Listen: Aite-Novarica analyst on why payment interoperability is threatened by legacy technology

Tech and regulatory hurdles stand in the way of a fully interoperable payments environment in the U.S. Consumers increasingly expect an interoperable — seamless and friction-free — payments ecosystem, with several banks and fintechs leading the charge through embedded data sharing and real-time payments (RTP). However, the growth in payments digitization has left many financial institutions and their customers struggling to keep up, Ginger Schmeltzer, strategic advisor at research firm Aite-Novarica , tells Bank Automation News in today’s episode of “The Buzz” podcast. “Most of us who have worked at banks have lived this: legacy technology,” Schmeltzer says. “The payments spaghetti infrastructure that so many banks have — with 40- and 50-year-old core systems that have been added on to and added on to as new technologies and payments come along — make it difficult to introduce new payment technologies.” Technology is only one barrier, Schmeltzer adds. Reticence from both consumers and banks to support data sharing, regulatory concerns from government entities and the hypercompetitive nature of financial services in the U.S. make true interoperability an ongoing challenge for market players. Schmeltzer sees new technologies playing a part in increasing interoperability in the United States. “The growth of application programming interfaces (APIs) over the last five or six years has made a huge difference in the ability for various players to work together,” Schmeltzer tells BAN . “QR codes have really jumped up in visibility during the pandemic, as people are looking for contactless ways to interact. That is really helping to drive more interoperability in a lot of areas.” Listen as Schmeltzer explains what interoperability means for payments systems and explores how financial institutions can move towards facilitating the environment. Subscribe to The Buzz Podcast on iTunes , Spotify , Google podcast , or download the episode .

The following is a transcript generated by AI technology that has been lightly edited but still contains errors. Alijah Poindexter 00:05 Welcome to The Buzz, a bank automation news podcast. I'm Associate Editor Alijah Poindexter. Recently I spoke with Ginger Schmeltzer, strategic advisor at research consultancy Aite-Novarica. Ms. Schmeltzerand I spoke about the hurdles to interoperability and digital payments long with some of the technology that consumers and institutions are using to help overcome these00:23 challenges. And no, that is the big question that kind of led us to do this study was the definition of interoperability. And we in the payments industry, you know, we live it day to day how to all of our definitions around, you know, technical legal compatibility systems, working with other systems, conducting clearing and settling transactions, yeah, we all these kind of technical terms, that all have to do with the actual kind of physical linkages and the back end. But from a consumer perspective, they don't think about any of that, right, from a consumer perspective, they just want it to work. And you know, they want it to be seamless, and honestly, friction free. But really, as we were putting together our research, we talked to payments industry folks and said, Look, you know, put on your consumer hat, take off your your payments industry, you know, employee hat, put on your consumer hat and you make payments all the time, what would it? What would the simple easy payment look like for you? Or what would interoperability mean from a consumer perspective? Well, the first answer was, consumers don't know what interoperable means. It's not a term that any of us use in our personal lives around payments. But there are seven start six, excuse me key things that from a consumer perspective, are what we're looking for with payments, right? First and foremost, it just works, right? It's familiar, it's reliable, we can make sure we know it works every time it just, it's gonna work, too. It's simple, right? Seamless, easy to use, not a lot of steps, not complicated. It's simple. I just, I, you know, I push a button, I hit it, I click something, I hand over a card, whatever it is, it's easy, it works. It's accessible. I can get to that payment method, I can use it. And no matter where I am, no matter how rich or poor I am, no matter whether I'm banked or not, I have an access to a payment method of my choice to conduct my payments, forth, it's ubiquitous, right, it's available everywhere, I can use it where I need to, I can make or receive a payment from anyone for anything. It's just out there. Fast, right? It's just it happens real time near real time. Consumers are kind of trained by you know everything else in our lives to expect things to happen right away. And payments in our perspective should not be any different. And finally, it's secure. Again, consumers don't think about what makes it secure behind the scenes, they just want to know that the payments going to take place, it's going to it's going to go through in a reliable way. And that it's not going to be a fraudulence or steal Carshalton credentials or anything like that. They just they believe that it's going to happen securely, and that someone in the provider universe is going to take care of that for them. That's what consumers think about when you talk about a payment payments being interoperable. From a consumer perspective, that just means that