Citigroup Launches New Digital Payments Unit

Summary

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WSJ Your Money Briefing – "Citigroup Launches New Digital Payments Unit"

Date: March 27, 2019
Host: J.R. Whalen
Guest: Telis Demos, Wall Street Journal Reporter

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Episode Overview

This episode focuses on Citigroup’s entry into the rapidly evolving digital payments sector. Host J.R. Whalen and reporter Telis Demos discuss why banks like Citigroup are targeting digital payments, the changing landscape of merchant-customer transactions, challenges such as fraud, and the competitive dynamics between banks and fintech companies. The conversation also touches on broader trends in real-time payments and the strategic positioning of major financial institutions in this high-growth area.

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Key Discussion Points & Insights

1. The Shift to Digital Payments ([02:52])

• Evolution of Payments:
  Telis Demos explains how processing credit card payments was once a commoditized, low-margin business that many banks exited. Now, due to the proliferation of payment options (Apple Pay, PayPal, Alipay), the field is hot again.

  “For a long time it was totally commoditized ... Each transaction would make fractions of a cent. This just wasn’t something where the banks really saw a lot of room for them to add value.” (Telis Demos, [02:52])

2. Explosion of Payment Options and Fraud ([03:48])

• New Ecosystems:
  An increase in e-commerce and digital "wallet" options has diversified the landscape, introducing new forms of payments and risks.
  • Platforms like Apple Pay, PayPal, Alipay, and Paytm provide alternatives to traditional card payments.
• Fraud Risks:
  The proliferation of digital transactions has increased fraudulent activity, compounding merchants' and banks’ challenges.

  “Now merchants are having all these problems with accepting credit card payments that aren’t real ... you’ve had all of these new challenges introduced into what was a pretty basic, pretty standard business over the last few years.” (Telis Demos, [03:48])

3. The Bank’s Key Strength: Data ([05:19])

• Why Banks Matter:
  It's not just about trust—banks’ access to sweeping transaction data gives them unique fraud-prevention capabilities.

  “It’s not so much about credibility as it’s about data. Banks bring a tremendous amount of knowledge about individuals and about transactions ... If banks are both the issuer and then also the acquirer...they can see both sides of the transaction and essentially be able to say, okay, we know everything about this transaction.” (Telis Demos, [05:19])

• Balancing Fraud and User Experience:
  Banks and merchants strive to weed out fraud without creating friction for legitimate customers.

4. Making Payments Faster ([06:16])

• Settlement Delays vs. Instant Transfers:
  Currently, credit card payments don't result in immediate fund transfer to merchants. New technologies are enabling instant movement of money, which both consumers and merchants desire.

  “There are new technologies that basically make it possible to move money instantly. Banks are beginning to think about how they can bring some of those tools to bear to actually move those dollars right away rather than having this delayed movement of money...” (Telis Demos, [06:21])

5. Strategic Opportunity: Banks vs. Fintechs ([07:24])

• Expanding the Relationship:
  Traditionally, banks handled B2B transactions for large companies; now they want to extend their reach to consumer payments, leveraging global scale.

  “They’re seeing an opportunity to leverage their global nature...for companies that are touching consumers in many different parts of the world all at the same time.” (Telis Demos, [08:23])

• Banks vs. Payment Startups:
  Fintechs like Adyen and Stripe pose serious competition; banks must respond with either better deals or by investing in cutting-edge tech.

  “Those technology companies are fierce and they are well funded and they have a lot of resources to continue to innovate. Banks will have to find ways to keep up with them...” (Telis Demos, [09:09])

• Comprehensive Service Offerings:
  Banks may not win on technology alone but can offer clients integrated financial services as a key differentiator.

