The Other Side of Payments with Brandi Gregory

Hello, everybody. From Cornerstone’s headquarters in downtown Scottsdale, this is another episode of Cornerstone’s Plugged In.

Let me tell you a little bit about our guest here.

At Cornerstone, around these halls and across the country, we have 140 smart team members who cover every area of banking, M&A, technology, and lending. But my guest here always says to us, “It’s all about payments,” right?

That’s right. It’s all about payments.

This is our guest, Managing Director Brandy Gregory from Cornerstone Advisors. Welcome.

Thank you. I’m excited to be here from beautiful Ohio.

We love to have guests outside the firm, but this topic is so important that we had to get you on Plugged In right now because there’s a lot to talk about with banks and credit unions when it comes to payments.

Especially as we’re looking into next year, planning, budgeting, and thinking about what we have to work on competitively.

Thank you so much.

Yeah, I’m excited to be here. Thanks.

You’re everywhere, right? You go to all kinds of conferences. You’re talking to the Visas, the Mastercards, the Fiservs all day long.

What are you hearing out there overall? What’s the chatter?

Uncertainty.

I think the number-one thing is uncertainty.

Everyone keeps saying, “Oh, when we get on the other side of the pandemic.”

We are on the other side of the pandemic because I’m here, which means I got to travel and leave my house.

So what do we need to do?

There have been a lot of headlines in the last two weeks. It’s the end of October, and there have been a lot of headlines in October around payments.

Let’s dig into some of those.

At Cornerstone, we love rock and roll music, so we’re going to have little themes here. I’m going to give you a song quote, and it’s going to tip off what I want to talk about.

Brandy, first one: “The best things in life are free, but you can save it for the birds and bees. I want money.”

You’ve been across the industry in the past few weeks talking about Reg II, and we understand this affects our bankers’ and credit unions’ money.

What’s going on with Reg II?

Even as we’re talking about the news, Visa came out this week and actually said Visa will have no impact to income from this change, which is a head-scratcher.

But if we dial back 10 years and think about the impact Visa experienced from Durbin, they lost about 68% of their volume on day one and got it back, let’s just hypothetically say, on day two.

From Visa’s perspective, they’re going to get this figured out before their fiscal year ends.

Their fiscal year started October 1 of this year. This impact theoretically goes into effect July 1, and their fiscal year doesn’t end until the next September.

Whatever happens July 1, they’re going to get it figured out, and they’re probably not worried about what their financials look like.

Tony DeSanctis and I have been talking about this, Steve, and I don’t have the magic globe.

Everyone keeps asking me, “Brandy, what do I budget for this?”

Everyone’s situation is different.

It’s going to depend on what networks you’re with, but we’re happy to talk to people about that.

Right now, we’ve coined it “sad math.”

We’re happy to help you figure out your sad math.

That’s the math that you want to have in the back of your mind.

For some issuers, it’s 9%. For some issuers, it could be 30%.

It just depends on what your spend mix is, how your cardholders act, and what other products you have surrounding it.

I was talking to an institution today, Steve. They still do debit rewards.

They showed me their sad math, and I said, “On July 1, you’ll be ending your debit rewards because you can’t afford it anymore.”

So, in a nutshell, for executives who don’t spend all day long in payments, Reg II really is about card-not-present transactions.

Me on Amazon buying heavy metal T-shirts.

It’s about the fact that a second network will be there, and that tends to compress price when you can route through two networks instead of one.

Is that how you would tell it to an executive who doesn’t live in payments all day long?

Yes, but it also increases fraud.

That’s the second hat trick to this.

I’m going to take away your income because I’m going to route it cheaper, and then I’m going to take away all your chargeback rights because theoretically it’s safer.

The word “theoretically” is intentional because it’s not safer.

As I recall from your articles, webinar, and town hall, I don’t put a PIN in online for card-not-present even though that’s how it routes.

So I’m getting the reduced margin, but I’m not getting the protection.

Correct.

Okay. Bankers and credit unions are doing their sad math.

What’s the reaction going to be when you have sad math and you say, “I’ve got to replace this money”?

What are replacement strategies going to look like in the next few years?

We just started to dig into this a little bit.

Glenn put an article out today in GonzoBanker.

Credit unions, I think, are doing this better potentially than banks. Bank of America has done it.

It’s the relationship rewards.

You’re going to need to look across your entire ecosystem at how you reward your customer to get the loyalty because you could have a 5% loss of income from this, kind of gradual, and then over time it potentially is going to ramp up.

It’s not like, “Oh, I fixed it. I plugged the hole today. I’m good for tomorrow.”

The hole is just going to keep getting bigger.

