Banks have historically been the dominant players in payments systems in Europe and around the world. However, with the advent of technology, one of the key challenges banks face is the disruption occurring within the payments sector, also known as the “rise of the FinTech”. As payments are of strategic importance as both the anchor for client relationships and as a platform for selling a range of other products, such as loans, credit cards, saving accounts and mortgages, banks need to stay ahead of the race to remain profitable.
New payments services are accelerating the shift from cash to non-cash payments. Consumer preferences are changing, thanks to the convenience offered by contactless cards and online and mobile payments. As such, digital payments are enabling much more data to be captured with each payment. With greater processing power, analytics to discern payment patterns, and in-memory databases that enable data to be analysed more quickly and effectively, the value as well as the amount of data collected has increased. Such payments data is also of value to consumers, for personal budgeting, as well as to non-banks. This is one of the key reasons why payments are the biggest area of investment for Fintech.
Such competition from non-banks is of course not new. In Europe, Ipagoo, an online-only service that allows Euro-zone customers to create virtual bank accounts throughout Europe, has successfully transformed the customer experience, reshaped the payments and broadened the financial services landscape. If you were based in the UK and you moved to Spain, for example, you’d have to be onboarded separately in each country. But, now once a customer has set up an Ipagoo account, he can set up a local account “in just three clicks”, according to Carlos Sanchez, the founder of Ipagoo. Now, you can manage your accounts in one place without having to have different accounts in each country.
Banks, therefore, are currently going through a wave of infrastructure modernisation that is required to compete effectively with non-bank innovators and address evolving customer needs. More than 15 countries have modernised their payments infrastructures in the past few years, and many others are in the planning stage. Because infrastructure upgrades are costly at both the system and bank levels, banks need to be strategic in their decisions. Banks have to consider whether they should collaborate with either other banks or non-banks to upgrade their capabilities, or go it alone.
Collaborate or Do It Alone?
I believe that both small and large banks should collaborate with non-bank in this innovation race, as opposed to doing it alone as they are unlikely to win. Given their (banks) culture, regulation and regulatory systems, and the skills and firepower of the non-banks, the odds are stacked against them. While there is a possibility for in-house innovation, banks should be careful not to over-invest.
Industry collaboration is a cost-efficient way of developing new infrastructure, taking it to market and making it available to customers. The UK’s Zapp is a good example. Developed by the bank-owned payments processor VocaLink, Zapp, which was scheduled to be launched in October 2015 but was delayed to this year, is a mobile payment method linked to consumers’ existing banking applications and bank accounts, which allows online and Near Field Communication (NFC) enabled in-store payments. Several UK banks such as HSBC, First Direct, Nationwide, Santander and Metro Bank have signed up for Zapp, allowing integration between it and their own mobile banking apps. At the same time, several UK retailers have signed up for Zapp, allowing it to be accepted in their stores.
Partnering with non-bank players, including payment providers, will be essential for banks in revenue growth. Banks cannot afford to start seeing margins being squeezed and market share lost in other areas. Instead, banks have to face this challenge head on. Whether via joint ventures or higher investment, banks need to keep up with technological change if they are to have a long-term business model.