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Notable Quotes & Memorable Moments

• “The era of digital payments...is not in its infancy anymore. It is here to stay, and big banks want a piece of the action.” (J.R. Whalen, [02:32])
• “If banks are both the issuer and then also the acquirer...they can see both sides of the transaction and essentially be able to say, okay, we know everything about this transaction.” (Telis Demos, [05:19])
• “It’s going to be really interesting to see how that landscape evolves over the next few years.” (Telis Demos, [09:37])

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Important Timestamps

• [02:32] - The rise of digital payments and banks’ renewed interest
• [02:52] - The evolution from card swipes to diverse payment methods
• [03:48] - How fraud challenges have accompanied new digital options
• [05:19] - Banks’ unique data advantage and fraud prevention capabilities
• [06:21] - Innovations in speeding up the flow of funds
• [07:24] - Banks’ efforts to expand from B2B into consumer payments
• [08:23] - Global opportunities for banks and the challenge from fintech competitors
• [09:37] - The uncertain future competition between banks and tech companies

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Summary

This episode provides a detailed look into how and why Citigroup—and large banks more broadly—are striving to innovate in the digital payments space, an industry marked by fast-changing technology, new entrants, and shifting consumer habits. Through the lens of Citigroup’s new digital payments unit, listeners gain insight into the competitive dance between banks and fintechs, the ongoing challenges of fraud, the growing importance of instant payments, and the broader industry implications as these financial giants chart their future course.

Transcript

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[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. Citigroup wants in on the action when it comes to digital payments and to make it easier for consumers to move money from point A to point B when paying for goods. We'll have more on that in a moment. First, these money and market stories you should know Good news for home buyers Home price growth slowed for the 10th straight month in January. Prices of homes in major metropolitan areas across the rose 4.3% in the year ending in January. That's down from 4.6% the prior month. Slower price growth, along with lower mortgage rates and a growing inventory of homes for sale, are all potentially good news for home buyers this spring. Now, alongside that data, construction on new homes, what's known as housing starts, fell almost 9% in February. They're below averages from a year ago. But falling interest rates could spark home buying and in turn more construction. After approaching 5% last month, the average rate for a 30 year mortgage has since fallen to 4.28% as of last week. Meanwhile, consumers might not have as rosy an outlook as those in the housing market. The Conference Board on Tuesday said its index of US Consumer confidence declined in March. More specifically, consumers who described business conditions as good as fell to 33.4% in March from about 40% in February. But there is a silver lining. Consumers slightly raised their expectations of short term income prospects, suggesting the tight labor market could lead to higher wages. About 21% said they expected higher incomes. That's just slightly up from 20.6% in February. The era of digital payments and the ability of customers quickly move money to pay for goods is not in its infancy anymore. It is here to stay, and big banks want a piece of the action. Wall Street Journal reporter Telus Demos is here with some details. So tell us. It's Citigroup, that's the latest bank that wants in on this fast growing area of the banking sector. Or as you put it in your story, the hottest area of the banking sector. And that is linking merchants to customers.

[Telus Demos]

That's right. For a long time it was totally commoditized the business of essentially accepting credit card payments on behalf of a merchant. It was pretty simple. People wanted to swipe their cards, they'd go to a terminal, they'd walk into the store, go to a terminal, swipe their card. Somebody needed to do all that processing work. Banks had years ago, outsourced all that basically. First you saw the creation of the Networks, Visa and MasterCard. And then you saw these processing businesses that were set up to work with retailers and other merchants in order to get them to accept those. In fact, banks used to own some of those companies. They'd spun them off years ago or in the process of doing so because it just wasn't that great of a business. It was all about volume. Each transaction would make fractions of a cent. This just wasn't something where the banks really saw a lot of room for them to add value.

[J.R. Whalen]

We can trace this to last year when banks lined up to be a part of the real time payments network to move money instantly between customer accounts.

[Telus Demos]

That's right. What's happened over the last few years is that the business has gone from a pretty basic accepting card swipes at terminals type thing, which was the vast majority of activity, to this explosion of payment options and types and things like that. Think about all the shopping that you do online. Think about all of the wallet options you have now. Are you using Apple Pay? Are you using PayPal? If you're in another country, are you using Alipay? Are you using PayTim? There are all these new and different ways to pay. Some of them involve credit cards, but in a way, some of them involve entirely new types of payments where you're spending money within an ecosystem and merchants are trying to get in on that. Plus you have, with the advent of more online commerce, you see an explosion of fraud. Now merchants are having all these problems with accepting credit card payments that aren't real. You've had all of these new challenges introduced into what was a pretty basic, pretty standard business over the last few years. Now banks are kind of coming back into that business and finding or searching for lots of different ways to make money within payments.