Your hole may start as a pinhole, and then it’s going to keep growing.

You have to have a secondary way to offset that gradual loss.

I think that’s going to be loyalty and relationship.

Again, I just said you’re going to get rid of debit rewards, which you are.

You need to find other ways to reward people across your ecosystem.

Is it auto loans? Is it lending? Whatever it is, make them want to give you all of their business so that you can start to replace that income.

So you can’t just manage loyalty at the product level. It’s the relationship level.

I think another point there, Brandy, is deposits have not been the bastion of competition.

Rates have been low. No one’s been competing on rate.

Now we’re going to need deposit funding in the years ahead.

It used to be, “I don’t care about balances. Let’s just have the transactions.”

I think you’re going to see some of those rewards also look at balances and other engagement.

Have they recovered yet from overdraft loss?

Right.

I think if you figured out how to tackle loss of overdraft income, then maybe you already have the right strategies in place to absorb this.

But I haven’t met anyone who’s overcome the overdraft loss yet.

Right, exactly.

I remember back in the ’80s a great movie I loved, The Breakfast Club.

My song lyric here, Brandy, is, “Don’t you forget about me. I’ll be alone, dancing, you know it, baby.”

Tony DeSanctis, your colleague in Cornerstone’s payments group, has shared a lot of data showing that payments wallets are growing.

First it was card-not-present. Let me put in my card number or just auto-save that data.

Now it’s, “I’m going to use Apple Pay. I’m going to use Shop. I’m going to use PayPal.”

The numbers I’ve seen that you guys are sharing show that’s pretty substantial three years out.

It’s kind of cliché for someone like me, who’s not as deep as you, to say, “Stay top of wallet.”

Bring that down.

What can I do to stay top of wallet?

How do I make sure my bank credit card is right there in Shop, Amazon, or PayPal?

This is one of the main reasons why I don’t love when people just want to randomly flip their card brands.

In today’s environment, it’s easier to put a plastic card in a wallet than it is to put your plastic across your digital ecosystem.

I’ve got to put it in Starbucks, Netflix, everywhere.

Or I just put it in Apple Pay and use Apple Pay to pay for everything.

But then you’re asking, “Am I doing all the right things?”

There’s no good way to confirm that you are working with your cardholders to get it to the right place because the vendors still are not reporting how well penetrated your cards are into those different tokenized ecosystems.

I was talking to somebody, and they said, “Brandy, we have no idea. We see token transactions, but we have no idea which wallet or where it’s coming from. We just know it was tokenized.”

The processors need to do a better job of preparing and arming institutions and issuers with data so they can figure this out.

But you have to reward people.

I know so many folks are reducing their branch footprint and going digital.

You have to have the outbound contacts. You have to have the call campaigns.

You have to be communicating in whatever way you communicate.

Everybody does it differently. SMS, push, whatever.

Do a TikTok.

Do a TikTok and be like, “Put your card in your wallet.”

Maybe you’ll get the youngsters.

You like to hire, Brandy.

Operators are standing by for the TikTok actress.

But I think that’s what they’re going to have to do.

Now, on this same vein, this week you can buy on Amazon with Venmo.

Right. Here you go.

The regulators, now Venmo just comes along and makes it a closed-loop transaction, completely eliminating the card networks.

That’s super interesting because of the PayPal involvement there and PayPal’s relationship with some of the brands.

Everybody’s quietly trying to build their own closed loop of the future in many respects.

One takeaway, one call to action: As much as you can, work with your processors, work internally, and get as much data as you can about payments behavior.

You have to understand your data.

If you get nothing else, that’s what Tony and I have been saying.

If you get nothing else from the last month, please understand what your data is.

If you can’t get it from your processor, ask someone for help because they have it. You just may not know how to consume it.

Speaking about where we go with this pressure, there’s a song from the ’70s, “Takin’ Care of Business.”

We talk a lot about payments in terms of consumers.

I understand, obviously, that small business is covered by Durbin.

But when we look at our clients, they don’t have the interchange revenue in small business at nearly what they have in consumer.

A lot of community and regional banks are commercial-business focused.

Is there upside out there in banking land for small-business payments growth?

Yes, because people historically just put small business under regular consumer.

They’re both impacted by Durbin.

If you’re over $10 billion, sure, it’s impactful from an interchange perspective.

But for those that are under $10 billion, you need to get your small business out of your consumer because it’s a better interchange rate.

Even though the new Reg II also applies to that, it’s still a better interchange rate.

Those average tickets on small-business online shopping are huge.

If you took those average tickets onto a small-business interchange rate, that would be a game changer for these institutions.

Again, understanding what your portfolio is and where your spend is.

