By Simon Wilson, Co-Head, Payments at Icon Solutions
For several decades, incumbent banks have held a comfortable leadership position in payments. But the rapid growth of digital payments has signalled opportunity for new market entrants to attack this status quo.
To develop effective strategies to stay ahead, incumbents must understand who their competitors are now, and assess how their strengths and weaknesses compare in the key competitive battlegrounds of data, trust, cost, innovation, scale and alternative payment methods.
Who are incumbent banks competing against?
Incumbents are facing increasing competition from card networks, payment platforms, challenger banks and big tech players, which is upending the payments ecosystem.
Incumbent banks’ market position is underpinned by strong consumer trust and massive scale, but these historic advantages can no longer be taken for granted.
Take trust. This is a layered concept, ranging from transactions being reliably processed, responsible data use and, increasingly, an expectation that organisations are acting in their customers long-term interests. And demographic trends are showing that consumers increasingly trust non-bank and alternative providers to deliver financial services.
A recent Oracle digital banking survey focused almost exclusively on Gen Z and Millennial customers showed that 64% would recommend their bank for various spending, savings, borrowing, and investing products, but 56% said they would be willing to switch to banking solutions offered by one of the big tech companies. And at the end of 2020, 15% of Gen Z and millennial consumers considered their ‘primary’ account to be with a challenger, up from 4% at the start of the year.
Elsewhere, banks are sitting on a goldmine of customer data but must start using it more effectively to gain an advantage. In itself, data has no real value, so it is the ability to effectively organise, translate and leverage this data as meaningful customer insight and value add products and services that has emerged as a key competitive differentiator.
Legacy infrastructure also makes it difficult for banks to compete on cost, which is more important than ever as margins evaporate, and payments become instant, invisible and free. This hampers the ability to realise partnerships to drive innovation and limits the opportunity to explore alternative payment methods.
And as incumbents look to bolster their strengths and address these challenges, they must also recognise the areas where the competition excel.
Card networks – moving beyond ‘just’ cards
Card payments are trusted by millions of consumers and businesses worldwide, with card networks managing massive volumes to realise huge scale advantages. This is combined with recent mergers and acquisitions to support end-to-end payment services and multi-rail offerings. Take Visa’s Crypto APIs, for example, which enable banking clients to access and integrate crypto features more easily and demonstrates the innovation that is happening in this sector. Mastercard has also confirmed it will enable crypto flow across its network in the near future.
Payment platforms – creating ecosystems
As the payment ecosystem has expanded and digital volumes have increased, organisations like PayPal, Stripe and Square have evolved from single specialised propositions into comprehensive payments platform businesses, providing previously bank-led offerings such as SME lending, corporate treasury services and credit.
Payment platforms are effective at managing high volumes and have the capacity to scale and drive innovation in specific market segments. Platforms are fast to adopt new payment methods such as digital currencies, and their use of data is improving consistently, offering some personalisation to customers.
Challenger banks – the new(ish) kids on the block
Challenger banks can best be described as banks without the baggage, unburdened by 50-year-old legacy infrastructure, sprawling bureaucracies and siloed departments.
Challengers have built market momentum and presence through their reputation for customer-centric products and services, having made consumer behaviour and experience their focus. Revolut for example offer in app investment in stocks, crypto and commodities, as well as vaults allowing you to save money in any currency or commodity.
Challengers also benefit from a low-cost infrastructure to bring products to market quickly, and have been more willing to explore alternative payments than traditional institutions. Again, take Revolut for example, who offer free and instant transfers in 28+ currencies, crypto and commodities. AndFirst Boulevard neobank will be among the first to pilot Visa’s Cryto APIs to enable their customers to buy and sell bitcoin through their digital accounts.
Big tech – the wild card entrants
The big tech GAFA (Google, Apple, Facebook, Amazon) players are the ‘wild card’ entrants that represent potentially the greatest competitive threat to incumbent banks. One look at China, where Tencent and Alibaba have established dominant positions and massive payment volumes through WeChat and AliPay, is enough to keep bank executives up at night.
Big tech enjoy massive scale but, so far, have been content with relatively limited plays, such as overlaying services through their mobile wallet platforms or partnering with financial institutions on limited offerings. We can expect continued investments and acquisitions to support data-driven, experiential products and services.
A potential roadblock is that regulation will make it difficult for big tech to undercut the competition by subsidising services below cost. Regulators have also shown their teeth in blocking Facebook’s considerable crypto ambitions, forcing a rebrand from Libra to Diem.
How can banks compete in payments?
It is clear that incumbent banks are under significant and sustained attack from various competitors and the reality is, this competition is only going to intensify. As J.P. Morgan CEO Jamie Dimon notes, incumbent banks should “expect to see very, very tough, brutal competition in the next 10 years.” When asked why JP Morgan intended to focus on buying FinTech and tech firms, Dimon noted, “our new competition is Apple, Amazon, Google, WeChat and AliPay” – rather than other banks.”
Incumbents must therefore focus on combining a clear, executable strategy with flexible technology solutions and expert partners to improve data-driven propositions, promote trust, reduce costs, realise scale advantages, drive innovation and support alternative payment methods.