When I look at the retail payments market, I see all the attributes that any strategist worth his salt would love: It’s large, growing, profitable and accessible. The North American retail payments market is $300B and has grown at a 6 percent CAGR between 2015 and 20181, generated strong margins and has contributed significantly to banks’ overall profits.
That rosy picture may have induced incumbent retail banks to have false hope about the future. The coming years look quite different. Payments revenue growth is projected to slow to 4 percent CAGR between 2019 and 20252 and, according to our 2019 Global Payments Study, $88B of revenue is at risk.
A majority of the retail payments executives we surveyed from the top 20 US and top five Canadian banks believe they will lose a hefty portion of payments revenue to non-banks, fintech, Big Tech, challenger banks and other incumbents in the next three years.3 In other words, accessibility is a two-edged sword. These new players have the power to beat incumbents by offering instant and invisible payment options and better customer experiences.
It is my premise that only banks that adopt the latest technologies, transform their customer experience and deliver new value-added services will hang on to payments revenue. It is going to require leadership from industry executives—and they’re going to have to make some big bets and pivot to the future.
Five big bets can turn the game around
1. Reinvent revenue
Incumbent banks are feeling a big squeeze on their retail payments. First, customers want experiences over transactions—and non-banks and digital disruptors are doing a bang-up job of delivering them. They’re hitting the four Rs of customer-centricity—recognize consumers, remember their interactions, recommend products and services and reward them as valued customers. Considering the potential value lost, I was surprised to learn that only 32 percent of bank execs we surveyed consider evolving customer demand a top-three challenge for their business.4
Another big squeeze on payments revenue? Fee compression. Between 2015 and 2018, revenue per transaction dropped from $0.34 to $0.29 for debit cards and from $1.21 to $1.07 for credit cards with merchants and regulators looking to lower interchange fees.5 Card issuers are spending more on customer rewards programs, eroding the economics of card transactions, leaving banks to rely more on interest income. Banks must create a new generation of payment revenue streams to release the pressure.
2. Jettison legacy tech
The days of monolithic technology stacks are over. Banks need an agile technology foundation that allows them to quickly respond to customers and integrate with ecosystem partners. The executives we spoke with recognize that their legacy technology footprint is stuck in the mud and new technology is the only way forward.
Untethering from legacy technology is the only way to capture the efficiency and innovation that new technologies afford. Bank execs told us they are interested in artificial intelligence, robotics and machine learning (52 percent); innovative payment hubs (48 percent); distributed ledger technologies (36 percent); and open APIs (32 percent).6 These capabilities are essential to enabling high-speed and continuous payment flows, but ripping and replacing existing systems isn’t so easy.
Through digital decoupling, banks can chip away at the process, hollowing out the core and importing functionality to the new architecture until 100 percent of the core functionality resides in the New. Banks can boot up value-added services faster, and at a lower cost, by integrating customer-facing apps in a modular fashion.
3. Run with the unicorns
Who’s afraid of fintech? It’s no surprise that many banks are, given that payments fintech is North America’s largest fintech segment. It attracted $10.6 billion across more than 800 deals between 2016 and 2018.7 Amid the migration from card-based networks to multi-purpose payments networks, it makes sense that fintech will be a leader in the market. But that doesn’t mean incumbent banks will be left behind: You need them, and they need you.
Incumbents have scale—vast networks, global resources, large customer bases and strong brand recognition—that fintech does not. Fintech has the killer technologies and innovation engine that many banks do not. Collaboration makes sense for both parties, and we know it works. Consider how US banks joined up to create the fintech-powered Zelle, a P2P offering designed to compete with Venmo. Banks can continue to power such innovations with the right fintech partner, so determine which ones you want to beat, buy or collaborate with.
4. Spin data into gold
Data has traditionally been the exhaust of IT systems. Going forward, it will be the fuel that will fundamentally change banking. Data creates efficiencies and helps banks transform service experiences and product offerings. Data scales, process doesn’t. Today, information surrounding the transaction is provided for free. In the future, leaders need to develop data-centric products and services that merchants and customers are willing to buy. Making that shift will require executives to navigate and tackle data protection, legacy technology and lack of analytics capabilities, operational agility, talent and funding (all of which are imposing barriers.)8
Banks can seize the opportunity—with caution—to protect the integrity of customer relationships. The rewards are many: Data-driven decision scoring and fraud detection can increase conversion and decrease fraud losses, selling merchant transaction data for a segmented audience can allow banks to promote co-branded and real-time offers and discounts, and a fusion of consumer transaction and third-party data can help merchants to better understand shoppers’ behaviors.
5. Treasure trust
Consumer trust can make or break a bank’s moves to beat competitors or generate new revenue. A lack of trust puts a bank’s reputation on the line and delivers a direct blow to a company’s competitiveness. The good news is that most consumers surveyed (86 percent) trust their bank to look after their data and 80 percent trust the bank to take care of their financial well-being.9 Many other industries took a big hit. More than half (54 percent) of companies on the Accenture Strategy Competitive Agility Index experienced a material drop in trust and lost out on $180 billion in revenue.
Banks must be sensitive in how they use consumer data, as cool can get creepy in a heartbeat. It will be important to secure personally identifiable information to maintain consumer trust. Banks can also build trust by preventing the bad guys from slipping through the cracks. There has been a 67 percent increase in security breaches over the last five years, so cybersecurity must be top priority, especially as criminals continue to refine their approaches to doing damage. Remember, fraudsters innovate too.
We’re just skimming the surface in exploring how these big bets have a big impact on banks. In future blogs, I will delve deeper into each of these five. For now, feel free to read more about the future of digital payments.
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1 Accenture Research Global Payments Revenue Model
3 The top 20 US banks are defined as having greater than $3 billion USD in revenue, and the top five banks in Canada are defined as having greater than $10 billion CAD in revenue.
4 Accenture 2019 Global Payments Survey
5 Accenture analysis, revenue per transaction includes interchange fee and currency conversion fee, other fees are excluded
7 Accenture Research analysis of CB Insights data
9 Accenture 2019 North America Financial Services Consumer Survey