Chris Nichols on the Future of Payments

Intro: Helping community bankers grow themselves, their team, and their profits, this is The Community Bank Podcast.

Erik Bagwell: Welcome to the Community Bank Podcast. I’m Eric Bagwell, Director of Sales and Marketing for the correspondent division at SouthState bank, and joining me, Caleb Stevens. Caleb is a business development officer in our division and also works on the podcast. Caleb, what’s going on?

Caleb Stevens: I’m, good. Good to be back here in 2022. Brand new year. Heard you had a big trip over your Christmas break down to New Orleans? I think, right?

Erik Bagwell: Yes, we did not stay at home. My wife has wanted to do that for a long time on Christmas Day. So we headed out and went to New Orleans up through Memphis, and back to Monroe, Georgia. But it was fun.

Caleb Stevens: That’s awesome. Well, it’s good to be back. Appreciate everybody who has listened over the past, I guess year and a half. I guess we’re going into almost our second year on the show here in a few months, so that’s exciting.

Erik Bagwell: No doubt, I can’t believe. And I think last year we hit our goal. We did 52 shows last year, did a show a week so that was really cool.

Caleb Stevens: We were nervous about that at first because we were like, “Man, that’s a lot of effort, a lot of work. How are we going to find 52 guests?” But, man, we’ve been really fortunate to have some great guests over the past several months. So we’re excited to keep it rolling into this year.

Erik Bagwell: Absolutely. So let’s talk about this show today. We’ve got Chris Nichols. Chris is Director of Capital Markets here in our division, always on the cutting edge of technology and what’s the future looking like as far as kind of all things banking. But today we’re specifically talking with Chris about the payments atmosphere, I guess, and what that’s going to look like, the changes that are going on, and how that affects banks. And obviously, if it affects big banks right now, it’s going to affect smaller banks too. Talk about a little bit what Chris mentioned with us.

Caleb Stevens: Yeah, Chris is one of the most forward-thinking guys in the banking industry, just period, I think. I mentioned on the show, he was recapping this conference he went to, and he had all these big bullet points of all these things coming down the line in terms of what payments is going to look like, cryptocurrency. And so Chris has got an idea minute, he’s a little hard to keep up with because he’s got so much great content. He just goes through so many things that you’re like, “Wow, we could chew on that for an hour if we wanted to, but we’ve only got 30 minutes on this show.” So we appreciate Chris being on, great way to start off the new year, and we hope you guys enjoy.

Well, Chris, thanks for joining us on the podcast, it’s good to see you. How are you doing?

Chris Nichols: Doing well, Eric, Caleb, good to see you guys.

Caleb Stevens: You are super excited about everything payments. In fact, I really enjoyed hearing, or reading, I guess on LinkedIn, some of your takeaways from this big money conference that you went to maybe a month ago. And every day you kind of listed some of the bullet points or some of the things that stuck out to you, kind of recapping the days. And some of the things you were talking about went way over my head, but I was like, “Wow, that’s super interesting. We need to have Chris on the show to talk more about everything you’re saying in the payment space.” So let’s just kind of start here. Why and what do you see ahead for payments and banking?

Chris Nichols: Sure, a great, great question. And yeah, before you get to the real fun stuff and the wild stuff that was highlighted in Money 20/20. Let’s talk the basics of payments. The basics of payments is, for the first time, we have this rise of real-time processing now. It’s been in the works. Some banks have been on it for about two years. But really, we now have about 150 banks processing in real-time, we’re going to have probably another 300 in 2022, including ourselves, as you know, at SouthState. And so we’re excited about it. But it is a game-changer for a couple of different reasons. And one is you’re clearing transactions through the clearing house now and then in the future fed now. And we’ll be able to go both ways and we’ll be able to provide it to our correspondent banks as well, to anyone who wants to get involved. But that additional rail of RTP is a game-changer because now you can clear transactions in real-time without really the credit risk. And so as you know, we live in a batch world up to this point, and we clear payments maybe next day, maybe it’s same day, which is four to six hours. But usually, it’s two, three days for things like bill paying and account-to-account transfers. And so that all goes away and what you have is just a lot more openness and agility to create a bunch of different new products.

