The Executive Interview Series provides readers with exclusive insights from movers and shakers in the payments industry. The Payments Industry is under continuous transformation, as such this series provides diverse perspectives on everything from strategy to payments technology and to the future of the industry.
In this interview, TSG’s Market Intelligence team-member Alex Ferguson spoke with BHMI CEO Dr. Jack Baldwin to learn more about his thoughts around the payments industry and the effect the COVID-19 pandemic will have on its future.
BACKGROUND: Jack T. Baldwin is CEO and Chairman of BHMI, a leading provider of enterprise software applications and creator of the Concourse Financial Software Suite. Prior to co-founding BHMI in 1986, he had accumulated decades of experience in business and academic computing. For over 30 years he has been active in the software payments marketplace as a leader at BHMI.
Q: Alex FergusonWhat do you see as the short-term and long-term effects of the current crisis on the payments industry?
A: Dr. Jack BaldwinShort term, the impact I see for the payments industry is similar to the impact I see on the economy as a whole, a major contraction of economic activity, i.e., fewer purchases = fewer payments. For fintechs or other payment processors that are compensated directly or indirectly by the volume and amounts of financial transactions they process, reductions in either dimension will have a direct effect on revenue. Initially, payments processors handling transactions for customer-facing businesses will feel most of the impact of the economic shutdown. For example, processors active in the hospitality and retail industries will be negatively affected. However, financial processors for online businesses should see an upsurge in business as consumers are forced to purchase goods and services online because of isolation at home.Long term effects will be determined by how long economic activity is curtailed. If governments continue to constrict business as a consequence of combating coronavirus for an extended period, then cash-strapped consumers will not be able to purchase discretionary goods and services. Even online processors will feel the pinch as all types of purchases shrink. All payments companies dependent on transaction dollar volume will suffer.
Q: Alex FergusonIs there an aspect of the pandemic and the current state of widespread quarantining that you think most people haven’t considered in its effect to commerce?
A: Dr. Jack BaldwinRight now, everyone is concentrating on getting through the pandemic with the least loss of life as possible. So the issue of the moment is disease containment. “Social distancing” is the new catchphrase everywhere, and in some hard-hit locales, lock-downs are being ordered to force individuals to isolate themselves. Nevertheless, there is recognition that people and businesses are being hurt by the current situation, and the current $2 trillion bill by Congress is targeted to help individuals and companies economically survive the latest crisis. But even $2 trillion is insufficient to carry the economy for an extended period. At some point economic activity needs to return to a more normal state to prevent the U.S from entering a 1930s‑style depression. Presumably that time will occur when the “All clear” signal is given that individuals and businesses can resume normal life. But the question is “What determines when the ‘All clear’ signal can be raised?” A number of pundits have noted that at some point the coronavirus cure will be worse than the disease; i.e., the consequences of a locked down economy will become worse than the consequences of unchecked coronavirus. President Trump was noting this when he declared that he wanted restrictions on individuals and businesses to be over by Easter. I don’t think enough people are considering the medical trade-offs that might be necessary to return the U.S. to a normal state.
Q: Alex FergusonAre there certain sectors of the economy that you feel will be hit hardest by the COVID pandemic? Are there one or two verticals that you think will be hard hit that would be a surprise to people?
A: Dr. Jack BaldwinRight now, the businesses that are being impacted by coronavirus concerns are hospitality‑related businesses or other businesses that involve customer/vendor face-to-face interactions. This latter category includes most retail establishments. Additionally, organizations with employees who are blocked from work, but who cannot work from their homes, will be impacted because their workforces become totally nonproductive, and in some cases this happens overnight.If the current curtailment of economic activity continues for many months, surprises may be in store for businesses not currently negatively impacted. For example, most stores selling cleaning and janitorial supplies are currently experiencing an upsurge of business because of the focus on disinfecting cleaners and paper supplies like paper towels and toilet paper. However, as businesses shut down temporarily or permanently, then the need for cleaning services disappears and, by extension, so does the need for cleaning supplies. This economic knock-on effect will be pervasive.
Q: Alex FergusonSpecifically, in the realm of payments how do you feel a prolonged closure of non-essential businesses will affect the industry?
A: Dr. Jack BaldwinAs noted previously, as economic activity shrinks so do payments, both in volume and amounts. Some credit card processors that cater to bars and restaurants have reported that sales from many of their customers have fallen more than 50%, primarily from decreased sales of alcoholic beverages that can’t be purchased for carry-out. On the other hand, credit card usage is surging for online sales as individuals are forced to order goods and services online while isolated at home. However, this activity will decrease over time as individuals and businesses run out of cash. This is one of the reasons for direct cash payments included in the $2 trillion economic stimulation package. This helps keep cash-strapped consumers as active purchasers of goods and services.
Q: Alex FergusonHow do you think payments technology and the industry itself will grow and adapt to the state of current global affairs?
A: Dr. Jack BaldwinPayments‑focused organizations will adapt, just as other businesses will adapt. For example, there are already businesses advertising coronavirus testing services. The issue is – how will basic economic activity be affected by the coronavirus pandemic? If vaccines and / or medical treatments are devised quickly so individuals and businesses can resume normal economic life, then a post-coronavirus world will not look much different from today. If not, then many payments companies will likely shrink or disappear as payments amounts and numbers shrink. It is difficult to imagine that world governments will allow their countries to fall into depression.
Q: Alex FergusonWith the current crisis in mind, are there any parts of the payments ecosystem that you feel are inelastic and won’t change in response to this crisis?
A: Dr. Jack BaldwinAs profits shrink in the payments industry, some marginal players will be forced out of business because of the need for payments businesses to cut costs. For example, some ISOs may disappear as processors assume more payments processing responsibility. Other ISOs may start offering better, cheaper services that allow some payments processors to outsource some aspects of payments handling because internal operations are more expensive.
Q: Alex FergusonSpeaking more broadly removed from the current pandemic, what do you think the payments technology and the industry will look like a decade from now?
A: Dr. Jack BaldwinI think we’ll see more mobile payments activity as older consumers who are not particularly facile with mobile technology are replaced by younger consumers who consider mobile devices as indispensable tools of daily life. China is one example of a society that has essentially leapfrogged over card-based payments – in many instances, mobile-originated payments are the only types of payments that businesses will accept – even cash payments are excluded. There is a reasonable chance that facial and voice recognition technology may eliminate the need for any payments originating device, mobile or otherwise.