The global payment business is growing at a healthy pace and by 2018 will account for 43 percent of all banking revenue, up from 34 percent in 2009, McKinsey concluded in a recently released study, “Global Payments 2014.” Asia-Pacific (APAC)—which currently accounts for the largest share of payments revenues (40 percent)—will continue to be the engine of growth, contributing 56 percent to the global increase in revenues over the next five years, the study reported. China alone will account for 40 percent. Western Europe and developed Asia, where growth has been negative in recent years, will return to positive growth.
The digital transformation of payments, particularly through smartphones and tablets, is helping to grow merchant payments.
“The question is whether incumbents will be nimble and innovative enough to tap into a significant share of this growth.” Incumbents, in this case, means banks.
“I don’t think banks are going to lose,” said Philip Bruno, a senior partner in McKinsey's Global Payments Practice. Back in the days of Internet 1.0 it was popular to say the world needs banking it just doesn’t need banks, he recalled. The threats then were mostly small startup while today banks face potential competition from large, tech-savvy companies with ample treasuries — Google and Apple, for example.
“The payment market then was $112 billion and banks owned it end to end, Today in US it is $290 billion and banks have well over a 90 percent share.”
McKinsey counted 450 payment startups from the time of Netscape’s IPO to eBay’s purchase of PayPal.
“Less that 10 of those firms are around today,” said Bruno. “The difference today is the competition comes from firms with tens or hundreds of billions of dollars and tens of millions of customer relationships they can turn into something, so I do think it is going to be much tougher for banks. They did create online banking, but they did it at banking speed. Now they have to operate at Silicon Valley speed.”
Data is going to be an area of competition and it will require banks to do more analysis with more data. They have done a reasonable job within the walls they know, said Bruno, like using transaction data to understand customer risk. But it took an outside financial firm, the credit card company Capital One, with its information-based strategy (IBS) developed in 1991 to develop much more complex models of customers and their ability to pay. (Capital One has since expanded into banking through a number of acquisitions and is one of the country’s top 10 banks by deposits.)
New players in finance are combining new sources of information such as social networks and location-specific data to create fresh market insights and new products, McKinsey said in its report. “The challenge for banks is to shift from their traditional heavy reliance on siloed, proprietary data, to a more open approach that encompasses a broader view of customers.”
Banks are just beginning to adjust to some of these ideas. Bruno said that many have their customer data in silos and the idea of sharing it across the bank is a foreign concept for many. That is changing in some organizations — Bank of America has worked with Cardylitcs to create BankAmeriDeals, a merchant-funded rewards program using customer data to create targeted digital offers.
Digital has transformed the buying process from one where a consumer made a purchase and the payment came at the end, to one in which consumers are in a mode of consider, evaluate, buy and bond.
A customer with phone in hand can walk through a Best Buy, or a FootLocker, compare prices, check for coupons, see loyalty points and make a purchase from Amazon or Zappos from inside the store. The obvious danger is that Best Buy pays the costs of brick and mortar, staffing, heat and lights while Amazon gets the business.
This has a name — showrooming, where potential buyers check online prices on a phone while wandering around a retailer’s showroom floor. And just to keep things complicated, Business Insider says reverse showrooming, where buyers check products online and buy them in brick and mortar stores, is growing in popularity.
The store can counter with offers of its own, including the convenience of trying on merchandise or letting customers hold different phones and tablets to check their fit, weight and comfort. Especially with mobile devices which make it easy to research purchases from a store’s showroom, the evaluating, purchasing and loyalty are converging, said Bruno.
While a customer is standing in the middle of Best Buy’s computer section, testing a tablet for size and weight, using an iPhone to check reviews on Amazon, examining targeted offers from Best Buy that appear on the phone, the customer’s bank is out of the loop. When she makes the purchase, at Best Buy or through Amazon, the merchant captures her information regardless of the payment method she uses.
While she is standing there looking thoughtful, or confused, she is in the midst of a greta deal of spending to capture her purchase.
Bruno said that by 2018 payments revenue is projected to be $340 billion — $187 billion in commerce related payments and over $160 billion in what Bruno calls commerce facilitation revenue — advertising, loyalty and activities around considering and evaluating a purchase. Digital players dominate that part of the business. Banks should worry because they “have a whole new set of competitors, the digital folks who play in the $160 billion part of the business are looking at my $187 billion payments revenues and licking their chops.”
Bruno said that although payments make up 35 to 45 percent of a bank’s revenues, they are rarely managed as a business across the bank.
“I think they will need to coordinate in the future,” Bruno said “Particularly in digital. It could be they develop B2B2C, which means the consumer group has to work with the commercial banking group.”
The digital challengers are playing in the evaluate-consider portion of the buying experience, and adding on payment at the end, perhaps through Facebook, a debit card/mobile budgeting solution like Moven or Simple, a credit card or another payment service. The payment type that is top of wallet will almost be an afterthought in the purchasing process. A shopper may spend half an hour at Best Buy doing research and comparing prices and offers and then a few seconds on the payment.
Bruno said that success for payment providers will depend on understanding the changing role of payments.
“As a payments guy, it is not about the payment — it is about what a customer is trying to do,” he said with a trace of regret. “At the end of it, yes, there is a payment in there.”
Sometimes the payment is almost automatic as part of the experience.
With Uber, the payment is a fully integrated part of the car service process. Panera Bread makes it possible to order a sandwich and pick it up with the payment done effortlessly — saving time for both the customer and the shop which can process more orders faster at busy times of the day. In the transaction, Uber and Panera capture the customer data and develop the relationship that allows them to offer loyalty points and reward programs.
The issue for banks is what role they will play in this evolution of payments.
The financial institutions don’t want to just sit in the background — they want to deliver those experiences and become the brand bringing them to the customer, Bruno said.
“The fear of the banks is that someone else owns that customer relationship and provides the payment services.”