it's seamless, easy, works ubiquitous, accessible, it's something that I just know, I mean, to be able to use to pay or get paid. Alijah Poindexter 03:06 Think I know the answer to this question already. But I'll go out on the limb and ask it. Has anybody been to a bank or a payments provider or a fintech? Has anybody really delivered on all of those fronts you just listed? Or is there like, is this an industry wide trend of not really hitting each of these benchmarks that we see? 03:25 So I think that consumers have and merchants, right, and all of us in the payments industry have gotten used to this? Right? I mean, if you think about payments, it's all additive, right? Cash still exists checks stellar in US car journeys, that we keep adding on new payment methods. And all of us in the space, both of us, those of us who are using payments, those of us who are providing payment technology have to adapt and deal with that. So banks are not just handling cash and cheques anymore. They're handling cash check cards. Zell, you know, other p2p mechanisms, card processing, you know, it's just as an as an as Apple Pay. And so the challenge there is we as consumers have just kind of gotten used to it being a little uncomfortable and not working, right. So I can use my bank account for direct deposit of my paycheck. But when I go to buy something at the at the local store, I'm not going to pay with my bank account, right? It won't work as well. So we have lots of different use cases. And we as consumers have said, Okay, well for this, I'm going to use Pay Pal for this, I'm gonna use my credit card for that. I mean, my bank account for paying the, you know, the local kid who cuts my lawn, I'm going to use Venmo, right? We've just decided that we're going to manage through all the complexity. And at the end of the day, consumers aren't necessarily cognizant of how they can make it simpler, but they want it to be simpler. They need it to be no one has solved that problem across all of those of those use cases. But it's getting there right so think about in 10 years, I guess really since Uber came on the scene but the big appeal of Uber to so many folks despite this, aside from the you know challenge of getting a cab on a rainy day in New York City kind of thing is that the payment just was invisible, right the payment just went away you get in the car Are you want where you told me you wanted to go, you got out and you walked away, you didn't have to fumble with the card or cash or negotiating or any of that it just happened behind the scenes, it was all all seamless. And that was a very exciting and delightful experience for consumers. That's the kind of thing we're starting to see happen more and more, you're seeing that, you know, QR codes have made their way into things like Venmo, and Square Cash. So to pay you, I just scan your QR code, and the payment then happens with one click, it's easy to exchange information with Exchange Bank Account Details, or card info or emails or anything else, we just scan a QR code and happens, right, so we're starting to see simplicity and accessibility happening more and more and speed. What we're still not seeing is that, that that kind of you know, the the, the it just works across the spectrum, you just, I can't say allies, I'm gonna pay you with my Visa card for pay back for dinner the other night doesn't work that way, right? That's not a use case to clickable with a card. But there should at some point, be aware where I say I'm going to pay you with Venmo, you want to start with Venmo it makes Denville and PayPal there, I'm gonna pay you with Venmo and you want to get paid on your Visa card. That should be something that could happen, right? It can't today. But there should come a point where just like, I can email you from my Gmail account, and it arrives to you and your Hotmail account. And that all happened in the background, it's routed it seamlessly, it doesn't matter, right, I don't have one on to both be on Gmail for email to get through. It just it just happens from one to the other. And it happens instantaneously, we should get to a point in payments, where that's going to happen. Now that is a utopian view, right? I get it, I work in payments and have for 22 years, it's not that easy. But from a consumer perspective, it should be that easy. From a consumer perspective, I subscribe to Netflix, I can watch any movie anytime, as long as I pay my subscription fee. Right? It's and it's, I can immediately get that movie, I can download that song, I can get the you know, the this new content that I want for a game I can get to document it's all it's all real time availability payments in the consumers mind is the same way and should be just as accessible. Alijah Poindexter 06:59 So maybe we can take it a little bit deeper, you know, kind of follow up on that. So, you know, what are the biggest barriers? You know, aside from the fact that, you know, I think a big one probably would be like closed networks, like obviously Visa and MasterCard, there's no, you know, there's not really an exchange there. But aside from that, and maybe I could be wrong. But aside from that, you know, what are some of the barriers from both the institutional perspective and the consumer perspective in facilitating a truly interoperable payments environment? 07:25 Sure, and you're not wrong and the MasterCard visa example, one of the biggest barriers is competition, right? Visa and MasterCard aren't you know, they cooperate in some areas like like fraud and things but but at the end of the day, competition banks aren't aren't, you know, motivated to, to cooperate with each other MasterCard and Visa don't necessarily want to cooperate with each other Fiserv and FIS, and square and Stripe and, you know, they all want to be successful in their own company and their own products and their own implementation. So necess not necessarily wanting to make it easy for me to pay you, you know, and match up different payment mechanisms, they want me to pay you on Venmo into your Venmo account, because that's uh, that that works better for that company. And so pushing competitors to cooperate to make a system interoperable, you know, there's a lot of hurdles to making that happen and not unreasonable ones who said, you know, these are all for profit businesses, and they need to make money for their shareholders. So that's certainly one one hurdle privacy is another right consumers most of the time are interested in protecting their data and protecting their privacy. Now, there's always a trade off between security and convenience, right. And so So consumers will share some data in pursuit of convenience or ease of kind of managing their lives. But data sharing is foundational to interoperability from a payment provider perspective, right? If I want to be consumers and share their data, it's really hard for me to do to make things interoperable, because I can't, I can't match that consumer up with the other end of the payment. And so there has to be waived for for managing data sharing and in a way that's comfortable for consumers and for the providers to make this all happen. Another barrier is governments, right? So government policy regulations around consumer protection, around payment enablement around, you know, managing competitive situations, those can be issues as well can go owners government requirements can actually reduce the ability to build interoperability because they are, you know, often in the spirit of protecting consumers or businesses can can cause problems that don't let us build towards interoperability. And then finally, and you know, I think most of us who have worked at banks have lived this legacy technology, right the payment spaghetti infrastructure that so many banks have with you know, 40 and 50 year old core systems that have been, you know, added onto and added on to as new technologies and new payments have come along, make it really difficult to adapt quickly and to to introduce seamlessly and and kind of elegantly new payment technologies. So we've got lots of kind of challenges there. And that's not even mentioning things like consumer education, right? Consumers today have so many different payment types that they're all juggling, right I mean, all of us have a bank account and all of us all this money. In the United States, let's say for those that are banked have a bank account, probably a credit card, probably have a Venmo, or PayPal or Square Cash account or all three have a Starbucks prepaid card, you name it, right, we've got kind of all these things, we're definitely gonna try to buy now pay later loan, we might have a car loan, we have a mortgage, and we have, you know, paying, you know, fees for our kids at schools or activities, or whatever. So we have all these things that we're managing in our lives and all this complexity, which is a bit overwhelming for consumers. So educating consumers, not just on what's out there, and how to use it, but what their protections are, like protections on your credit card transaction, or different protections on your bank account transactions, right. And consumers don't necessarily know or understand the implications of things like that. And so there's a big consumer education hurdle to understand all the different options that are available, how they work together, how they don't work together, how to best protect yourself, and how to streamline your own life around all of that. And then finally, visibility, right? i There's a lot of people out there talking about and say crypto, for instance, most consumers don't know what that is or how to use it, but they hear about it and think, Oh, well, how can I use that? And so kind of visibility into what's there. And what's what's possible, is definitely a big part of it's very closely tied to education. So it is a big part of kind of expanding capabilities around payments and making consumers truly able able to manage interoperability as and when it becomes available. Alijah Poindexter 11:22 You know, every, every payments expert probably well, you know, by definition, they probably have their own sort of take on it or spin on it. But from your perspective, I mean, out of all of those barriers on both the institutional and the customer side, is there one that sticks out to you is like this is going to be like this will be the biggest hurdle, or are they are they all about equal? 