Traditional Banks Are Getting a Digital Makeover
Release Date: 09/24/2021
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On this episode of COMMERCE NOW Jens Audenaert, SVP/GM of Payments at Diebold Nixdorf, and Tim Sloane, VP of Payments Innovation at Mercator Advisory Group sat down with PaymentsJournal to discuss the current trends in the banking industry and how traditional banks can use these trends to remain relevant in an industry full of new technology.
LinkedIn Profiles -
Speaker 1: On this special episode of Commerce Now, DN's Jens Audenaert, SVP and GM of payments, joins Payment Journal's Ryan Mack to discuss how traditional banks are being forced to adapt in order to remain relevant in an industry full of new technology.
Speaker 2: [00:00:30] Welcome to the Payments Journal podcast. And here is your host, Ryan Mack.
Ryan Mack: Welcome to the Payments Journal podcast. I'm your host, Ryan Mack.
Increasingly we're seeing the payment become implicit in the transactions of all kinds of services. To be explicit, the payment is being made invisible. You can get a ride, a coffee, and a lot more, without pulling out your cash or a credit card.
As more and more services start to offer their [00:01:00] own payment schemes to ease friction for consumers, introduce loyalty, lower costs, and generate additional revenue streams, traditional banks, processors, and card issuers are being reduced or even eliminated. This trend heralds the tipping point in the ongoing struggle for banks and issuers to remain relevant. The new business model being forced upon the traditional banking stalwarts is making them rethink everything from time to market, to which emerging payment methods to accept.
As payments become more frictionless, the banking industry struggles [00:01:30] with how to cultivate and maintain customer loyalty. Consumers can choose from multiple payment alternatives, even when their bank doesn't offer it as a service. So to unpack this topic in further detail, I have Jens Audenaert, who is the SVP and GM of payments at Diebold Nixdorf, and Tim Sloane, the VP of payments innovation at Mercator Advisor Group.
There's certainly a lot to unpack on today's episode, so without any further delays, let's start the show.
So Jens and Tim, it's an absolute pleasure to have you on today's episode, where [00:02:00] we're taking a deep dive into an important question that's going on in the industry, and one that I don't think I would've ever thought that I would have had to ask here, and it's banks maintaining relevancy in this new payments landscape.
So Jens, I want to start with you for the first question. So taking a look at the payments industry, what are some of the key trends that you're seeing in banking and payments today?
Jens Audenaert: Sure. And first of all, thanks Ryan for having me on the podcast, Tim, it's great to be here with you.
I think when we think [00:02:30] about trends in the payment space, there's obviously a lot of them, but one of the key trends that we've been seeing for a number of years now is really the dramatic rise of digital payment vehicles and the associated transaction volumes. And like many things digital, that's been accelerated in the last 18 months because of the COVID pandemic. We've seen contactless transaction volumes go through the roof. But again, it's been an underlying foundational trend that we've seen for a number of years.
And a lot of it has to with [00:03:00] consumer expectations, really. If you think about how people buy goods and services these days in many instances, you don't even think about the payment anymore. You can buy a coffee through an app, you can get a car service through an app. And so consumers have really started to expect these very seamless, integrated payment experiences.
And I think that's very relevant for retail banks, because a lot of those experiences are being delivered by fintech, by neo-banks. And [00:03:30] so for retail banks, they really have to think through, how do we remain relevant when a consumer doesn't really necessarily associate their card or their primary bank with that payment transaction? That's obviously a threat to retail banks, but it's also an enormous opportunity for them to think through, how do we adapt in a way that we can actually offer these additional services to our consumers?
Tim Sloane: I totally agree with that. As payments become invisible and merchants want to make [00:04:00] payments invisible, you see the card on file volume starting to move to an environment where automatic acceptance is done. You also have voice payments taking place in an increasingly large environment, where they talk to their Amazon Alexa or their Google speaker, and they're asking for something to be delivered, it's delivered automatically, and the payment becomes invisible. So [00:04:30] how a financial institution can drive itself to be top of wallet in those environments is critical. And that's what's happening now. Further off, we see things shifting to IOT type payments where it's entirely automated and decisions are being made by the machine.
Ryan Mack: Yeah. And one thing to kind of point to there. I mean, Tim, you brought up in terms of invisible payments, and I certainly think that that is a very interesting component of this as well too. But every time I hear the term invisible [00:05:00] payments, I also think invisible brands as well too. Which, to Jens, you were talking about there as well too, kind of from a financial institution perspective. And it is okay, well, how do we ensure that our brand still remains relevant to our audience and our clients and our members today? So the next question then that I've got for you, Jens, if I could start with you, is how do you think banks will really maintain their stickiness with the consumers when the trend is really kind of moving away from, as we were talking about there, even being associated with the payment [00:05:30] part of it?
Jens Audenaert: Yeah, it's a great question. And Tim, I loved how you phrased that as well.