[J.R. Whalen]

Again, you mentioned the fraud. With all this convenience and all the different options, there has been fraud that has emerged for the banks. Is it fair to say they bring a lot of credibility here for the merchants to rely on them to run a clean process here in getting money from point A to point B, it's

[Telus Demos]

not so much about credibility as it's about data. Banks bring a tremendous amount of knowledge about individuals and about Transactions from their other businesses that they can then bring to bear in the payments. In the consumer payments realm. Right. For example, banks issue credit cards. If banks are both the issuer and then also the acquirer, that is the party that accepts the payment, then they can see both sides of the transaction and essentially be able to say, okay, we, we know everything about this transaction. So therefore we know that it's genuine. And what merchants are looking to do is find ways to reduce the fraud rate so that they don't end up on the hook for owing money that they don't have, but also that they don't end up stopping transactions that might otherwise be genuine and creating friction for the customer. So banks bring tons of data and that's been the rationale behind a lot of recent deals, new ventures in this area.

[J.R. Whalen]

Does it also help with the speed factor and efficiently getting money from point A to point B?

[Telus Demos]

There are ways that banks think that they could accelerate the speed of payments. For example, the way that credit cards and debit cards mostly work today, especially credit cards, is that there's an instant transaction where you pay, the merchant is paid, but the actual dollars behind that don't necessarily move right away like you might see in your credit card statement pending transaction or. And the merchant doesn't actually necessarily get that cash right away. They get paid on some delay. Depends on each merchant and how they're set up. Now there are new technologies that basically make it possible to move money instantly. Banks are beginning to think about how they can bring some of those tools to bear to actually move those dollars right away rather than having this delayed movement of money that frustrates both consumers and merchants. At times, banks see that as one opportunity for themselves.

[J.R. Whalen]

Also. One of the baseline realities here is the banks are hoping to drum up more business.

[Telus Demos]

Yeah, ultimately the banks see they have clients that they handle a lot of business for a lot of transactions. Business for in what they call the B2B or business to business realm, that is I'm making something. I have suppliers that sell me parts. I need to pay them with wires or cross border transfers. I'm receiving, receiving payments from retailers. I'm making widgets. They're being sold through a retailer. How does the retailer pay me? Where do I keep my money? All those things are what banks do for large companies, including a lot of retailers and merchants. They're looking to extend that relationship now into a new realm. Some banks have already been there for a long time. JP Morgan has had an acquiring and merchant payments business. They've worked with big companies for a while, but they've been introducing all kinds of new ideas into that. For example, Chase Pay, which is a way for Chase not just to handle the transaction, but actually give the consumer an app that would allow them to pay Citigroup. Now, Citigroup has been the dominant player in those business to business payments and transactions for many, many years. They do it globally. Now they're saying, okay, we want to be in an additional part of that chain, which is the place in which the merchant touches the consumer. They're seeing an opportunity to leverage their global nature to be able to do that for companies that are touching consumers in many different parts of the world all at the same time. Banks are also seeing opportunities to take back some territory from some of the technology companies that have emerged over the last few years, like Adyen and Stripe, to help companies do payments more seamlessly, more globally and things like that. But those technology companies are fierce and they are well funded and they have a lot of resources to continue to innovate. Banks will have to find ways to keep up with them, either by offering customers a better deal like, okay, maybe we don't have the best technology in the world, but we can do it for you as a loss leader for other services. Or they can say, you know what, we have so much money, we can actually invest in all the latest and greatest technology as well, and we can offer you something that those technology companies maybe can't, which is like a complete banking relationship. It's going to be really interesting to see how that landscape evolves over the next few years.

[J.R. Whalen]

All right, we'll see what the future holds. That is Wall Street Journal reporter Telus Demos here in our studio. Telus, thanks for coming on the show.

[Telus Demos]

Thanks for having me.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for

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