I spent more time than I should have over the weekend reading the Deloitte report Payments Disrupted – The emerging challenge for European retail banks. Payments disruption is a hot topic and this report provides an insightful overview of how regulation and technology are leveling the payments industry playing field. The Deloitte study has a European focus, which makes it all the more interesting for us SEPA geeks 🙂
Following are 7 payments disruption themes that i noted from the Deloitte Payments Disrupted report:
1. Payments Disruption – The Threat is Here:
To date banks have pretty much owned or controlled payments schemes and this command is now threatened due to the following 3 factors:
- Customer preferences are changing
- Innovation is enabling a variety of technological solutions
- Regulation is calling for change
The threat is essentially from non-banks – that is comprised of tech giants (for example Google, Apple, Samsung, Paypal), but also new and innovative start up companies.
2. Payments Disruption – Regulation:
- Payments Services Directive (PSD) – 2007 – The regulation that underpins SEPA (Single Euro Payments Area), essentially removing the concept (and fees) of a cross border payment within the SEPA countries
- Interchange Fee Regulation (IFR) – December 2015 – puts a cap (0.2% for debit card and 0.3% for credit card of the transaction) on bank to bank fees for debit and credit card payments in the EU
- Payments services Directive 2 (PSD2) – expected in 2017 – is expected to promote competition, innovation and the use of technology (smartphones) to drive payment solutions in the EU (European Union)
The above initiatives curb fees, open up existing services to new innovative providers which is disrupting traditional revenue streams and the existing and deeply embedded traditional payment services model.
3. Payments Disruption – Technology:
Deloitte highlight the conflict that exists between the 2 forces at play:
- Banks – offering security
- Non-banks – offering convenience
But acknowledge that developments in biometric authentication offer a “tantalising prospect of marrying convenience with security”. The report highlights Apple Pay as an example of security and convenience.
Technology is also enabling a move away from cash – the main channels being contactless cards and mobile payments
4. Payments Disruption – Big Data:
Interestingly, Deloitte highlight how a traditional cash payment has little collectible data, but a digital transaction has all kinds of insightful data about the transaction and in particular about the customer. This data has now spawned a whole industry of its own, which is giving companies unrivaled insights into their customers, their spending habits and products and services that may be attractive to them. Deloitte highlight 6 reasons why data is valuable to banks:
- Pricing – understanding competitor pricing and their customer, companies can price accordingly
- Cross Selling – This is the controversial one, by gathering data about the customer, companies can offer other services that the customer may find interesting
- Improved credit scoring – rather than having to get credit scoring data from external sources, companies can now do this in-house
- Liquidity – a better understanding of when their customers make / receive payments can help to improve intraday liquidity
- Empowering the customer – by giving them access to their own data, for example by providing a budgeting app
- Maintaining Customer Stickiness – by offering discounts, access to loyalty schemes associated with a bank card
5. Payments Disruption – Changing Customer Preferences:
Deloitte outline how customers are more willing to experiment, especially when it comes to low value transactions. The guys explained how the payment many believed that “if a more convenient payment mechanism were available, small businesses and individuals will migrate to it”.Well, that is not really telling us anything new – but it makes for a good quote!
Deloitte continue “there is a risk that the payment itself will disappear”. This got me thinking… Is that a risk? Or is that actually what we’re heading towards? A process whereby making a payment is so seamless – so straight through – that it disappears….?
6. Payments Disruption – Future Scenarios:
Deloitte outlines 4 trends:
- The status quo – enough said!
- New oligopoly – basically bigger is better – the big banks and big new tech-companies dominate the minnow fintech companies
- Utility model – this is where apps, provided by banks and non-banks, would run on the banking platform. These ‘rails’ as Deloitte call them would be low-margin, high volume
- Parallel payments infrastructure – this is where new and alternative payment methods become available – for example, crypto-currencies like Bitcoin and Ripple
7. Payments Disruption – The Banks Strike Back:
How banks respond to the disruption is a hot topic. to this end, Deloitte posed 4 scenarios to the banks:
- Collaboration within the industry – This was the most widely supported strategy
- Embarking on innovation within the bank
- Becoming a platform provider for API
- Outsourcing payment services to another provider
The Deloitte Payments Disrupted report is an interesting insight into what the industry, banks and non-banks are thinking right now – the questions were asked during March and May this year. Identifying the 3 key areas – Regulation, Changes in consumer demands & Technology – nicely categorises why change is happening and how the 3 factors have emerged together to create a perfect storm for the financial services industry. The continued growth of the fintech sector and investment therein clearly highlights how banks are viewing the ‘threat’ with some responding in a collaborative manner. Data privacy, security and particularly customer perception around how data is shared and used by companies will be an on-going challenge. One thing is clear, the payments landscape is changing. How banks and non-banks meet customer needs will ultimately be their failure or saviour.