, I don’t think the payment I’m owed has arrived yet. Where is he?”

Due to the pace of transactions on our platform, we were unable to manage these payment transactions manually for a very long time. And yet, the investment required to develop the right technology was not trivial.

Software is the gateway to financial services

Banks need to embrace software as a channel to continue being part of customers’ financial lives. Beyond the simple growth of integrated payments, the convergence of software and payments is important because it has a profound impact on financial services. Software is the gateway to our financial lives; the applications it powers become the “new bank branch”. Activities that once took place in person or over the phone (obtaining a loan, making a payment, investing in a security) now take place entirely in software.

How Modern Cash Can Help You

At Modern Treasury, our platform complements banks’ existing products to help them prepare for a software-driven future. We’re here to partner with banks looking to adopt the software and help them grow their business and lead the next phase of financial services.

To learn more about our banking partnership program, please see our website or reach out to [email protected].

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