And so the RTP rail is one and two, this rise of this payment hub that we’ve been working on that many banks have and we’ll hopefully provide one to our correspondent banks next year. But other fintechs have them and other banks like JPMorgan, and what have you, they have them. And really that’s the paradigm-shifting concept of, “Right now our customers have to decide which payment channel to choose, whether it’s writing a check or getting cash or ACH or wires, etc.” And this industry has been doing our customers an injustice by trying to make them understand the difference between a wire and an ACH, etc., and putting different rules and usually forcing them into a branch actually conduct a transaction, particularly if it’s over $2,500 or $3,500. That all goes away. Each silo has different data segments, has different KYC, AML, BSA requirements, different identification, and so we use different products across each channel, and it really creates more risk for us. And so now with this concept of a payment hub, it’s a game-changer that we can have all our risk in one place, the customer is indifferent, they don’t really care how payment goes. And really, we’ve boiled it down to three things a client cares about, whether it’s a retail customer, or a commercial customer: how fast you can get the payment there, how much does it cost to get the payment there, and how stable or, you know, if I need 100% certainty on some payments, I may choose a different channel. And so those three things, you can boil it down, and you can set it, “how I want to receive money, how I want to send money,” and then you can forget about your application from there on out.

Erik Bagwell: Chris, I was in a grocery store two weeks ago, a little country grocery store near the house. And I was not in a hurry and there was a lady checking out in front of me and it was taking forever. She had a lot of stuff, but it was the only lane that was open. At the end of getting all her items scanned, she pulled out her checkbook, and I thought, “Oh my word.” But I wasn’t in a hurry, so it was fine. But she wrote the check, and it just took forever. Seems to me the changes you just talked about, it’s like warp speed there’s changes in the payments industry. I think a lot of banks, maybe even listen to now, they might be equivalent maybe to that lady, probably not that antiquated. But why should community banks not want to be like that? And how does this payment change going to affect them? And why should they care about it?

Chris Nichols: Yeah, that’s right. So somewhere around 1950s, banks, Bank of America in particular, invented the credit card; subsequently sold that off. Well, it’s been owned by banks, it’s been largely the domain of larger banks. And so with the rise of this payment hub, in particular, RTP, it opens up this whole new avenue that you can quickly get into payment space. And so not to say that any community bank wants to do this, but a Signature Bank or a Silvergate Bank locked onto these crypto rails and just leapfrogged all of the other banks, including all the big banks, to go after these crypto fintechs that are out there and have really made a name for themselves. They trade at high multiples. They’re killing it in terms of earnings growth. And so that’s an example that, taken to the extreme, a community bank can really get involved and leapfrog over the rest of the industry. I mean, really, you can take back what banks had ceded 20, 30 years ago to the Visa and Mastercards in large part. If I’m clearing RTP, I have the network, I have trust, and I have credit. Those are three of the four major things, and the fourth is marketing. But if you add marketing in there, you basically have recreated a card network. So every bank could have their card network. And what’s really important for these community banks to do no matter what size, no matter if you’re 100 million, or you’re 100 billion, you can now take this simple product and go after particular industries, whether it’s payroll or insurance companies or auto dealers, whatever it is, and really change their game in terms of how they handle payments, and you could become relevant to them again.

Caleb Stevens: Let’s spend some time on the crypto side of what you just mentioned, Chris, because we’ve touched on that subject a couple times on this podcast. We’ve had Patrick Sells on from NYDIG, we’ve had Steve Schnall on from Quontic bank. Of course, they have that whole Bitcoin rewards debit card checking account, I believe, something super forward-thinking. Talk a little more about next year, next couple years, where do you see crypto going in terms of how it relates to FDIC insured traditional community banks?

