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:
- 84% of people surveyed admitted to thinking about payments differently in 2020
- 54% of UK consumers said they have used a payment method new to them since COVID-19 began
- 43% of UK consumers said they increased their online shopping habits because of restricted access to high street stores
- 61% of UK consumers are happier using contactless than they were last year
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.
Key challenges amidst continued ecommerce (including contactless) payment growth
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?
- Meeting compliance and regulatory requirements, e.g. ISO20022, variable recurring payments (VRP) and automatic sweeps, whilst going beyond compliance mandates to innovate the customer proposition and end-to-end experience to capture new value.
- Competition for unbundled existing revenue models, considering challenges from or collaboration with Fintechs and big techs e.g., Google, Amazon, Apple.
- Increasing accessibility for the underbanked and less tech savvy.
- New fraud, anti-money laundering (AML), and security threats, in part emerging from migration to new technologies leveraging API-based connectivity, combined with multiple parallel change workstreams and aggressive timelines.
- Increasing data management and strategic capabilities, knowledge and training to handle increased data sources, complexity and volume, in order to exploit data as an asset for new value creation.
- Developing and bringing new services and value propositions to market that leverage real time payment (RTP) processing.
- Improving security messaging while not concerning customers, especially those new to making digital payments.
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.
Opportunities for real-time payment innovation
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:
- Instant credit options, reduced transaction times, straight through processing and sped up merchant payments will improve the customer purchase experience, and lead to reduced goods and service delivery times, leading to increased conversion and retention rates and reduced payment issues.
- Inefficient cash pools to manage risk will decrease, thereby freeing up working capital for change and innovation initiatives.
- RTP combined with real time service messaging will improve order management and collection leading to increased customer satisfaction and operational efficiencies.
- With RTP and services such as VRP, open banking can move beyond first wave money management solutions. For example, online point of purchase credit checks with 3rd parties to select from available ‘buy now pay later’ (BNPL) options, or scheduling payments to and from high interest accounts until payments are due.
- Different payment channels such as card, mobile, BNPL, and cryptocurrencies can increasingly be brought together into single solutions across providers.
- Combined RTP, 5G connectivity and the Internet of Things (IoT) will enable conditional scenarios based on customer choices to be carried out automatically at the moment of need by machine-to-machine payments. For example, ordering goods or software upgrades ‘just in time’ anywhere if within a certain payment threshold.
- Voice payments have been available for some time (PayPal introduced payments through Apple’s Siri platform in 2016) but payment and security innovations will drive improved consumer confidence and further adoption, especially in younger generations.
- An enrichment of customer data leveraging advanced analytics will lead to further opportunities to provide consumers more tailored flexibility, value and differentiated offerings.
Embracing the new payments ecosystem
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:
- Track the disruptive ecosystem, create hedge scenarios and plan challenges to start experimenting with new business models
- Create a unified, systematic capability to monitor the payments playing field and continually evaluate different value creation threats and opportunities.
- Use market trajectory and internal capability intelligence to define ‘what if’ scenarios and leading indicators to monitor in preparation for disruption.
- Prioritise early high potential use cases, set up a decision framework for ‘Build, Borrow or Buy’ investments and a partner engagement model to run challenges with external partners or solution providers, and invest in rapid early creation, ideation and validation activities to assess value proposition desirability, feasibility and business model viability.
- Integrate divestment and consolidation opportunities to holistically assess a potential risk/reward portfolio of all options.
- Integrate digital, data and innovation capability development centrally to redefine the business operating model with self-disruption at the heart
- Ensure the data science and analytics function is driven by business outcomes, connected into all back-end infrastructure and front-end operational functions, including business-as-usual and new value opportunities.
- Create an internal-facing product roadmap for harnessing new data points as an asset, capitalising on new data points and opportunities for advanced data analytics, in order to rapidly generate new business model opportunities, to add to the innovation and transformation investment portfolio.
- Look for synergetic opportunities to prioritise, align and harmonise improvements across multiple areas end-to-end, e.g. reconciliations, AML/money laundering and fraud tracking, billing, data management analytics, customer reporting, KYC, onboarding, and archiving.
- Define and integrate a skills-based transformation roadmap to align data, strategy and technology transformations with workforce upskilling and partner ecosystem expansion.
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:
- Understand unique capabilities that can work in partnership with other ecosystem players and develop value-capturing collaborative business models
- Track problem-solution and product-market fit opportunities with banks as the B2B2C customer or collaborator.
- Develop proposition communications designed and targeted to benefit customers and larger organisations’ specific challenges, offering only the capabilities necessary to solve the problem.
- Develop APIs and white-label solutions with clear use cases and scenarios that enable easier conversations about collaboration opportunities with banks, in order to help accelerate their digital platform development and increase reach to incumbent customer bases.