A Shifting Landscape
Payment revenue is predicted to grow significantly in the next three years lifted by the continued transition away from cash, sustained strong growth in electronic transactions, and greater innovation. BCG forecasts that the sector could be worth US$1.8 trillion by 2024 up from US$1.5 trillion in 2019 whilst McKinsey in its Bank Pulse study 2020, predicts payments revenue growth to US$1.6 trillion by 2025.
Yet established banks and financial institutions would need to work hard to capture this growth. The payments space is increasingly crowded, with an expanding array of non-traditional players. Open-banking legislation `enacted across a number of countries has already removed some of the largest barriers to entry for external players, levelling the playing field. The Financial Brand in its Neobank Tracker counted 270+ neo-banks, and the number of challengers are growing daily, with several regulators globally issuing banking licenses
From Fintech to TechFin
In addition to Fintech players, Techfins, Amazon, Google, Facebook, Apple, Tencent are rapidly diversifying into financial services as part of their larger ecosystem dominance strategy. Techfins have well-established digital services ecosystem and leverage their existing consumer base and behavioral data collected over years to develop attractive propositions and achieve rapid scale. These players embed payments and financial services into their core technology products to make them more attractive and lock-in customers.
The platform-centric data-driven business models of Techfins distinguish them from other businesses. Also, as they have the requisite financial muscle, and as the business model is independent of margins generated from financial services, Techfins pose a bigger threat to banks than Fintechs. As they make in-roads into the payments space, according to Accenture, the players would shrink the payments revenue pool for banks by 15 per cent by 2025 and may cost up to US$280 billion in revenue opportunity loss globally.
DNA of Techfin Players
Big Tech Revenues by Sector of Activity
Source: FSS and BIS
Increasingly, Techfins are also looking beyond payments to capture traditionally profitable product pools. Compared to Fintechs, these players are well-placed to challenge legacy banks, as they have all the advantages of a mainstream bank -- a wealth of data and a large, sticky, existing customer base. Google for instance recently become the first regular Techfin to open a checking account, starting with Citibank and 10 other banks and credit unions in the US. The company wants to leverage the financial know-how of its partners, while providing the digital layer through Google Pay. Alibaba’s Ant Financial and Tencent’s WeChat provide a cornucopia of financial products, having expanded rapidly.
Source CB Insights
Techfin-led peer-to-peer and marketplace lending models have also recorded sharp growth in many economies. Amazon, for instance, uses data to underwrite small loans for merchants, consumers and SMBs. Likewise, Alibaba-owned Mybank disburses instant credit to MSMEs within 3 minutes. BIS estimates that the flow of these new forms of credit reached US$223 billion and US$572 billion in 2019, respectively.
Techfins are targeting the distribution side of the business and are happy to collaborate with banks to take care of regulation and compliance. They have no legacy infrastructure (e.g., branches) so their costs are lower, and the provision of financial services will keep customers within low-cost ecosystems.
As Techfins further establish their presence, they will upend existing revenue models for the industry. These are expected to replace fee-based models as primary sources of revenue. Most Techfins are leveraging their existing consumer base and behavioural data collected over the years to develop better payments solutions. Once they firmly establish themselves in the payment’s ecosystem, they look to add other complementary products/services that can be cross-sold to increase customer stickiness and generate incremental revenue.
What About Established Institutions
Reorient Business Models
The redistribution of profit pools will require incumbents to reorient business models, ramp up the pace of digitization, gain economies of scale, and manage risk in new ways — whilst speeding innovation cycles. Although there is no standard playbook, three primary strategic options would emerge:
One, value shifts from payment plumbing to control over digital channels. Banks cede control over distribution to Techfins and provide mere payments plumbing. Due to cost commoditization, incumbents will consequently see a decline in profit margins.
Two, incumbents embrace ecosystem play, curating services, particularly in markets, where open banking regulations have been enacted. Platforms that offer the ability to engage with financial products from a single location will become the dominant model for the delivery of financial services. Banks would choose between being a multi-service integrated provider of both financial and non-financial services, or they could become a specialized niche organization for a specific segment of the banking community.
Three, incumbents offer Banking-As-a-Service and expose APIs to third party partners as well as participate in external ecosystems to expand distribution and improve access to new customers.
Build an Agile Technology Foundation
Many incumbents are mired under the weight of inflexible legacy systems. According to a 2019 study by consultancy Cornerstone, almost 70% of respondents said that their institution’s current technology infrastructure was a barrier to digital transformation and a staggering 55% of banks stated they lacked digital maturity, with only 12% rating themselves as digital leaders earlier in 2020. Banks need to invest in an agile technology foundation to innovate and integrate with ecosystem partners at market speed. This will require an end-to-end digital banking transformation, driven using data, AI, applied analytics and cloud computing.
Adopt a Data-Driven Approach
Data will become increasingly important for differentiation, but bank’s data sets will be enriched by flows of data from multiple sources. Consumers accustomed to digital services by fintech are demanding experiences that are personalized and completely intertwined with our wants and needs. Embedded banking, supported by modern technology and enhanced by high levels of insights, provides unlimited opportunities for financial institutions to retain current customers, generate new relationships and deepen the customer journey through the purchase of both financial and non-financial products and services. Techfins enjoy the advantage of having a single view of customers across verticals in which they operate, which provides an irreplaceable competitive edge.
Source: The Financial Brand
In Conclusion
A large number of incumbent banks would need to transition rapidly to stay competitive. They lack inhouse capabilities and need to collaborate with payment technology vendors such as FSS, who can play the role of technology and market specialists to help navigate the new landscape.
