Thomas Mathew, TCS Financial Solutions
The decibel level in the payments industry is high with payment related innovations becoming commonplace. Ubiquitous mobile devices, with always-on internet access, supported by a number of path breaking technologies are providing a platform for disruption in the payment marketplace. Perpetually connected customers are quickly reclaiming control of the banking relationship with how and who they do business with.
There is friction everywhere in the payments industry with customers transaction fees and delayed payment settlements continue to be big sore points. New technologies led by mobile computing, in particular, are bringing to light these glaring inefficiencies.
Is the payments industry in a dire state? It depends. For many of the newcomers, this is an exciting place to be in, as there is an opportunity to solve some of the perennial problems facing the industry through new, digital innovations. For a retail bank, however, there are more questions than answers. Are these innovations hyped? Will they move mainstream and disrupt the industry? Should banks be worried about it and what should be their response? While it is not easy to predict if any of these could disrupt the payments industry soon, it is also certain that ignoring them will be at one’s own peril. But one thing is clear – a correct understanding of this consumer-led, technology-driven payments landscape and how it will pan out in the future needs to be factored in while formulating a payment strategy.
Analyzing the payments industry using Michael Porter’s Five Forces Framework:
Porter’s “Five Forces” theory is a popular framework for industry analysis and strategy development, designed by Harvard professor Michael E. Porter, which posits that competitive intensity and attractiveness of any market is determined by the bargaining power of customers, the threat of substitute products or services, the bargaining power of suppliers, the threat of new entrants and rivalry among existing competitors. By analyzing these forces in relation to the payments industry, one can gather a clearer picture of the competitive environment and how the current innovations collectively and separately impact its future.
Force #1: Bargaining power of customers:
Consumers today live in a world that is always connected, with “always on” messaging and social networks. They expect banking to work in that context. Consumers are also rapidly adapting to the new digital-led banking experience. From a mainstream banking point of view, it is not a satisfying experience with detailed paperwork, manual interventions, longer processing time and excessive fees. Laxity in security and frequent downtime deny a 24×7 banking experience. Payments have become expensive, time-consuming and opaque. High churn, low switching costs and a plethora of substitute solutions from alternate providers are attracting consumers to these newer players who are providing an alternate digital experience.
The bargaining power of buyers is VERY HIGH.
Force #2: Threat of substitute products or services:
The mobile phone has become a disruptive payments platform for new innovations and is attempting to replace cash and checks. Some of the recently launched products have the potential to disrupt the payments industry, namely P2P payments, mobile wallets, mobile check deposits, pre-loaded cards, digital currencies, smart ATMs, among others.
P2P payments: After registering with a bank or a trusted third-party organization, money transfers can be made using just the receiver’s e-mail address or mobile number. Major players in the fray include PayPal, Square, Google Wallet, Ribbon, Dwolla and ClearXchange. Paym was launched in the UK recently with nine participating banks to facilitate money transfers using just a mobile phone number. Similarly, Tencent and Alibaba are battling it out in China. Vodafone led M-Pesa is a successful mobile money system for the unbanked in Kenya, which lets customers pay bills, transfer money without any bank involvement.
Mobile wallets: Contactless payment technologies allow banks and other providers to launch digital wallets that can potentially replace physical wallets and also provide a number of add-on services like ticketing, couponing, loyalty offers, payments and banking. A number of non-banks like Google, PayPal, Square, Starbucks, Isis a joint venture by AT&T, T-Mobile and Verizon among others, have taken the lead in launching the mobile wallet.
Mobile check deposits: Mobile check deposit is a technology that replaces the inefficiencies prevalent in the world of paper checks. Customers deposit a check into their bank accounts by snapping a photo of it with a smartphone. A 2012 Javelin report found that mobile check deposits can cost the bank as little as four cents per check, while the traditional branch-based deposits could cost anywhere between 75 cents and three dollars per deposit. According to Mitek, around 11% of US consumers have already used mobile check deposits.
Pre-loaded cards: Reloadable prepaid cards sold at retailers and banks function like debit cards without the checking account, and are targeted at people who are unbanked, as well as those who would like to avoid high bank fees. These cards can be used to withdraw cash at ATMs, purchase online and, at supermarkets, reload cash, with lower fees than that of bank accounts.
Digital currencies: A digital currency is a way to exchange money in real time without any chargeback and behaves literally like cash. Bitcoin is one of the popular digital currencies without any physical borders, national sovereignty or middlemen and is an internet-wide payment system where transactions either happen with no fees or very low fees. Digital currencies have the potential to disrupt the high-fee world of banking through new ways of paying for goods and services.
The above innovations, amongst others, address the current inefficiencies in the payments marketplace and can provide a superior digital experience to consumers.
The threat from the substitute products is VERY HIGH.