Chris Nichols: Yeah, great question. And the real answer is I don’t know where it’s going to go. I know it’s exciting. And I know so far, it’s changed the way of thinking for a lot of banks. So when we talk about a payments hub, right, I mentioned some of the rails, crypto, like RTP would be another rail. Now, crypto has this huge advantage of you don’t need a centralized authority, so it’s decentralized finance or DeFi. And that allows a couple different things. One, we’ll see the rise of smart contracts. And so now we already have banks using these contracts where you can have program money to do certain things. So the classic example is buying a house. Think about it, you could walk into your realtor on a Sunday morning, find a house that you want, start that process, give them your credit information, have that loan all on the blockchain, have flood insurance, your credit checks, all that verified on the blockchain, and you could actually transfer money on a Sunday evening to close that house. So that’s unheard of. And that’s maybe an extreme example. It is currently being done in some fashion in kind of a beta or alpha test mode but that will become commonplace. And if you think of all the areas where we could have these smart contracts, or crypto in general, that you don’t need a central bank, any commercial bank, the Federal Reserve involved, it’s a game-changer. And so now you can deal with money across borders, across different time zones or times, and you can move money. And so if I have to send a million dollars, and I want to verify identity, and I want to maybe escrow those funds for certain things to happen, I can do that during the crypto rails.

And so, I think all banks have to start thinking about what’s ahead for crypto. We saw the White House working paper a couple of weeks ago that basically said crypto will be largely the domain of the banking industry, because of the regulation, the framework that’s already in place, that’s going to be the first push. It was a clear message to the Facebooks of the world, which they have the Libra, the Diem cryptocurrency, you know, they’ve invented their own, Uber, etc. A lot of these fintechs wanted to get involved and wanted to create their own crypto rail and cryptocurrency, and the regulators kind of got together along with the White House and said, “No, we’re going to slow this down and be methodical. And by the way, it’s going to go by the way of the banks.” And so, banks have to start thinking about this. How they actually pull this off will be a question. You may just want to custody; you may want to allow transactions.

I mentioned the Signatures and Silvergates of the world that have gone all-in and went after the crypto exchanges and have done a great job doing that. Even with our footprint here at SouthState, it’s debatable how much our customers want it. But I can tell you, in some of our branches, we can get 20, 30 inquiries a quarter of customers wanting to hold crypto. And the number that everyone throws around is 22% of all community banks’ customer base have crypto in some form, and it’s at an exchange Coinbase or Gemini or something like that. And wouldn’t it be nice to have it all in one account? So a bunch of things to think about. It’s probably too soon for many community banks, but I do think it needs to be on the radar screen. And I do think most banks will be surprised that their customer base wants to start trafficking crypto or holding crypto, if nothing else, as a legitimate asset class.

Caleb Stevens: Yeah, I was going to say, so for the CEO who’s listening who maybe crypto hasn’t been on his or her radar up until this point, but now they’re looking around saying, “Wow, this really is a thing. It’s no longer just a fad that I thought it was four or five years ago.” Maybe they’re a little scared of it. Maybe they’re not educated on it. What’s an easy first step to sort of start preparing, assuming they want to be around for the long term, and they want to continue to innovate in their bank? What’s just some easy things they need to start maybe doing or thinking about?

Chris Nichols: Yeah, great question. Insightful. When the apple credit card came out, I went to bank conference after bank conference and just implored the audience, “Go get one right now as I’m talking. Sign up for one, understand the customer experience.” I say the same thing with crypto, particularly, “Christmas is right around the corner, etc., give the gift of crypto. If nothing else, challenge yourself in the new year to go buy $10, $5, $100 whatever it is, of various cryptocurrencies to understand it.” And we actually published a blog about this. So, some of my favorites, it’s definitely Bitcoin, it’s Ethereum, it’s Algorand, it’s Cosmos. There’s a bunch of different blockchains but you need to buy the underlying crypto. And this is a game-changer in case any banks think that this may not catch on. To be able to invent something on the blockchain, like a payments product, whether it’s a smart contract for invoicing, or just trading concert tickets, whatever it is, to invent a product and then be able to invest in the underlying traffic or flow of that has never been seen on the face of the earth. So I liken it to inventing the light bulb, and then running out and investing in electricity at the same time. And unlike other investments, I have near-perfect clarity into what’s happening on any given blockchain. I know what developers are on it, what they’re doing, what the hashrates are, and so I can project forward. If I see a lot of developer activity, inventing these different light bulbs on a blockchain, I can now say, “Well, I have a lot of certainty that Ethereum, which I was just looking at this morning, is going to continue to go up because I know all the activity.” All the smartest minds right now are gravitating towards crypto in the blockchain, they’re going to continue to invent these game-changing products that are going to pay off and you’re going to have to have the underlying, or native crypto, whether it’s Ethereum, or whether it’s ATOM or what have you, that’s going to support that to transact it. So it’s a pretty good investment.

