Addressing Changing Customer Expectations for Payments
Conventional methods of making payments, such as handing another person a wad of cash, are far less common than they used to be. Many consumers have shifted significantly towards seamless, affordable, and above all, digital modes of transactions. According to the Consumer Financial Protection Bureau (CFPB), 85% of consumers aged 18 to 29 had used a payment app by 2022.
As consumers increasingly gravitate towards user-friendly payment apps like Venmo and PayPal, traditional financial institutions like banks and credit unions face the stark challenge of realigning their offerings to meet these changing expectations.
This article delves into the evolution of customer expectations in the payment landscape and elucidates what incumbent financial institutions must do to stay competitive in this increasingly digital-first world.
The Evolution of Customer Expectations for Payments
In the past, payments were a meticulous and time-consuming process. Customers had to physically visit financial institutions, stand in long queues, and endure complex procedures to transfer money. But with the digital revolution, expectations have dramatically shifted.
Peer-to-Peer Payments
The advent of peer-to-peer (P2P) payment platforms like Venmo and PayPal heralded a new era of convenience, speed, and security. These platforms offer instant, easy-to-use payment services that can be accessed from anywhere, at any time.
P2P payments became popular because they tapped into the evolving customer need for seamless, instant transactions. People found that they could send money to their friends or family, split a bill at a restaurant, or pay for a service with just a few taps on their smartphone.
The simplicity and convenience of P2P payments set a new standard in the payments landscape, and customers began to expect the same level of service from all their financial interactions.
Banks and other traditional financial institutions, therefore, need to adapt to this change. They need to prioritize creating digital, seamless, and user-friendly payment solutions that can meet the convenience factor offered by P2P payment platforms.
Furthermore, affordability is another significant expectation. With many P2P platforms offering free or low-cost services, financial institutions must strive to keep costs competitive.
Other Types of Payments
Beyond P2P payments, consumers want all their payments to be digital and instant. This trend has been accelerated by the COVID-19 pandemic, which highlighted the importance of contactless transactions.
Man consumers still value cash and physical cards, but they increasingly want to make all their payments digitally.
According to the Prew Research Center, only 24% of consumers wouldn't use cash for their weekly purchases in 2015. That number increased to 41% in 2022. Furthermore, 59% of households making $100K per year said in 2022 that they make none of their weekly purchases in cash.
Financial institutions must also recognize that customers expect a seamless and consistent experience across all payment channels, whether it's online, in-store, or through a mobile app. They want to be able to pay for purchases using multiple options like debit cards, credit cards, or digital wallets without any hiccups.
The Challenges for Traditional Financial Institutions in the Digital Payments Landscape
Traditional financial institutions face substantial challenges in the digital payments landscape, especially when they must compete with startups and smartphone apps.
One of the primary obstacles is the legacy systems that these institutions operate on. These systems are often outdated and complex, making it a daunting task to integrate modern, seamless payment technologies.
In contrast, Fintech companies like Venmo and PayPal are digital natives. They are built on modern technologies that allow for innovation and flexibility, enabling them to quickly adapt to changing customer needs.
Moreover, regulatory constraints may limit the speed at which traditional banks can innovate.
Stringent regulatory environments are designed to protect consumers, maintain financial stability, and prevent illicit activities. However, they also tend to slow down the implementation of innovative solutions. Fintechs, while not immune to regulation, often operate in a comparatively lighter regulatory environment, thus, they can move at a faster pace.
Traditional banks are not sitting idle, though. Many are responding to these challenges by embracing innovation and partnering with Fintechs to enhance their digital offerings.
For example, Bank of America has integrated Zelle, a digital payments network, into its banking app. This allows Bank of America's customers to make quick and easy payments directly from their bank accounts, mirroring the convenience offered by popular P2P payment platforms.
By adopting such solutions, traditional banks are not just keeping up with the changing trends, but also shaping the future of digital payments.
Embracing Innovation: How Banks and Credit Unions Can Adapt
Following Bank of America's example, banks and credit unions must continue to embrace innovation and partner with Fintechs to offer cutting-edge solutions.
They should also invest in upgrading their legacy systems to modern, agile technologies that allow for quick integration and adaptation of digital payment services.
Moreover, financial institutions must leverage data analytics to understand customers' needs better and provide personalized payment solutions. By studying customer behavior patterns and transaction histories, banks can tailor their offerings to meet the specific needs of their clients.
Furthermore, offering a seamless experience across all payment channels is crucial. This includes ensuring easy integration with popular digital wallets like Apple Pay or Google Pay.
Financial institutions should also prioritize security measures such as two-factor authentication and biometric verifications to ensure the safety of customers' transactions.
The Future of Payments: Meeting and Exceeding Customer Expectations
As we look to the future, the payments landscape is set to transform dramatically, driven by the relentless pursuit of innovation by banks and credit unions. Groundbreaking technologies like blockchain hold immense potential to reshape the way we conduct transactions, making them more secure, efficient, and transparent.
Blockchain, the technology that underpins cryptocurrencies like Bitcoin and Ethereum, offers a decentralized method for recording transactions. Its inherent security and transparency features can offer substantial benefits in the payments space. For instance, the implementation of blockchain technology could lead to real-time settlements, eliminating the need for intermediaries and significantly reducing transaction costs and time.
Besides, blockchain could enhance the traceability of transactions, making it easier for financial institutions to prevent fraudulent activities. This could lead to increased trust and security in digital payments, further driving customer adoption.
The future could also see the rise of Central Bank Digital Currencies (CBDCs). These digital forms of fiat money, issued and regulated by a country's central bank, could streamline payments while ensuring stability and security.
In the pursuit of innovating payment technologies, financial institutions might consider:
- Integrating blockchain technology for secure and efficient transactions
- Exploring the potential of CBDCs for streamlined and secure payments
- Enhancing data analytics capabilities for personalized services
- Partnering with FinTech companies to stay ahead of innovation
Moreover, the advent of the Internet of Things (IoT) could lead to an even more interconnected payments ecosystem. As devices become smarter and more connected, we could see payments being integrated into everyday items, creating a seamless transaction experience for the customer.
Banks and Credit Unions Must Follow Consumer Trends
The future of payments is poised to be shaped by the convergence of various innovative technologies. As customer expectations continue to evolve, banks and credit unions that can keep pace with this technological evolution stand to gain a significant competitive advantage.
To learn more, don't miss Future Digital Finance 2024. The event is happening from April 2nd to April 3rd at the Hyatt Regency in New Orleans, Louisiana.
Download the early agenda and register for the event today.