Force #3: Bargaining power of suppliers:
The several decade-old payment infrastructures especially in advanced countries are an impediment to supporting real time payments. There is a lack of transparency in the current settlement process with the value of free float enjoyed by banks continues to remain very high. Unable to support innovation, various stakeholders are looking at alternate approaches to improve the current system. Countries like Australia are building new payment platforms that will transition to a real time system. Similarly, the Financial Conduct Authority is planning to open up the UK payment sector to new companies to improve competition. The Federal Reserve is also planning to overhaul the U.S. payments system to achieve faster payments than is currently offered by ACH. On the other hand, the emerging market countries have leapfrogged with state-of-the-art national payment infrastructure and are able to provide a better customer experience. Without a modern payments infrastructure at banks, the market is open for new players for greater disruption, while also rapidly making the current systems redundant. A number of players are already innovating in this area such as Dwolla, Square, PayPal, ClearXchange and virtual currencies like Bitcoin, all with the capability to build an alternate payments infrastructure.
The bargaining power of suppliers is HIGH.
Threat of new entrants The payments industry has become a hotbed for innovation with new players wanting to upstage the traditional ones and dominate the market quickly. They come from varied industries ranging from startups, telcos, card companies, supermarket chains, technology companies and de-nova banks, offering simpler functionality through an exciting digital experience that appeals to everyone including the millennials. Many see greater opportunities in the payments data to generate advertisement revenues. A number of these players are today offering everything from debit cards, checking and savings accounts to money transfers and small business lending outside of traditional banking.
Square, Stripe, YapStone, Xoom and PayNearMe lead a crowd of startups, many aiming to simplify how money changes hands. Giants such as PayPal, Apple, Amazon and Google top a list of big companies that already have substantial payments operations, with Facebook recently applying for an e-money license to enter the remittances market.
Cell phone carriers are pushing hard into mobile payments as a natural extension of their services e.g. Isis, Weve a similar venture of Vodafone, O2 and EE among others. Vodafone is successfully replicating the M-Pesa model in the emerging markets and even in Europe. Supermarket chains like M&S, Sainsbury and Tesco are becoming financial services providers offering products such as credit cards, saving accounts, personal loans and insurance, among other services.
MCX , a consortium formed by retail giants Wal-Mart, Target, Home Depot, 7-Eleven, Best Buy, CVS, Sears and Shell will bypass the traditional payment networks altogether. Starbucks’s spectacular success with its mobile payment application, with several million active users already, is an eye opener. Digital currency Bitcoin and its offshoots are pursuing new ways of settling money globally and on a larger scale.
The threat of new entrants is VERY HIGH.
Rivalry amongst existing competitors The competitive rivalry in payments has intensified over the past year with banks, card companies, telcos, de-nova banks, payment companies, supermarket chains and large technology companies all trying to engage with the consumer, with traditional players trying to hold on to their customers in spite of the many frictions that exist in their offerings. Card companies like Visa, MasterCard, and American Express are looking at opening up their market through new offerings based on pre-paid cards, mobile wallets, among others. PayPal continues to dominate the payments settlement business. clearXchange, a network of four of the seven largest U.S. banks operates a P2P network for its member banks, while Western Union and MoneyGram maintain their domination in the remittance business.
The rivalry amongst existing players is VERY HIGH.
What should banks do?
As one can see, Porter’s five forces analysis implies an approaching digital disruption that could fundamentally transform the payments industry. A number of players from diverse industries are trying to influence the outcome of this marketplace in the backdrop of a rising customer preference for greater self-service in an increasingly integrated digital and physical world. And banks are running the risk of being relegated to back-office utilities thereby losing their customer touch points. Despite the looming threat, banks continue to possess inherent strengths. They have large customer bases; vast amounts of customer and transaction data; and strong capabilities to execute payments securely – all of which are difficult to replicate quickly by newcomers. Much will depend on their ability to leverage these competitive advantages by providing greater customer fulfillment through rapid digital adoption. Banks should consider the following.
- Build strong capabilities in (a) customer data consolidation (b) real time channel interfaces and (c) rapid creation of new payment products through a modern open banking platform.
- Digitize business processes quickly, be it customer communications, channel interactions, marketing and selling, amongst others.
- Build fundamental capability to support multiple contexts of customer fulfillment irrespective of what form factors the future may take hold (Google Glass, smart watches, etc.) thereby helping consumers make optimal decisions on what to buy, where, when and how to buy it – whether it’s dinner, a car or a new home.
- Continuously evaluate new technologies to generate innovative ideas for a superior digital customer experience, through dedicated innovation labs or partnership models.
Finally, each bank will have to pick a strategy that leverages its strengths and supports its business goals, but also accept the changed context that they have to strategize for. In the meantime, consumers are embracing mobile in large numbers and are clearly showing their preference for the convenience and simplicity of transacting on the mobile anywhere, anytime and on any device. Banks need to rise up to that occasion and delight their customers in this new, digital world.