When people say there’s no intrinsic value like gold, that you can turn into jewelry or use for electronics, I kind of rebut that and think like, “Actually, it’s more intrinsic in value, because you actually see the products that are being used on the blockchain in real-time. I can’t get that with any other investment, including equities. When I invest in Amazon or Google, I just have to rely on their public releases every quarter of their financials. I can go to Ethereum and see what’s happening right now, what kind of activity is going on, what kind of mining is taking place, I know the supply and demand. And so all that has some real nice properties for investment. So I’d say step one is to get your staff or at least yourself, go out and invest in these different currencies, use Coinbase or use some easy way to log in, get yourself a digital wallet, start exploring how these move. And they’re volatile. And they’re volatile, because there’s no central bank, and there’s no commercial bank holding reserves. And so, when we say that it’s never going to be a currency, I say, “Yeah, but it’s a pretty good store of value and a pretty good predictor of the economy right now.” And so, you’ll learn that as you hold it.

Erik Bagwell: Chris, you mentioned somebody buying a house and using these types of payment processes. What other types of customers for banks would benefit from these new payment tools?

Chris Nichols: I mean, that’s the beauty is it’s a green field, a wide-open space in which to invent. And so we saw New York Community Bank is one that handled the mortgages, and they’re able to securitize the mortgages right on the blockchain and handle the payments accordingly. And so that took about 100 plus basis points out of that transaction. That opened up a lot of eyes. So the mortgage side is one. Anybody that handles invoicing. For some reason, you get paid monthly or every two weeks. And if you’re a gig worker, you get paid every day. So, if you work for Uber–So there’s a lot of payment companies that would now have cheaper payments, and payroll companies that can now pay their employees every day. And so, payroll companies is a big one. Insurance companies, law firms. It goes on and on that you could invent these specialty products, based on what their needs are in terms of flow of funds.

So, with real-time payments, or with a payments hub, for example, you can have the sub-accounts. And so, there’s all sorts of companies that could benefit from having a sub-account. So, you actually don’t need a separate bank account. But if you just think of your normal household, you may want a sub-account for savings, you may want a sub-account for your vacations, for your kid’s college fund, and you don’t need separate physical bank accounts anymore, you can now hold those in this additional application layer within your payments hub. And so, it’s a wide-open space, we’re just at the very tip of the iceberg. But I do implore banks to start to get involved. There are many clear paths out there for law firms, for homeowners’ associations, realtors, you name it, there are specialty payment applications for them. Charities, nonprofits, municipalities, utilities, I can go on and point to fintechs that are delving into these spaces, and a bank should think about partnering, but they should also be exploring on their own and possibly inventing a way to get into a niche market.

Caleb Stevens: Well, as our listeners are thinking about their strategic plan for 2022, I mean, just thinking off the top of my head, I would imagine that thinking about NIM compression, they’re thinking about, “How are we going to grow loans? How are we going to grow fee income? What are we going to do in our securities portfolio? Should we wait until rates rise? Should we invest lower for longer?” There’s a lot of things on the minds of our listeners right now. Where should payments be in their payment strategy? Why should that be on the list of all of these pressing issues? Because certainly, I think you can make an argument that there’s things that are urgent and important. Would this fall in that category as well? Or would this maybe be not urgent but important from a long-term perspective? Where do you kind of see that in the list of initiatives?

Chris Nichols: Yeah. And I think the question you just asked is one that’s mandatory with all banks. I mean, a bank may not decide to go into payments, but like you said, you should have to force rank your management team and board to say how important payments are and where do they rank and figure out maybe it’s not important, maybe it’s too much risk or too much effort, we don’t have the expertise, etc. Or it’s really important. And I would put it, for any bank with long-term aspirations, as really important. It’s part of cash management, treasury management. I believe that you’re not going to be relevant to the customer unless you can handle their payments transactions on a day-to-day basis. And everybody will go at least real-time processing over time because it’s faster, cheaper, it’s without risk, they’ll be using these payment hubs. And so, to get that company to get the main checking account and the main transaction account of each of these small businesses and midsize businesses, you’re going to have to have an application like this.

