In 2015, the total value of global retail payments transactions was estimated at $16 trillion, of which digital payments accounted for a mere 8%. By 2020, the total value of global retail payments transactions is estimated to exceed $21 trillion, with digital payments contributing around 20% to the figure.
The digital payments universe as it exists today
The payments ecosystem is essentially a subset of the banking universe. However, this space has witnessed increased traction in the last few years, driving rapid entry of niche players, some of whom are from other industries. Telecom companies such as Vodafone, Sprint, and AT&T have introduced innovative platforms in the past, to enable NFC payments through SIM-based secure elements, such as Vodafones mPesa, SoftCard wallet and the first version of Google Wallet. Financial institutions have started partnering with companies like Boku for carrier billing, enabling an alternate commerce ecosystem. Then we have retailers like Amazon, Walmart, and Starbucks launching their own consumer-facing payment wallets to enable single-click checkouts. A number of US merchants are forming consortiums to promote a closed payments loop bypassing credit card schemes in order to get rid of additional charges and network fees. Device manufacturers such as Samsung and Apple have also introduced mobile wallet apps to make mobile-led payments convenient and secure for customers. Additionally, technology companies such as Facebook, Google, and Microsoft are introducing advanced applications and platforms to facilitate real-time payments. Clearly, the payments ecosystem is buzzing with activity – be it in terms of products and services offered, technologies employed, or newer ecosystem entities and business models coming to the fore.
So, are traditional banks and financial services institutions worried?
Well, maybe a little. Through our interactions with some of the leading banks in North America, weve learnt that though the emerging scenario is a concern, its not devastating by any means. Rather, banks are looking at the bigger picture and regarding this evolution as a new opportunity. To keep pace with the changing ecosystem, several banks have embarked on innovative payments initiatives and programs. For instance, American Express has launched Amex for Developers, a portal that provides single-point access to the companys APIs in categories such as payment services, customized experience, data intelligence, and fraud prevention.
We feel a 4P approach can help banks fine-tune their strategy as they aim to stay competitive in the emerging payments ecosystem.
Surviving the digital payments storm with the 4P mantra
The first P stands for proactively engaging with customers. This can be done through value-added services, omni-channel customer engagement, targeted offers, contextual rewards redemption, and offering a gamified experience. For instance, Bank of America has introduced full-service automated financial assistants (a.k.a. chatbots) on its website to keep customers engaged, and help them perform simple tasks like budgeting and making payments without manual intervention.
The second P refers to offering personalized products and services by taking into account customer personas and life-stage event analysis. Particularly worth noting are US Banks initiatives such as Real Time Reward Redemptions and Personalized Customer Experience, as well as S&T Banks My Rewards program, which offers personalized cash rewards tailored to the shopping preferences of customers who often use debit cards.
The third P refers to participation in open or limited member ecosystems. You cant win the war alone, right? In order to grow, banks will need to collaborate with other industry players including competitors, to devise winning market strategies that make use of latest technologies. Active participation in consortiums and industry bodies will help incumbent players leverage new technologies to introduce compelling products and services. In a bid to counter the likes of Venmo, the clearexchange consortium with members including BoA, US Bank, Wells Fargo, and so on, has decided to launch Zelle as a P2P offering integrated with their mobile banking and payment apps.
Finally, the fourth P refers to partnerships with new startups and innovative fintechs. Banks would do well by partnering with fintechs offering niche products that strengthen their own products and services portfolios. A classic example is JP Morgan Chase that has partnered with online lender On Deck Capital to offer faster loans to its four million small business customers.
It is imperative for banks to adopt a multi-faceted growth strategy given the dynamic payments ecosystem that is rapidly changing to keep pace with customer expectations and technology trends. While proactive customer engagement and targeted product offerings will address the expectations of the digital natives, it is the partnerships and ecosystems that will help banks and financial services institutions lower operational costs and leverage the right technologies for delivering value to end customers.