In Focus
RETAIL BANKING | Sandra Sendingan, Singapore

How banks can win in a rapidly shifting global payments arena

Incumbents are building up capabilities and forging partnerships with former foes to stay competitive.

After a spike in the previous year, the growth of APAC payment revenues stabilised to 6% in 2018 to signal a more moderate pace of expansion, according to McKinsey. Balances and the rapid evolution of interest margins drove headline figures upward although the healthy pace of growth is unlikely to hold against increasing economic uncertainties, said Olivier Denecker, partner in the Brussels office of McKinsey.

“Our forecast is that growth will remain relatively stable at 6% driven by continuous growth of balances and number of transactions,” he said. “If external events create major economic issues and GDP strongly decreases, that would have an impact on the growth forecast for payments. Based on previous analysis, we estimate that if we get a 50% change in GDP growth, this would impact on the three to one level on payment growth rates. So 50 basis points GDP growth would have an impact of 1.5% on payments growth.”

Against the dimming economic outlook, banks are stepping up partnerships, building capabilities and leveraging new technologies to retain their dominance in the payments space, especially in the service of big corporates with massive transactional needs and where BigTechs have yet to penetrate.

In an interview with Asian Banking & Finance, Denecker outlines how banks can continue to create value in a rapidly evolving payments arena.

As BigTech companies look to set up payment ecosystems of their own, how can banks stay competitive when more agile players enter the fray?

If you look at what happened in the Dotcom era in the 2000s, a lot of the disruptors ended up being absorbed or cooperating with banks. The big difference between then and now is that there are not the nimble FinTechs but BigTechs like Alipay, Amazon, and Google that have deeper systems and very strong systems which not only claim payments as a part of their user journey.

What this means for banks is that there is a need to look at the FinTech world and see who you would work with as a provider or as a technical partner.

If you look at Europe, it’s more of an element where ecosystems have a lot of participants already on the commerce side and banks have a bigger chance of being part of the organizers of the ecosystem rather than just participating for market share within that ecosystem.

It’s not between banks and FinTechs, because co-opetition (cooperation + competition) is the name of the game there, but between banks and BigTechs. This will depend on whether the regulators opt to do the same thing to the BigTechs as they do for banks. As regulators force banks to open their system to BigTechs, will they compel BigTechs to also open their systems to banks?

However, BigTechs have not discovered the corporate side yet, I would say. If you want to serve large corporate clients, you have to be able to move large amounts of liquidity. To make a payment of a million dollars, you need a different balance sheet as a provider. One of the benefits for banks is that the ability to move large slabs of liquidity is still something that is uniquely reserved for them, which helped banks retain their position very strongly in the corporate space. But in terms of digital experience, it’s not enough to keep people tied to the existing systems as you also need to upgrade the experience into one that is fast, transparent, open and integrated.

How do you see this interaction developing especially when there are spaces where they need to be in direct competition with one another?

That’s the reality - every competitor is a potential partner, and every partner is a potential competitor. I think that the lines are not as tightly drawn as you would like them to be. As a bank, it’s very likely that you can compete with a FinTech on most dimensions like distribution and client retention but you have to also absorb the fact that this will attract alternative offers into the system which may compete with yours. I think exclusive partnerships are very rare in this space.

The one critical factor that would break any co-operation is if somebody claimed full customer ownership and full customer interface which would relegate somebody else to just being a product provider. That’s when you will have a competition that is no longer compatible with cooperation on different fronts. If you have a partnership with a FinTech that also becomes a bank, you have to understand that they’ll not always be a partner but sometimes will be a competitor, and at some point you may have to push your product against theirs.Those are demands of the open model. The moment you go ‘open’, you have to accept the fact that the customer will not necessarily stay captive of your products only, across the entire journey, even if you provided the initial customer interface!

What are the strengths of the banking-as-a-service model and how does this shift reflect the growing trend towards outsourcing development efforts to external providers?

The banking-as-a-service or software-as-a-service type offers are not new. You’ll get a balance between the players that will build their own transaction components and payment platforms, and those that will source the entire service from go-to providers that can get the entire service component and not software components.

This is not going to be the only model but this is going to help a large set of banks keep up with the pace of change at levels where the capex is not crippling, and at the same time creates the opportunity for a new segment of service to emerge in the industry.

As traditional sources of growth for retail payments change due to stringent regulation, how can players continue to create value in this space?

If you look globally at the number of payments, you will see that it is still growing very healthily - electronic payments globally still grow at 10%. To capture that growth, you need to make sure that as more transactions happen, you can find yourself in a position where you are the one capturing those transactions, including the data, insight and the experience linked to that. At the moment, one of the big fears for banks is if somebody captures the interface between them and their client. The payments fees, you probably don’t care as much, but the fact that your client doesn’t interact with you anymore is concerning for a bank.

The payment value chain is rapidly disaggregating. The other important element is the way in which people actually start diversifying very slowly. We come from a situation where all transactional experiences are very siloed: at the Point of Sale (POS) you use your card, for bill payments you use transfers or direct debits.

Where we are going now, the customer experience is no longer connected to the payment instrument, but to the interface. In some cases this means transfers work better at the POS than cards while for some bill payments the credit guarantee of cards, adds real value. As the customer interface for credit transfers is being adapted to the POS (often using the phone as a channel), we will see more substitution of cash payments at POS by transfers. You can start your account payment in a way that is is more suitable for the POS experience although the experience might be the same at the POS. Players that are best equipped to use the diversity of features that payments products offer will be able to develop a better customer experience. The bank that can use these instruments to deliver the best customer experience will be able to benefit from it.

What we mean to say is that this is a high and stable growth market but there are quite substantial challenges. There are big differences between regions, countries and segments. Despite this positive outlook, the biggest concern you should have is that the value is distinct and that the growth is potentially vulnerable to external factors.

To deal with that shifting value, you really need to act as an incumbent. You need to act on the transformation, systems and analytics parts. That is not something that is incremental anymore but something that is requiring a rethinking, a mentality shift in a lot of operations.


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