I think for a bank it's really around, when you think about remaining relevant, it's making sure that you're actually funding and processing those transactions for your consumers. And so it's really staying abreast and keeping up with the innovation that's expected of the banks.
And sadly, if you think about the ever increasing rate of change in the space, if banks look internally, many banks are actually realizing that they have a decades old infrastructure, [00:06:00] old code, very monolithic, millions of lines of code, and it's really, really hard to adapt to the trends in the market. And so I think this is where banks really have to think around what's the infrastructure that I need so that I can very easily adapt to the changes that we see in the market and that I can actually meet consumer expectations. And that's really hard with the old technology.
So this is where having technology that can be deployed in the cloud, if it's microservices, [00:06:30] architecture enabled and API first, things that are really easy to adapt, that's really what's going to be important here. At the end of the day, it's about being able to test and design and deploy new services for your consumers in a matter of weeks or months. And many retail banks today, that could be a process that takes over a year. And so it's really that agility that banks have to work on and have to look at when they think about modernizing their technology infrastructure.
Tim Sloane: I totally agree with you. If you take [00:07:00] a look at what it costs, when Uber was on the rise, you saw Capital One, Discover, Amex, offering $20 or more if a consumer would put their card into that mobile app. And that's a significant amount of money that they're trying to use marketing dollars to become top of wallet. But that's not sustainable. Those cards are going to churn, not just at the end of the card life, but when [00:07:30] lost, stolen, or something else happens and the card has to be replaced. And so if they haven't moved to a tokenized infrastructure that enables that card on file to remain active, despite the physical card having been broached, you're in trouble. If you're not providing services that better guide the consumer as to what cards are on file and how much they're spending, then you're going to be usurped by a financial institution that [00:08:00] has that capability. So there's a lot of ways they've got to sharpen their game.
Ryan Mack: Yeah, I certainly have to agree with that there in terms of just the top of wallet conversation that we're having here. And the importance, I really kind of feel within the next year or so, that you're going to see a lot of financial institutions question about, just because of all these new technologies that are coming into play and the new ways that people are able to pay, again, to kind of the point we were putting out there earlier of just, it becomes a little bit more, the payment becomes more [00:08:30] invisible. But having that top of wallet status, obviously, like I said, it's going to be very important. But then Jens, to the point that you were making though, in terms of kind of the millions of lines of code and the infrastructure changes that need to happen here, do you really think then that banks are now ready to make this change to modern technology for their payment solutions?
Jens Audenaert: I think it's more a question of willingness over readiness. So I think that whether it's CIOs or business operatives at retail banks, they see the trends that we're talking [00:09:00] about. They obviously understand some of the operational benefits of maybe having a cloud native infrastructure over a hardware, on prem infrastructure that's going to be much more costly. They get all of that. But at the end of the day, payments is very core to what a bank does and so switching out your payments platform is a very risky endeavor. And so that's where some banks have been waiting.
Now I do think Ryan, to your point, that that is going to change in the near future. And we've talked about some [00:09:30] of the reasons why. But first of all, I do believe, and we do see, that the change, the pace of change, is increasing. And so it's becoming as a result, harder and harder for banks to stay up with what's expecting, both from market and consumer expectations. Also from regulatory requirements, with that old infrastructure.
But I think the second reason is what Tim was talking about. You really want to be top of wallet, and so the competitive pressure [00:10:00] is also increasing. There are fintechs, there are neo-banks, that are delivering these delightful more seamless payment experiences. And so now is the time for traditional retail banks to really make sure that they don't have their lunch eaten.
And then lastly, I would say because it is a risky endeavor, I think some banks were taking a wait and see approach, and we are seeing large retail banks now really embracing a cloud strategy and really modernizing their technology [00:10:30] infrastructure, and doing it very successfully so with great results to show for it. And so I do believe that there's going to be many banks now following suit.
Tim Sloane: So, we see a huge trend in the payment processing space where those payment processors are moving to a payment as a service model, and are using Visa Direct, MasterCard Spend to be able to send funds directly to an account in close to real time, and provisioning wallets [00:11:00] in close to real time as well. And so the bar is being set pretty high and financial institutions have to really start to consider the way they're processing payments now and recognize that consumer expectations for the way money moves is changing as well.
Ryan Mack: Yeah. If I could, when we're taking a look at modern payments and payments infrastructure, a few key words come to mind. So we've got obviously [00:11:30] like leveraging cloud, modern technology stacks, microservice architecture, APIs, things like that. But Jens, from your perspective, what does a payment solution need to really be innovative nowadays?
Jens Audenaert: Yeah, that's a great question because you used all the buzzwords, and you hear them all the time. But it can't be technology for technology's sake. So, I think we talked a little bit about some of the operational benefits, but for me what makes a payment [00:12:00] solution innovative is really that it's future-proof. There is a lot of things that are changing in the world of payments, and so you can pretty much put a solution in place, a payments platform in place that can cater to what we see today, but the world is changing and it's changing fast.
