Banks risk losing US$280bn of payments revenue as digital payments and competition from non-banks grows

According to a new report from Accenture, payments are becoming more instant, invisible and free (IIF) thanks to developments such as Open Banking and customer expectations.

Accenture surveyed 240 retail and corporate payments executives from 23 markets to get their views on readying their banks for the IIF payments world for the report: Payments Pulse Survey: Two ways to win in payments. The report is based on a revenue-risk analysis model that Accenture developed to measure trends in how consumers pay and projected changes in merchant behavior, technology and regulation.

The report quotes: “A mix of powerful market drivers—from customers’ and merchants’ rising expectations for speed and convenience to new providers now taking market share—is creating a new world in which all payments are IIF. With some six percent annual growth occurring in global payments revenue, there is by our estimation, some US$500 billion in incremental payments revenue up for grabs.

“Yet, capturing this growth opportunity will not be easy. Our survey gauged timings for payments becoming IIF and identified tactics and tools banks plan to use to add value and raise their game as IIF payments happen.”

It adds that in order to add value, banks can deploy innovation across two key complementary, interconnected and interdependent actions to win big: scale and differentiation.

Technology displacing the role of banks

As much as 15% of banks’ global payments revenue, or US$280bn, is likely be displaced by the growth of digital payments and competition from non-banks, according to the report.

The report found that global payments revenue will likely grow at an annual rate of 5.5%, from US$1.5 trillion in 2019 to more than US$2 trillion by 2025. Only banks that change their business models to adopt the latest technologies and focus on providing value-added services to customers will capture a share of the US$500 billion in incremental revenue growth.

The report also notes that over the next six years, banks will face further pressure on income from card transactions and fees, with free payments putting 8% of payments revenue at risk. In addition, competition from non-banks in invisible payments — where payments are completed in a ‘virtual wallet’ on a mobile app or device — will put 3.9% of bank revenues at risk. Card displacement by instant payments, where funds are settled and transferred in real-time and banks make little to no interest, is projected to put an additional 2.7% of payment revenues at risk.

This builds on current declines in income from card transactions and fees, with regulation triggering fee compression and technology displacing the role of banks in payments.

Gareth Wilson, Accenture’s global payments lead commented: “Rather than being at the forefront of the new wave of the booming payments market, banks are feeling the heat from new competition and seeing their margins squeezed. We face an inevitable world of instant, invisible and free payments, which spells trouble for banks that don’t want to be relegated to the plumbing of payments. But it also presents an opportunity to tap into a new business model based on this digital boom.”

Playing the scale card and creating new market distinction

The report, on the basis of the findings of the survey and their experience with the payments industry, carves out the two key ways banks can extract more payments value and win.

The report adds: “To protect the economics of their payments businesses, banks will need to define their business and innovation strategies around two approaches that address the challenges of IIF payments. First, scale technology to reimagine how their core payments operations are done to ensure that they continue to benefit from the volume/value tradeoff and second, differentiate themselves by adding value in a low-margin, high-volume business.”

Other highlights

Other highlights from the report are as follows:

• Forty percent of the banking payments executives polled see payments as already being instant and another 38 percent say that payments will become instant over the next 12 months
• More than 90 percent of bankers globally (98 percent in Asia Pacific) agree that payments are becoming more instant for businessto-business transactions
• On average, 77 percent of respondents agree that payments are generally becoming more invisible as they are progressively incorporated into third-party apps or devices, such as wearables, digital wallets, IoT devices and smart contracts
• Seventy-three percent believe payments are already invisible or will be so over the next 12 months; even more so for consumerto-consumer (84 percent) and consumer-to-business (83 percent) payments
• Seventy-one percent of bankers and payments executives agree that payments are becoming free. That number is greater in Europe (93 percent) and Asia Pacific (75 percent) where fee income accounts for the lion share of total payments revenue compared to North America (61 percent) where the revenue pool is more diverse
• IIF payments could push the operating margin for payments down to 4.3 percent by 2025
• Customer experience at 28 percent and efficiency at 27 percent is driving invisibility and disintermediation
• 18 percent of respondents said that building security into the retail payments transaction will be the main priority for banks; 22 percent cited artificial intelligence, robotics, machine learning and innovative payments hubs as the key platform
  technology capabilities that they need in adapting core systems to high-speed and continuous payment flows.
• 69 percent of banks aspire to sell raw data within three years. Already 20 percent of banks monetize data delivering actionable insights and 75 percent aspire to do so in the next three years. However, customers’ data protection concerns (14 percent) and operational complexity (13 percent) are the top barriers to monetizing customers’ data.

Not if, but when

The report concludes saying that IIF payments are here and banks should no longer be surprised. They need to catch up with the pace for transforming themselves to stay relevant.

“Those that embrace and acquire the ability to scale their businesses and deliver for their customers will be positioned for breakthrough outcomes, including differentiating experiences…even in the IIF payments world.”

The full report can be accessed here.

Earlier this week, a report by Aite Group revealed that high costs, low margins and increasingly commoditised business models are eroding payment profits, resulting in some services failing to break even.