11:42 Man? That's a good question. Elijah, it's hard to say that one is more important than the other right? There are there are enablers, right? So if governments, governments, and some markets around the world, say Singapore, for instance, is put into into in a standardized QR code, right, so they've done something that says, Okay, we're gonna make this easier, so that everybody who wants to use a QR code to access a payment mechanism or payment method, it's now one one entry point, and we'll facilitate kind of matching that off on the backend to governments can be an enabler for that. And but can also be a huge detractor, so I wouldn't say there's a lot to be said for that. But legacy technology is a huge hurdle for so many of the companies that are that are well established and well trusted brands for consumers. And so that's a big hurdle. Right competition that is never going to, that never is not going to be a problem, right? There's so many players. And yeah, we see mergers and acquisitions all the time, we see we see roll ups, we see things kind of consolidating and, and becoming, you know, less competitiveness, maybe, but that also creates problems on the other side. So I don't think there's any one barrier that is kind of the most important one to overcome. If I had to pick one, honestly, I would pick consumer education, but it is so tied to everything else, I think that's really challenging. Consumers have so much to juggle in their lives. And part of the reason we did this project was because at the end of the day, consumers, I just want to send an email, I know it's going to arrive, I want to just pay a bill and know that it's going to be done, I don't want to have to deal with all the follow ups making sure the payment posted and did they are they going to turn my water up because they didn't actually receive the payment that I actually sent. And it's that kind of consumers just just want to be able to be confident that the money's going to flow through and get on with the rest of my life payments are such a critical part of all of our lives. And yet something that we just don't want to think about, we want it just to be taken care of, I want my paycheck direct deposited, I want to get a check and go to the bank and have to stand in line like my parents and my grandparents did. I want it just to happen. Right? And outgoing payments, the same thing, I want it just to happen. And I want to be confident that the funds are in my account, I won't overdraft, you know, I won't miss any of the payments, I want someone to help me kind of figure all that out. And, you know, the less complex that can be and the more help I can get in managing that the better. And part of that is allowing me to kind of choose how I how I pay and how I get paid, and make that as seamless as possible. Alijah Poindexter 13:57 So maybe you can delve into the tech side. So you know non card contactless payments, automated environments. You know, what are some of the biggest tech pieces right now, as it applies to payments interoperability like what moving forward? What are going to be some of the key tech pieces or automation pieces to help facilitate that? 14:15 Yeah, that's a great question. And I think that we've already started to see most of that arrive. Right. You know, the growth of API's over the last five or six years has made a huge difference in the ability for various players to work together whether they want to or not, that's a whole nother discussion we could have right I think that that's making a big difference. I think QR codes have really kind of jumped up in visibility during the pandemic as people are looking for contactless ways to interact and that is really helping to drive more interoperability and a lot of areas I think that something else we're seeing finally really kind of take hold in you know, the US and Europe for instance, although they were already there and China mobile wallets right I think the mobile wallets are starting to let you know me I pay with Apple Pay and you get paid with Apple Pay but I can my payment method is in the wallet yours in your wallet can be wildly different. It doesn't matter Apple is the one that's connected Apple Pay is the one that's connecting us on either side. So you're starting to see, you know, technologies come along that are helping to bridge that gap. You know, Zell in the US has really taken off as they've kind of built a more of a system wide interoperability for for bank to bank transfers. So you're starting to see a lot of that happen. And I think consumers are getting much more comfortable with that kind of technology as well. I think that, you know, 20 years ago, consumers would have been horrified at the idea of storing everything on a phone or of scanning a QR code, because I don't know where that goes or what what's happening with that I think consumers are much more comfortable with with new technology and how it enables those interactions. And so I do think that we're starting to see some of the technologies allow that to happen. The fact that we all have a phone in our hands, everywhere we go all the time is a huge enabler for interoperability and, and for for ubiquity, right? I mean, everyone has a phone, maybe a flip phone, and maybe a fancy you know, high end iPhone, or anywhere in between. But we do have the ability to carry a lot of payment credentials, shopping, bank account information, everything right there on the device, there's a camera there's GPS has a lot of ways for providers to verify my identity, my location and the likelihood that I am the person making whatever transaction I'm trying to make, based on a lot of things that are behind the scenes and not really visible to me as the consumer. You've been Alijah Poindexter 16:31 listening to the buzz, a bank automation news podcast. Thank you for your time and be sure to visit us bank automation news.com For more automation. You can also follow us on Twitter or LinkedIn. Please don't hesitate to reach out to podcast your podcast

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