Big banks counter fintechs by bringing scale to small merchants

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While many of the moves fintechs like Stripe, PayPal and Square make are designed to compete against each other, their biggest threat might be traditional banks — which provide the infrastructure these fintechs rely on and, increasingly, have been flexing their own technology muscle.

While the fintechs that offer merchant loans usually argue they’re lending to the ultra-small businesses that banks don't serve, competitive forces will bring the technology companies deeper into banks’ domain.

“The fintechs are driving all of us to think about how to go to market, to take the friction out of customer experience,” said Julie Pukas, head of U.S. Bankcard and Merchant Services at TD Bank in New York. Pukas' responsibilities include any TD-branded card for consumers, small to medium-sized business and corporate customers in the bank’s 13-state footprint on the U.S. East Coast.
To improve its appeal to merchants, TD is in the midst of a major IT overhaul to link business payments and banking to other parts of the bank. That project builds on top of a digital onboarding system for merchant that the bank launched about a year and a half ago, replacing manual processes with more online access, mobile tech and self-service.

It’s a new model at the bank for customer-facing departments, and TD’s merchant sales reps are the institution’s first sales force to offer an end-to-end digital onboarding experience. That’s reduced time to add merchant clients, replacing scanning and paper-based processes and supporting self-boarding for merchants.

TD Bank did not release specific statistics on how its business banking or payments business has grown as a result of the onboarding project, citing speed as the primary benefit. Today it’s not unusual for the bank to have a sales conversation with a merchant, and that merchant can be operational with the bank and have its merchant and payment system up within 24 hours — a reduction that can be measured in days, according to Pukas.

“When the companies are starting out they want funding, but then as they grow they need to move money, or need different types of funding, or corporate or commercial cards,” Pukas said. “It’s a bit more of an expansive model.”

TD's next step ties the merchant onboarding upgrade to other departments of the bank to expand relationships beyond traditional merchant acquiring, including lending, investments, real estate — eventually the entire bank’s menu of services.

“We can more holistically support our customers as they grow,” Pukas said.

This project is taking place as Square, Stripe and PayPal make myriad moves that give the appearance of banking.

Stripe is combining payment gateways for e-commerce and in-store transactions as it simultaneously considers Stripe cash advances for merchants. That would counter PayPal and Square, which have lent funds to merchants for years, using past and future payments at merchants to inform lending decisions and collect on the loans.

PayPal has been spending billions of dollars to combine transfers, B2B payments and merchant business technology; while Square improves its point of sale hardware and takes steps to become a regulated bank.

TD Bank contends that it can build deeper relationships with added technology.

“TD does merchant acquiring, they know their business’ circumstances and can provide a loan quickly and easily,” said Gilles Ubaghs, a senior analyst at Aite Group. “This gets back to the model that companies like Stripe and Braintree developed. It’s not about the payment but more about an automated approval process.”

The fintechs are doing well with faster automated approvals, and that’s what the banks can improve upon with projects that automate lending and other financial services, according to Ubaghs, adding an integration between merchant acquiring and other financial services can enhance banks’ competitiveness with fintechs. “When these small businesses go to a bank to get a loan, it’s still usually paper-based. And often you’re sent to different departments for different services,” Ubaghs said.

As TD Bank considers a more proactive — and less reactive — response to fintechs and general innovation, it’s also strategically teaming with fintechs to compete in the supply chain and B2B payment markets. It recently announced a collaboration with Bottomline Technologies to offer Paymode-X with Visa Payables. That collaboration is designed to encourage B2B payments automation by pre-setting preferences among a large network of businesses.

“We also look at fintechs as partners,” Pukas said. “We have to figure out gaps in our product lines as we think about the segments that are important to the bank.”

Other banks, such as JPMorgan Chase, Bank of America and Wells Fargo, have also worked to counter fintechs with mobile apps and digital payment services.

Citigroup has made several moves in recent months to build out its business payments services. That includes last week's release of Virtual Accounts, which allow clients to segregate balances in a single physical account. That’s designed to improve visibility, control through centralized payments, receivables and liquidity management.

“Many of these online marketplaces have sub-accounts of merchants that sell on those marketplaces,” said Manish Kohli, global head of payments and receivables for treasury and trade solutions at Citigroup. “We are seeing a growing use case for virtual accounts in this space.”

Citigroup launched its virtual account in 16 markets in Western Europe, with the goal of expanding it further. “Customers like some of the functionality that fintechs provide, but are also looking for robust risk management, global scale and deep understanding of treasury management that typically comes from only banks,” Kohli said.

The Virtual Accounts not only complete with JPMorgan Chase, which acquired WePay to serve online communities, but also counter the fintechs that are actively pursuing online marketplaces.

“Clearly there are multiple fintechs out there who are creating small niche solutions that are directed toward corporate buying centers,” Kohli said. “We continuously scan the market and look for quality providers like that who we can partner with, collaborate with or invest in.”

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Retailers Citigroup TD Bank Square PayPal
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