And if you say, “It’s not important,” or if you say, “I’m going to wait five years, maybe to do this, or three years to do this,” you may not have the time to change the treasury management system of these banks because they’re going to be so intertwined. And so right now, why I’m pushing this so much for our bank and for other banks is 2020, you’re going to see the separation between the haves and have nots within the payment space. And so I think that’s the important part – move sooner rather than later. But even if you choose to move later, you’re going to have to have some sort of payment application to handle your good customers. Otherwise, you’re going to cede that treasury management function to the larger banks, and community banks are going to be scrambling just competing on lending, or one-off products that’s going to be more commoditized and you’re not going to be real relevant.

Caleb Stevens: And who specifically inside a typical, maybe billion dollars or less community bank needs to really champion this, because I’m thinking from a CEOs perspective, he or she’s got so many different priorities they’re having to juggle at one time, is there someone in the bank that you would recommend, “Hey, leaders, make sure you designate somebody to really lead the charge on this”?

Chris Nichols: Yeah, it’s different from different banks. And you’re right, there does need to be a leader, someone that can be accountable for payments. Hopefully, it’s a payments person. If not, it’s probably someone in the treasury management function. If not, some banks, it’s in IT. I think that it should be a business line position. And I think they should be closely aligned with treasury management or cash management for a bank and be part of that team that goes after trying to bring in new relationships and commercial customers in particular but also, for households. You know, for retail, we have it figured out with P2P – Zelle, Venmo, etc. Some banks are using those applications. And I think the next iteration is, “Okay, how can we be more important, more relevant to both the household and that business?” But you’ll see things, which is ironic that banks will charge for escrow. So, you’ll actually pay to hold your money up to have a third party verify a transaction. So, the proverbial concert tickets that I buy online, I’ll have a third party verify that they’re not counterfeit, they’re legitimate, and then release the funds. And I’ll pay for that as a consumer and charge for that as a bank.

And so you have new product ideas everywhere. You’re not going to be involved in the conversation unless you go down the RTP side, the payment hub side, and then start exploring crypto, all that opens up. So somebody needs to be responsible for that and to explore, because I think that even if you dabble in it in 2022, you’ll have a much better understanding. So should we see, which I believe we will, a US central bank digital currency, you’ll be able to understand how that works. And so, my prognostication for the future is that we’ll be minimizing the crypto rails but the crypto rails will still be around and will be a very large part of the payment channel and payments hub of banks, but we’ll also see a US digital currency. And I think that’s going to be a paradigm shift for many banks. And those banks that can’t keep up is one reason why I think we’ll see 1000 community banks in a five-year, 10-year period of time.

Erik Bagwell: Well, Chris, this has been a fascinating conversation. I think if we have had this conversation five or 10 years ago, it’s like speaking another language. And I guess the moral is don’t be the lady at the checkout counter writing a check.

Caleb Stevens: What is it, the law of diffusion of innovation, that bell curve, and you’ve got the innovators, the early adopters? I forgot all the different ones. But yeah, definitely don’t be towards the back end of the curve if you’re listening.

Erik Bagwell: Absolutely.

Chris Nichols: Yeah, we just passed the hype cycle and so now you’re going to see in 2022, the real products come out. And again, it’s experimentation, so in addition to getting Ethereum, if you don’t have an account at a Capital One, or Wells Fargo, or JP Morgan, get one and transfer money at six o’clock in the morning, and you’ll see how easy that is and how it was free. It’s free to do it. And then you open up and start to understand, yeah, this frictionless payment hub is going to catch on and payments are going to be a big thing and a way to hold customers and retain them and drive deposits as well as fee income. Thanks for having me on. It’s been great talking to you guys.

Erik Bagwell: Chris, thanks for doing it, man. Appreciate it.