Other parts of this series:
The world of payments is in turmoil, with no end in sight. In the previous posts in this series, we’ve detailed the trends driving this disruption, and zoomed in on the rapid change around the world and by payments instrument. Today we’ll wrap up by addressing the elephant in the room: what is to be done about all this?
To defend and expand their payments market share, tomorrow’s industry leaders will adapt their innovation strategies across product segments and territories. A high-margin, low-volume product like remittances requires a different approach than a low-margin, high-volume core product like debit cards. Market nuances like consumer preferences, national payments systems and regulation also need to be considered.
Here are three approaches to innovation that banks may use to defend or grow their positions as payment leaders.
1: Defend the core and reach scale
In markets with low margins and high barriers to entry, it can be prohibitively complex and expensive for any single player to build enough scale on its own to bring disruptive solutions to market. When innovation means changing market infrastructure, it may make sense for incumbent banks to cooperate.
For example, recently launched national real-time payments platforms (over 30 have gone live since 2016) encouraged banks to collaborate and develop payment apps (e.g. Swish in Sweden, PayNow in Singapore). Since they are offered by many banks, they can reach scale quickly—in Singapore the value of transactions grew tenfold between April 2018 and 2019.
Accenture’s Global Payments Revenue Model projects that banks’ largest consumer payments products by revenue are credit cards (59 percent) and debit cards (12 percent). These are areas where consumers and banks alike may benefit when institutions work together to offer interoperable, scalable platforms.
2: Augment core products with new customer experiences
For products or segments that don’t rely on new infrastructure adoption and that haven’t yet been disrupted, product experience innovation can be the best choice. By innovating here, banks can differentiate established products from those of their peers and build customer relevance.
Consider the example of Barclaycard, which launched the first contactless cards in the UK in 2007 as part of a deal won with the consortium that runs the Oyster transport card system.
This gave Barclaycard the exclusive rights to place Oyster on its Visa cards for the next three years. Ten years on, contactless cards have become a basic requirement for competing in the market. But it doesn’t have to stop there. Forward-looking banks are already looking to add biometric authentication solutions to their contactless cards.
3: Partner with fintechs on innovative products
Banks can look to fintechs or other specialist players when they want to upgrade an offering with innovative products. This can apply both to non-core products such as remittances and to core traditional products where new competitors are offering appealing alternatives.
Commonwealth Bank of Australia, for example, partnered with Klarna when the fintech launched in-market. This allowed the bank to address the growing demand for alternative payment solutions in Australia and to enhance the customer experience in the banking app. The partnership combines the bank’s customer network, merchant relationships and existing digital technology with Klarna’s innovative payments technology and integrated shopping experience.
Succeeding in a volatile industry
If the recent history of payments teaches us anything, it is that the winners are proactive. They decide where and how they want to win. The pandemic is acting like gasoline on the disruptive fires that were burning across payments.
Now is the time for banks to define what role they want to play in the future of payments—before someone else decides it for them. Tomorrow’s leaders already know what they want to defend, which opportunities to attack and what they’re willing to let go. Having a clear approach to innovation to unlock new opportunities positions them to realise their ambitions.
If you’d like to discuss the future of the payments industry, I’d love to hear from you. I can be reached here.
The Payments Disruptability report on which these blogs are based can be found here.