You may not even realize people over the years have opened small-business accounts into consumer because they were sole proprietors.

Okay, so you’ve got revenue. You’ve got higher interchange there if that’s categorized correctly.

You’re probably not engaging them like a small business should be engaged with, maybe with more services on treasury and other things.

I also think what’s interesting right now is if you can get that payments activity, we also want those core deposits now because we just saw the greatest short-term rate increase in the Fed’s history over a six-month period.

Now I need deposits, and I also need interchange.

I think one of the calls to action is to get serious about small-business payment products and that whole relationship right now.

It’s figuring out where to start.

We’re throwing so many things at these issuers, saying, “Go here, go here, look, squirrel.”

So figure out who can help you determine where to look and how to do this.

I’ve seen both of the brands, so regardless of your brand partner, I’ve seen both brands put together killer small-business campaigns to help you tear that out of your portfolio.

They can help you find those customers within your portfolio, target them, grow it, and get those deposits.

It’s a lower lift for the institution.

We can’t forget that you’re paying 23 to 30 basis points of value to these brands for your business.

Make them work for it.

Put them to work for you because they have some really good tools.

I think we probably see that happening.

But for executives out there, you might not be leveraging that relationship enough.

That relationship may be two levels down, and we’re just not pushing the envelope.

For budget time, a good gut check is: Are we really getting the marketing value out of the branding agreements that we’ve got?

They’re getting more data-oriented, segment-oriented, and persona-oriented.

I sat in a meeting and listened to a brand present to a client who was going to tip to $10 billion next year.

They looked at the brand and said, “What are you going to do to help us? We’re going to have this huge impact. What are you going to do?”

We spent two hours talking about commercial.

They’re ready and excited to talk about it, and they want to help.

But they’re not salespeople, if that makes sense.

They’re not shoving their story down your throat. They’re waiting for you to come to them.

I don’t know if that’s the right answer, but just know that there’s a story to be had there.

So maximize your relationship.

No downside to asking.

Exactly.

This year, my wife took me to Vegas to see Lionel Richie.

So I’m going to quote this one: “Stuck on you. Been a fool too long. Guess it’s time for me to come on home.”

What I mean by “stuck on you” is processing in the payments world has really consolidated.

There was First Data and Fiserv, and now that’s one company.

There was Worldpay and FIS, and under FIS there was everything from Metavante to eFunds.

We’re down to a big FIS-Fiserv duopoly.

What does that mean?

Can our banks, credit unions, and regional banks still transform?

Or is that going to slow them down, basically having Coke and Pepsi on the processing side?

They need to go out and find the seltzer water because there is a seltzer water.

The seltzer water. The company that’s not those two.

I’ve been in the business 25-ish years now.

When I started, there were 15-plus processors.

There are also a lot of new processor entrants.

That’s going to be scary for banks.

“I’m not going to go and give all my business to the fintech card processor because they’re potentially just there to get bought.”

Banks traditionally like stability, and that’s what Fiserv and FIS have offered.

I think there are other alternatives out there now that offer that stability where you can be more transformative.

Both of those companies are seeing sweeping changes in their organizations in the last couple of months that really are impacting service.

Just know there are other alternatives where you can go and find service.

You don’t have to be hamstrung by that.

Ten years ago, we didn’t have APIs. We didn’t have open data streams. You had to be in one place.

All of that has changed.

To me, you shouldn’t and can’t blame your card processor or your core provider for holding you back anymore.

You’ve got to look in the mirror and kind of blame yourself if you’re stuck in one spot and not evolving past that because you have options.

That’s kind of which risk you want to take.

I might stay with the large-scale, proven provider.

Do I have slow risk or obsolescence risk?

Am I willing to accept the risk of working with some of these new players?

You’re going to have to at least know how to manage integrations, or at least how to manage vendors doing integrations.

Right.

We talk about how COVID forced digital.

If you feel like your core is hamstringing you but your digital isn’t, focus on digital.

Get that digital account opening solid.

Work on that cardholder self-service.

Don’t feel held back.

There are so many different niche things you can do to advance yourself.

I think that’s a good closing thought.

The collision of mobile banking, digital self-service, and payments is huge right now.

What we find is that there’s still a lot to finish on that roadmap.

It changes daily.

You can’t just be steady, or you’re going to be gone.

I think for next year, we’re going to be fighting more for deposits and payments revenue.

Don’t starve the digital roadmap, even though we’ve got margin to worry about, expenses, and potential loan losses.

Keep plugging away on the digital transformation.

Invest in that today because, over time, that’s going to be a cheaper expense than opening a branch and serving a customer in a branch.

It’s going to be a higher expense in the short term, but over time, it’s going to be a lesser expense.