Elly Yates-Roberts |
As the payments landscape continues to evolve, banks face growing competitive pressure from non-bank providers and challenger banks. With customers increasingly expecting speed, agility and flexibility from their payments, it has never been more important for banks to embrace innovation and differentiate themselves – and the possibilities presented by technology and open platforms can help banks gain the speed and transparency they need in order to compete effectively in this market.
There is significant opportunity for banks to differentiate themselves using payments to create new value propositions and attract new customers – customers that increasingly expect speed, agility and flexibility at every opportunity. At the same time, banks face numerous threats in the payments landscape, from the obstacles presented by legacy infrastructure and a lack of data connectivity to competitive threats from new players in the market.
The role of payments is fundamentally shifting. In today’s open economy, the way in which payments are embedded into commerce, and into people’s lives, has changed significantly. And while the Covid-19 crisis has certainly played an important role in accelerating the shift to online commerce, this is a change that has been in progress for many years.
An important driver of change is, of course, increasing competitive pressure coming from outside the traditional banking sphere. Non-bank competitors and challenger banks are competing intensely in areas such as data, insights, customer experience and minimising friction.
When talking about payments, it is helpful to distinguish between the two functions of distribution and manufacturing. Financial institutions that focus on the manufacturing aspect of payments need to achieve a certain scale in their payments processing – but this is difficult in practice, given the high number of financial institutions in the market. At the same time, challenger banks and non-bank competitors that focus purely on distribution tend to be less heavily regulated, and also tend to have a much lower cost-to-income ratio compared to traditional banks.
Moving forward, it is likely that the industry will see greater separation of manufacturing and distribution within payments, with some organisations likely to focus solely on distribution. It is also likely that the manufacturing side of payments could see greater consolidation in the future, not least due to the cost pressures associated with payment processing, as well as the high regulatory burden they face.
For traditional banks, it’s clear that a different approach is needed if they are to compete effectively – which is where a platform approach to payments comes in. Banks have much to gain by embracing platforms that provide access to a wide range of products and services offered by an ecosystem of providers, thereby delivering economies of scale that particularly benefit firms engaged in the manufacturing side of payments. By adopting a more strategic approach, banks can take advantage of platforms that not only deliver core processing, but also offer the ability to build on additional elements to meet their specific needs.
So what are the implications for banks’ positioning within this new ecosystem?
In the past, banks brought products and capabilities to the marketplace and customers simply fitted in with the way they were delivered. Today that old order has been flipped on its head, with the move to a much more consumer- and customer-led world; one where customers demand how they want to engage with their banks, and the onus is on the banks to provide the customer experience and journey they’re seeking. Payments are an extremely important component of this customer experience-led environment and lifecycle. Banks are wrestling with working out where they will sit in the customer lifecycle and how they want to play within it.
With the fundamentals in place and its direction of travel established, the bank can move on to selecting and stitching together the right ecosystem components. Choices here include going for platform-as-a-service solutions or licensed products, depending on how the organisation is structured and what it wants to achieve. On top of these decisions, the next set of choices are around planning out the customer journeys to offer the best possible experience.
There’s no doubt that today’s payments landscape is increasingly competitive – not only due to the impact of the pandemic, but as part of a shift that has been underway for some time. As the market continues to evolve, traditional banks must revisit their existing technology and processes in order to differentiate themselves in this space and attract new customers.
The ultimate direction of travel for payments? Towards a world where payments are not perceived as a separate service carried out for their own sake, but as one element of a wider value proposition and customer journey created via the ecosystem.
Anders Olofsson is head of payments at Finastra
This article was originally published in the Autumn 2021 issue of Technology Record. To get future issues delivered directly to your inbox, sign up for a free subscription.