By Simon Wilson, Co-Head, Payments at Icon Solutions
Remaining competitive in payments is the key to future relevance and profitability for incumbent banks. But with incumbents now competing on multiple fronts against various players, how can they stay ahead of the competition?
1. Reshape attitudes towards data
With the competition eroding banks’ traditional margins, a shift from a transaction-based to a data-driven revenue model has long been touted as a path to profitability.
And yes, incumbents sit on vast swathes of customer data. The problem is, they often don’t really know what to do with it. As Lee McNabb, Payments Strategy and Research at NatWest, explains: “[Banks] have been talking about data for aeons […] but do we actually do anything with it?”
This means that before even considering the significant technical, organisational and regulatory hurdles that are required to establish a viable data monetisation strategy, significant cultural shifts are needed to firstly reframe data as a strategic asset. This is easier said than done for career bankers entrenched in their verticals, so we are seeing cross-industry moves to drive this change. For example, NatWest’s Chief Data and Analytics Officer is not from a banking background and joined from video gaming giant EA Sports to provide a fresh perspective on the organisation’s strategy.
2. Embrace alternative payments
We are moving into a new era in the way that value is exchanged and stored, with payment methods converging. Real-time account-to-account payments, combined with open banking, have reshaped the payments landscape in many markets (just take a look at the success of UPI in India). Digital wallets are increasingly popular, and the future potential for mobile wallets can be seen in China where 70% of consumers use wallets on a regular basis.
Crypto is also experiencing a boom as the technology matures and mainstream institutions become more comfortable with the concept, with Fiat rewarding eco-conscious drivers with crypto and PayPal enabling shoppers to use crypto for online purchases. But it doesn’t end there, and we can expect more use-cases to emerge – particularly around loyalty and reward points.
To keep up, the focus should be on flexibility. While it’s unlikely that alternative payment methods will usurp traditional processes in the immediate future, customers are increasingly demanding multiple options. As Jim Wadsworth, Senior Vice President, Open Banking at Mastercard, explains: “[Customers] may prefer different methods of payments, and providers must respond to the challenge.” Incumbents need to prepare now for future payments innovation by ensuring their architectures are flexible to support multiple payment types and methods.
3. Leverage the trust advantage
Global research by Mastercard shows customers trust incumbents the most when it comes to new payment services, but this inherent trust advantage cannot be taken for granted.
McNabb explains that as organisations of systemic importance, banks have a responsibility to meet the needs of all their customers. Unlike the competition who can focus on a narrow demographic or customer segment, banks cannot afford to lose sight to the significant number of customers who are not digitally active, for example.
This reflects more broadly on the importance of purpose-driven banking. A massive amount of wealth is going to shift to younger Gen X and Gen Y customers over the coming years. These consumers increasingly value corporate responsibility and ethical behaviour, so incumbents must confront the uncomfortable fact that they are not trusted to act in their customers’ long-term interests.
To remain competitive, incumbents must focus on an improved advisory capability to build trust-based propositions that promote a long-term customer-bank relationship (rather than benefitting from revenues based on punitive fees from overdrafts and high-interest products). For example, salary advance lending schemes can help employees stay out of the clutches of loan sharks, while spending analytics can promote good financial practice.
4. Innovate by putting customers in control
Today’s digital economies are creating new and complex payment requirements. Consider platforms like Airbnb, where the payment flows are very different to traditional businesses. It takes money in as deposits, sends it back out as refunds, manages recurring service charges, and manages multiple FX and cross-border transactions.
In this complexity lies opportunity for banks to smooth out the value chain and let organisations focus on their core offering. The ability to put customers in the driver’s seat and give them what they want – control over how and when they receive payments, and in what currency – will be invaluable. As Wadsworth notes: “If customers have something simple and intuitive, they will take it over something complex.”
This concept also translates to the retail banking space, where the importance of personalisation to deliver tailored, contextual services underpinned by a simple UX will be a key competitive differentiator.
5. Realise scale advantages
Although incumbents benefit from massive scale and huge volumes, increasingly so does the competition. PayPal now has the same payment volumes as the top ten banks in Europe, and Square has more customers than most banks.
Scale also creates its own challenges. Banks need agility to respond to emerging requirements, but are often constrained by inflexible legacy infrastructure that cannot support rapid change.
Embracing collaboration with fintechs may be the best way forward to balance scale and innovation. A partnership approach will enable incumbents to deliver new value-added products and services at low cost, while maintaining their brand and core relationship with customers.
However, forging meaningful and profitable partnerships with fintechs requires a flexible architecture that integrates open APIs and makes it easy for potential partners to plug-in to the banks’ systems.
How banks can compete in payments
Across all the opportunities, remaining competitive hinges on banks’ ability to develop effective strategies that empower themselves, their customers and the wider ecosystem. This requires an understanding of how technologies, regulations and customer needs are changing, along with solutions and the expertise to transform legacy systems and culture.