Digital transformation for banks and credit unions in the U.S. is ripe with opportunities, some of which can strengthen customer relationships in ways that only a few years ago would have been scarcely imaginable. With the help of artificial intelligence (AI), direct connections and instant payments technology is moving banks closer than ever to end customers and merchants.
“Once you start paying your grocery store with your bank app,” said Carlos Netto, CEO of Brazilian FinTech Matera, offering up but one use case among many, “banks understand their users better,” and can monetize their relationships in new ways.
Faster payments are a certainty, though banks are at the moment hesitant to sign on to services such as FedNow, where there’s concern that interchange revenues will disappear and where they must think about the technical implications of connecting to new rails. As to the worries about interchange, Netto told PYMNTS, that’s a myth. There’s nothing inherent in the instant payments model that says banks won’t be able to make money from instant payment use cases.
“It’s just a matter of setting standards,” said Netto, who added that banks, right now, are making money from Pix, the instant payments system in Brazil that’s been growing by leaps and bounds.
In fact, there are some lessons that could be learned in the states by some of the stratospheric embrace by Brazil of digital payments, and instant payments in particular.
Matera’s helping move the needle, bringing its own payments infrastructure more fully to the U.S. as banks need some technical help as they grapple with decades-old legacy systems. The company announced over the summer that it had received $100 million from Warburg Pincus, earmarked for the FinTech’s North American efforts (the company has already been operating in the U.S. since 2000).
PYMNTS Intelligence has found in recent months that Brazil is the world leader in digital transformation. Our data show that mobile and online banking have been embraced by more than 60% of the population.
Netto noted that there were more than 5.5 billion Pix transactions in September alone, up 41%, by Matera’s own estimates, from last year. Nearly half of those transactions were done via QR codes.
There are a few specifics to Brazil’s markets that have given rise to those stats: Innovation has been largely a top-down affair, with connectivity mandated by the central bank. A decade ago, the central bank created payment institutions, which managed accounts and payment services — creating inexpensive accounts that fostered financial inclusion and also connected to instant payment rails.
“It’s helped Pix a lot,” said Netto, and gave tailwind to P2P payments, “as everybody was able to send money to everybody.”
Now, he said, there are a number of successes that can, and should, according to Netto, be replicated in the states.
“One thing that I believe that will work very well in the United Staes,” he said, “is the QR code.”
We’re moving toward a future where QR codes can be embedded in every invoice or credit card bill — and payment’s completed immediately upon scanning those codes with a phone. The payment method has proven so popular in Brazil, said Netto, that those transactions are on parity with P2P payments in Brazil.
To get there in the United States, he said, “having a standard QR code is the thing to be done now.”
Matera is part of a 40-member consortium, X9, that includes banks, merchants and solutions providers, tasked with developing a new QR code payments standard. The new standard, X9 announced this past summer, will establish the content of a QR code for payments, emphasizing interoperability, in order to process a payment digitally, and will include both merchant-presented and customer-presented QR codes.
The end goal, said Netto, is that the standard QR code can be used by any U.S. consumer, to scan and pay, easily, from any bank app.
X9 is also working on NFC that can also be used for instant payments. Apple, of course, has opened its NFC technology so that third-party developers can integrate QR code NFC transactions, and as Netto added, enable tap-to-pay payments with not just Apple Pay and Google Pay but bank apps too.
“You can open and pay through the Chase Pay app,” said Netto, “which is good for the bank,” as the financial institution gets more traffic. The payments themselves are streamlined as the QR codes contain all the relative instructions to speed the payment through without typing in any additional data.
“We are not creating anything new. Behind scenes is just the same data format that today we display in a form of QR code — but now we’re going to transmit using the electromagnetic waves — that’s the NFC,” said Netto.
Brazil’s success with instant payments and QR codes might be a beacon for U.S. banks. But the back office needs a bit of an overhaul as they accelerate their digital transformation. The legacy systems have been around for 40 or 50 years, said Netto, and when it comes to a core transformation, the result is what he jokingly referred to as “a CUO with PTSD — the core transformation is a project that nobody likes.”
Among the challenges are the fact that the core banking systems are not capable of handling the sheer volume of digital transactions, and especially instant payments that are coming down the line. Rip-and-replace solutions are not feasible in terms of time or money.
The company’s Digital Twin solution overlays the existing core banking platform, creating “digital twins” of the accounts stored on a core banking platform, what Netto called “a shadow of the existing account,” which in turn can connect to modern payment rails and AI technology to speed up transactions. “The value proposition for the CIO or the CTO,” said Netto “is: ‘Don’t worry, we’re not going to replace your core bank’ … while they can also send and receive instant payments.”
The digital twin construct is also useful for banking as a service — as sponsor banks that serve, say, 50 million bank/FinTech accounts can help control those DDA balances in real time (without taking the liability for those accounts into their own core systems.
“Whenever the user needs to know the balance of the transaction,” said Netto, “the FinTechs query the banks, the banks return [the balance information] and the FinTechs display the data … you’re getting the control of the balance back to the bank,” which satisfies regulatory requirements.
As he told PYMNTS, “the digital transformation is something banks cannot just ignore. They cannot be disintermediated — with someone taking care of the user and they’re just taking care of the money … the banks need to be ‘more’ digital, and instant payments is a good way to start this.”
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