Until relatively recently, monolithic banking systems and the behaviours that consumers needed to transact with them were taken for granted. In Rethinking Money: How New Currencies Turn Scarcity into Prosperity (2013), the authors Bernard Lietaer and Jacqui Dunne note that “humanity exists in an unrelenting flurry of monetary transactions that seem as natural and inscrutable to us as how one might imagine a fish to understand its aqueous environment— it’s taken totally for granted.”
But that is now changing at a previously unseen pace. The information age has been steadily unpicking the business model assumptions underpinning the incumbent banking ecosystems, and consumers have come to expect more convenient, instant and rewarding experiences from their financial services providers – on par with the rest of their technology-enabled lives.
In this article we review changes to consumer payment behaviour accelerated by the global COVID-19 pandemic, key challenges and opportunities for the payment ecosystem with a focus on banks, Fintechs and real time payments (RTP), and propose a set of principles based on our work with incumbent and challenger payment organisations for business transformation leaders to take action now.
Executive discussion regarding contactless checkout and payment options hit new heights in Q3 2020 (see Figure 1). According to CBInsights, a global market intelligence firm, earnings mentions of terms associated with contactless payments are up eight times since last year.
Payments are also top-of-mind for consumers. According to Paysafe, a multinational online payment firm’s latest Lost in Transaction research (2020), a survey in which 8,000 consumers globally were asked about their payment habits:
These figures are only likely to increase. By 2023, digital wallets are expected to become the most popular online payment method in the UK, accounting for 33% of the market. And while mainstream behaviours differ globally (for example in Brazil card payments are high, outright payments are rare, and instalments and cash payments on store collection are popular), payment solutions are becoming more diversified, cross-border, and fast-moving. New technology is creating more choice; global events are catalysing behavioural change; and as a result, the payments ecosystem is becoming an increasingly innovative space.
But consider the addition of regulatory changes, such as the globally emerging mandate to adopt ISO20022, a standard for electronic data interchange between financial institutions. Financial services organisations who have not yet implemented ISO20022 and want to stay ahead will need to carefully balance their agenda between adhering to standards and going beyond merely compliance, to deliver new value propositions that address consumer needs in different ways and create new business models.
Consumers have come to expect frictionless payment experiences (taking an Uber, for example), so experiences that disappoint, confuse and add barriers will quickly be dropped in favour of emerging alternatives.
From 2020 to 2023, eMarketer (2019) estimates that retail ecommerce will jump from $4.2 trillion to $6.5 trillion, a CAGR of 16%. So, what challenges must banks and payment providers address to capture growth?
For banks in particular, their ongoing ambition and desired role in payments is a key strategic consideration. The considerable costs of regulatory and IT change requirements alongside tackling disruptive competition in the end-customer experience, need to be weighed up against the potential benefits of investing in leading payment offerings in an effort to keep close to the end-consumer payment experience. Their desired role must also be reviewed in the context of the wider ecosystem, and whether deep organisational changes need to be made to allow for different operating models to be trialled and rolled out, for example through open partnerships with other banks (such as P27 in the Nordics); spinning out separate payment entities that can attract non-existing customers; removing internal barriers; new outsourcing models; or forging partnerships with Fintechs.
Much of the incumbent payment infrastructure was built around dated and slow processes. Consumers are adopting new options faster, in part due to the changes resulting from forced lockdown.
According to their consultation paper, SWIFT state: “In the next 5 years, if currently announced deadlines are met, ISO 20022 will dominate high-value payments, supporting 79% of the volume and 87% of the value of transactions worldwide."
The nature of instant payment means that the payment event itself will become more frictionless, and so what was a pain point becomes an opportunity for new value creation opportunities. These will be widespread, for example:
For banks, today’s methods of generating revenue are going to be progressively disrupted in the coming years. It is easier than ever to launch a new payment network.
Etch carry out research and work with financial services providers to address these challenges and define new solutions to take to market. Here are some recommendations for banks:
As the payment ecosystem matures, finding unique data propositions that can “plug and play” with other financial institutions under threat can lead to win-win-win scenarios for customers, incumbents, and new players. For Fintechs: