Traditional institutions have dominated the Payments industry for yonks. But will this status quo – in which payment systems continue to be run by and for the major banks – last?
Barriers to entry for many banking services, including payments, are now lower than ever and regulations such as the Payments Services Directive 2 (PSD2) are opening up the market to new, non-bank players, suggesting that the future of payments could really be anyone’s game.
The whistle has been blown and in a matter of months, the mobile payments sector has been swamped with Tech Giants. Within three days of launching Apple Pay it had 1 million credit cards on file. But Apple are far from smashing the leader board just yet, with Google, Amazon and Facebook muscling in on providing some traditional – discrete - Financial Services.
FSIs may feel they're a shoulder ahead
You’d have thought that traditional institutions would be quivering in their boots, but evidence suggests that they may not feel quite so threatened. About half of the European banks recently surveyed expect non-bank players to have either a low or very low impact on retail bank card and non-card payments.
In terms of “core” banking, you can sympathise with this position of confidence; banking is rife with stringent regulation, compliance costs and roof-high distribution costs. It’s also a much slower growth sector compared to those that the Tech Giants are used to. In this sense, it’s unlikely that I’ll ever find myself opening a deposit account with Facebook.
But the FSIs should brace for a tackle
Bank should, however, feel the heat of Tech Giants working their way around the fringes of mainstream banking, for example payments services, money transfers and loans. Apple, Google, Amazon and Facebook are also eye-ing up the front-end financial services and is this any surprise? These technology brands have huge global customer followings and they excel at customer services. Their business models are built around the customer and they’re agile enough to respond to new demands. These players are likely to be looking at owning more and more of the payment process – before, during and after the transaction – this would put them in a powerful position able to capture purchase behaviour insight together with benefiting from high frequency, low-margin revenue.
And the fans are screaming for the Tech Giants
Not only are Tech Giants well positioned, they may also have the customer fans to pull them to the finish line; recent streams of banking scandals and account outages, plus poor customer service, means that customer trust and confidence in the banking system is at an all-time low. Customers are looking for something new and vibrant and quite probably “non-bank-like”. The benchmark for what customers expect from their financial services provider is increasingly driven by experiences in other industries. Millennials want banks to be more engaged in their life and to offer them tailored information based on their transaction behaviour. It’s therefore hardly surprising that three-fourths of millennials (73%) are said to be “more excited” about a new offering in financial services from Google, Amazon, Apple, Paypal or Square than from a traditional bank.
How can the FSIs dodge a fatal blow?
It’s time to organise around the customer; in payments this means simplifying and personalising the service at every opportunity. Traditional players need to leverage the information that is held on their customers; remember what they did last time and make it easier for them to do it next time. This will allow them to play a deeper role in the lives of their customers and everyone knows that the party that owns the customer relationship is in power.
Larger banks shouldn’t however go it alone in this innovation race; it’s not always their bag given their legacy culture. It makes sense to team up with nimble non-traditional players; they’re a different kettle of fish and may have the potential to turn thinking about payments on its head and come up with entirely new ways of meeting customer needs. Building a digital ecosystem and partnering with different players may be a challenge for both the old and the new. Many banks adopt a conservative approach to technology development and fear that working with small companies is a security and compliance risk. Let’s not forget that Apple’s move into financial services made them relinquish some control over their brand as it works with payments processors such as AMEX, Visa and MasterCard.
What will the ref's verdict be?
It’s hard to imagine a payments world in which the traditional players don’t play a role. The well-loved tech brand could take on the face of financial services but (although less dazzling) the core infrastructure will always be needed. An alternative focus may be for larger FSIs to exploit their strengths in compliance and resilience and build scale in essential payment utilities. Whichever direction they head, there’s no doubt that traditional players need to be hot on their toes. Which way do you think the game will go?
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