Up until now banks have successfully seen off the challenge from non-bank entrants into the payments space, but according to a report from global consultancy firm McKinsey, things could be different this time.

In its recently-released report Global Payments 2015: A Healthy Industry Confronts Disruption, McKinsey notes that banks have always faced “attackers”, but in the past these did not represent much of a threat. In fact, of the 450 payment apps started in the dot.com boom of 1997 to 2000, only 10 have survived.

However, McKinsey says there are several reasons why this has changed.

This time, the “attackers” are technology titans such as Apple, Google, Facebook, Microsoft and Alibaba, and they can rapidly drive adoption and usage of their services from both consumers and merchants.

Smartphones and technology

The increasing ubiquity of smartphones is providing an important new channel for payments. McKinsey says there may be a segment of users that prefers to access financial services through third-party mobile apps, rather than bank apps. In fact, in the US, some 33 percent of millennials aged 15-34 believe that within the next five years they will not even need a bank.

Finally, McKinsey notes that consumers’ expectations are growing as they become more accustomed to using technology in their daily lives.

“Non-bank digital entrants have used su­perior design and user interface to build solutions that often surpass consumer and merchant expectations in terms of end-to-end customer experience. By integrating payments into commerce, non-bank attackers have created more seamless, personalised and interactive experiences, contributing to increased conversion rates,” McKinsey says.

It says the ultimate friction-free payment experience might be the set-and-forget feature in apps such as Uber and Lyft, which make the act of payment essentially disappear.

The popularity of mobile text messaging and voice messaging app WeChat in China provides a glimpse of where control of payments can lead, says McKinsey. WeChat aspires to address every aspect of its 549 million users’ lives through its WeChat wallet. This allows users to request a credit card statement or a bank statement, pay utility bills, hail a taxi, order a food delivery, buy movie tickets and book a doctor’s appointment.

McKinsey says while these digital entrants haven’t yet had much of an impact on payments volumes and revenue growth, the disruption threat they pose is a matter of strategic importance.

“They will then own the customer relationship and the ability to influence consumer behaviour, reshape industry economics, and potentially penetrate higher-mar­gin financial services,” the management consultancy says. “The long-term disruptive threat is that direct, front-end consumer relationships are disintermediated and banks run the risk of being relegated to the ‘pipes’ that other players use to move money, a much less profitable business model than today.”

Own the platform, not the pipes

Monitor Deloitte manager Hwan Kim says non-bank digital entrants are less interested in becoming a direct competition to incumbent banks (as an issuer in the payments space) but rather interested in owning the platform around financial services activities.

Hwan outlines several implications of the non-bank competition:
  • Disaggregation of customer ownership: Most non-bank digital entrants act as a customer interface to products and services offered by incumbent banks, such as mobile wallets in payments or comparison services in lending. As a result, the degree of issuers’ ownership in acquiring and managing customer relationships will decrease over time, weakening the linkage between institutions and customers and leading to higher turnover.
  • Reduced control over customer experience: In most of the non-bank digital entrants’ platforms, the parameters around customer experience are largely defined by non-bank digital entrants, limiting incumbent banks’ ability to generate truly unique and holistic customer experience digitally.
  • Consolidated access to customer data: By combining financial data (such as payments transaction information) with rich personal data already owned, non-bank digital entrants will quickly become an aggregator of rich, holistic data. On the one hand, this is an opportunity for banks – they can gain access to a richer data set than in the past; on the other hand, this threatens banks’ role as an aggregator of financial data, increases the cost of accessing data, and can fuel the emergence of niche new entrants focused on specific products by removing the hurdle of not having rich historical financial data of new customers.
McKinsey says some banks are responding to the competitive threat by building their own solutions.

Denmark’s Danske Bank, for instance, launched its own highly-successful P2P payments service, which has attracted two million users out of a population of 4.5 million and tellingly, 70 per cent of its users are non-Danske Bank customers.

The report outlines those banks which will be best placed to respond to the threat: “Banks that can develop a holistic digital strategy, assess their internal capabilities and needs, systematically scan innovations for partnership and acquisition opportunities, develop prod­ucts and services that create delightful customer experiences, and engage and rapidly respond to customer needs will be best-positioned to not just de­fend against non-bank attackers and disruption, but grow and deepen their customer relationships.”
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