Digital Payments – Opportunity or Threat

The volume of digital payments worldwide is soaring and will reach $5 trillion by 2020. This growth is fuelled by new payment systems that are designed to work seamlessly with mobiles, in-app methods or via browsers. There has been huge innovation in this area by the banks, software giants like Apple, and fintechs. This growth creates new opportunities and risks for the retail banks.Transaction accounts have traditionally been an anchor point for retail banking relationships. The bank that owns the transaction account is often the first bank in a customer’s think about for another product. When customers use another payment system for their transactions, as it is already happening in China and India, the bank’s primacy in payments is eroded resulting in lower revenues.

Growth of digital payments

With the proliferation of smartphones, consumers are increasingly using them for a variety of transactions every day. Use of contactless payments via phones is growing. With improved user experience design, consumers are finding it easy to forego cash and use the digital payments for goods and services. BCG study estimates digital payments to double from 2017 to 2020 in the USA.

Payment related revenue (including accounts, non-card payments, debit and credit cards) still accounts for a third of the banks’ revenue. As digital payments grow, the payment provider stands front and centre to the customer. Non-bank providers have recognised this opportunity. They are playing a role in storing value or in the exchange of funds. In addition to digital giants such as Apple, Google, fintechs like PayPal and merchants Amazon and Starbucks are competing in this field. Nonfinancial companies like WeChat and Facebook have so many customers that they have begun to offer payment services to their customers.

Growth in digital wallets

Three types of digital wallets are emerging to support electronic payments. These are:

  1. Wallets provided by card networks (Visa, MasterCard, Amex)
  2. Device wallets provided by Apple, Google and Samsung, and
  3. P2P wallets provided by fintechs such as PayPal, Venmo and Paytm.
    Card Network wallet Device wallet P2P wallet
Channel

 

Point of Sale In development
Mobile/in-app
Desktop/online
Value/ Product Linked card 2
Linked account 2
Physical card In development2
Stored value 1 2
Use Standalone app 3
Pay via message 3

Potential threats to banks

1 – Emerging threat to data and engagement 2 – Major threat to data 3 – Major threat to engagement

The growth rate of digital wallet adoption is similar to the growth in adoption of WhatsApp and similar disruptive platforms. With further advances and innovations like use of QR codes for merchant payments digital wallets will gain further momentum. As digital wallets promise a seamless experience, they have an edge over other payment mechanisms.

P2P wallets amongst younger generation are growing rapidly. Their social impact is appealing to the younger people. In China, Alipay and others already account for more than 60% of all online payments. They are leveraging this base to expand into mainstream financial services with a key focus on superior customer experience.

Threat to banks from digital wallets

Digital wallets threaten the banks in two ways. First, by reducing the number of banking transactions they reduce the data banks can access regarding their customers. Secondly, by reducing banks engagement with customers, they create a further barrier to the deepening of customer relationship. Primary customers generate 15 times as much value as casual customers, so this is a serious threat.

Banks that move fast and collaborate effectively are thriving. Half of Norway’s customers are using DNB banks Vipps P2P application. In Singapore PayNow application attracted one in ten adults as users in the first month of the launch. However, these are more the exceptions as most banking efforts in this area have failed to make an impact.

How banks can respond

BCG suggest 4 strategies for banks to respond to these threats:

  1. Create a seamless payments experience
  2. Personalise and reward payments
  3. Collaborate to develop effective response to third parties, and
  4. Protect and monetise their data

Create seamless payments experience

While banks have improved account opening experience and improved conversion rates for credit card and lending products, this is only a minor factor in customer payments experience. Customers care about getting the most out of their card, be it reward points, redemptions, changing account settings, paying bills and resolving disputes. Banks must pay greater attention to improving customer experience in these areas. When such processes are redesigned in an end-to-end manner there are often substantial cost savings to be achieved while improving customer satisfaction.

Personalise and reward payments

Banks have a huge trove of data available to them. In the past banks have successfully used it to generate leads. There is an opportunity to use advanced data analytics to personalise offers, rewards, features and pricing to customers on virtual one-to-one basis. Some banks have increased revenue by 15% and reduced churn by 10% using these methods. Banks can also encourage more transactions using the banks payments systems by rewarding larger transactions, bill payments etc.

Collaborate to develop effective response to third parties

As non-banks pose a serious challenge to the banks are becoming more open to collaboration with other banks on industry-wide solutions. Banks are already working with major digital wallet providers (such as ApplePay and AndroidPay) as this increases their card transactions and appeal to the younger generation. Cuscal is providing it’s client’s customers card control application to personalise aspects of card usage. Banks must continue to differentiate on the service they provide around payments. Financial insight and financial control may allow the banks to differentiate their service.

An example of a mutually beneficial collaboration is the one between JPMorgan Chase and PayPal, which enables Chase cardholders to easily add their Chase cards to PayPal accounts, see a digital representation of a Chase card in the PayPal interface, and redeem Chase reward points in the PayPal network.

Protect and monetise their data

Banks store vast amounts of customer and transaction data. Very few banks have successfully monetised this data. BCG has found that despite spending over $2 billion on data analytics large banks have generated only a small return on their investment. Banks need to find new use cases to monetise this data. For example, BBVA have created a new API (application programming interface) to aggregate transaction data from their POS network to third parties for a fee.

Summary

Massive changes are happening in the consumer payments industry at present. The advent of digital wallets, contactless payments, mobile payments and real-time payments are some of the change drivers. Many non-bank players are making significant inroads into the payments area. Retail banks would need to innovate in the areas of customer experience, insights from payments data and collaborate with other banks and third parties to remain relevant.

Based on BCG Study https://www.bcg.com/en-au/publications/2017/banks-thrive-digital-payments-grow/