For several decades, incumbent banks have held a comfortable
leadership position in payments. But the rapid growth of digital payments has
signaled 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.
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