And so if you think about what processing a payment means, it's authenticating the consumer, it's routing a transaction, it's then authorizing it. You have to be able to do all of these things in a number of ways and adapt [00:12:30] to what's expected.
Authenticating used to be a pin code, or maybe just an online ID and a password. But what about biometrics? What about, Tim mentioned tokenization. You really have to be able to allow any kind of authentication, to route any different way. If you think about open banking and the opportunities that that creates for banks to maybe route outside of the traditional international schemes. Accepting new modalities [00:13:00] and new ways of payments. What about crypto? What about peer to peer?
I think that's, for me, what an innovative payment solution is about. It's really allowing banks to adapt quickly to what we're seeing in the market today, but also what's yet to come. And so that's what things like an API first architecture, microservices architecture, will allow banks to do. Tim, would love your thoughts on that too.
Tim Sloane: I'm totally with you. I mean, you can't underestimate how much payments are changing [00:13:30] right now. We have PayPal who's enabled crypto. Visa announced a billion dollars crypto spent at the point of sale over their network. We have been consulting with financial institutions that are looking at custodial services to help consumers buy, hold and sell crypto. And you have the US government that is shortly going to be announcing their position on central bank digital [00:14:00] currencies. And that doesn't look like it's off more than a couple of years where that could significantly change what's going on. Facebook is also introducing their new currency DM real soon. So there's so much in play right now. Not to mention, faster payments, pay by bank. There are so many new ways to pay it's kind of mind boggling.
Jens Audenaert: Yeah. See, you can't really prepare for everything, but what you want in your solution is a solution [00:14:30] that can adapt to what is to come.
Tim Sloane: Absolutely.
Ryan Mack: Yeah, so speaking of that Jens, if we can, from your perspective, what does a roadmap really look like? Because we covered a lot of ground here and we're kind of like, look, there is a lot of change that's coming and that's already started to begin here. So then, where does an individual really start as they look at all of this change? Where would you say, okay, here's kind of the beginning part and then you can slowly kind of ramp up from there? I'd love to get your thoughts.
Jens Audenaert: Yeah. I mean, that is what we're doing at [00:15:00] Diebold Nixdorf with some of the banks that are on our payments platform, is really making that a seamless transition for them. And that really starts with having the right technology infrastructure in place that allows you, piece by piece, to really move pieces of your overall payment infrastructure onto a new platform that is much more flexible, that is much more adaptable.
So that's the beauty of a modern architecture that is microservices based. You can really think of [00:15:30] functionality piece by functionality piece and slowly but surely migrate over to a new system. And very quickly as you test, move back and forth between your existing infrastructure and what you are moving towards. So, part of the appeal of new technology is also that there is a very attractive migration path for banks that really decreases the risk to move over.
Tim Sloane: Our research indicates that while there's been a significant increase in trust in the cloud and that more financial [00:16:00] institutions are considering it, I'll admit that not enough have gotten there. That they really have to investigate and understand how far the cloud has gone, and how many configurations there are that let them control it and manage it effectively and secure it. That if they actually did that they would start to realize, now's the time. They can't be holding onto that infrastructure with all of the changes [00:16:30] that are ahead, unless they're ready to make a huge investment into that payments processing platform. And most financial institutions can't afford it.
Ryan Mack: Yeah. For a final question before we wrap up, and I think you kind of alluded to this in your last response, but I really want to make sure that the point is driven across for our audience here. So why then is Diebold Nixdorf venturing into the payment space? And what makes your approach different?
Jens Audenaert: Yeah. We're obviously new to this space, but Diebold Nixdorf has been around [00:17:00] for a long time and really understands the banking and the retail world, both through our hardware and our software businesses. I think based on our relationship with banks, based on our existing businesses, we really understood the pain point that banks are facing. And honestly, part of what's the issue here is that you have a mature industry that's not moving forward, it's almost kind of reinventing and disrupting itself. So we saw the pain point [00:17:30] and we're looking to address it in how banks really replace some of their old infrastructure with a very modern technology solution that very few letters in the market are really pursuing today or offering to their retail bank customers. So that's what we're trying to do here at Diebold Nixdorf. it's an exciting new growth opportunity for us. And we are live with a number of banks that are seeing great results so far.
Tim Sloane: It's great to have such a trusted name helping to move payments along at this very exciting time. [00:18:00] Welcome to the party.
Jens Audenaert: Well, thank you, Tim.
Ryan Mack: Excellent. Well, I think we'll end it there. So again, Tim, thank you so much for taking the time today for speaking about banks maintaining the relevancy in this new payments landscape, and I hope to have you both back on the podcast real soon.
Jens Audenaert: It was a pleasure. Thank you.
Tim Sloane: Thanks, Ryan. Thanks, Jens.