The digital transformation of payments is driving innovation and helping to grow the overall payments market.  This is a good thing for most players in the payments space, but the key question for banks is whether they—as the incumbents—will be nimble and innovative enough to tap into this opportunity.  This blog looks at the opportunities and threats for banks as a result of this coming digitization.

The opportunity:  Digital payments

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.  This data from McKinsey’s recently released study, “Global Payments 2014,” is described in Forbes’ article, entitled “Banks face powerful competitors in the payments business.”

In BCG’s Global Payments Report 2014, the authors write:

“Never in the history of the payments industry has there been a time of such disruption and opportunity across regions.  Digital technology will upset the competitive order and the role that payments play in both the operations of businesses and in the daily lives of consumers.  Payments players, depending upon their strategic decisions over the next ten years, will have much to gain or lose.”

The threat:  Digital titans 

As digitization transforms the payments industry, the key issue for banks is to determine what role they will play in order to realize this growth opportunity… or whether new digital competitors will gain most of the value.  And these new competitors are not only start-ups; rather they are digital titans:  Apple, Google, and Amazon.

Although banks are the incumbents in payments, the game is shifting to one being played on the “home fields” of the digital titans.  That is, a game where rapid technology development speed, cloud-based scalability, simple interface and user experience, and robust data analytics become increasingly paramount.

Philip Bruno, a senior partner in McKinsey’s Global Payments Practice puts it this way:

“I don’t think banks are going to lose.  However, today banks face potential competition from large, tech-savvy companies with ample treasuries — Google and Apple, for example. 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.”

In addition, Bruno said:

“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.  The fear of the banks is that someone else owns that customer relationship and provides the payment services.”

Recommended actions

Banks maximize their chances for digital payments success by doing the following:

• See payments as a platform, not simply as a product
• Identify the initiatives that warrant investments
• Pursue multiple paths in order to gain broader experience and new customer insight

Incumbent banks must figure out how to integrate their own payments services into platforms that contain additional benefits.  Remember consumers don’t think much about the actual payment process, but they all like to save money, be appreciated as a loyal customer, and be wowed by their overall product experience.

Banks need to understand the economic impact of payments digitization on their bottom line, as well as the impact on providing real value to consumers and the solution’s ability to scale.

After banks identify the right projects, they must make “buy vs. build” decisions or make partnership decisions, and subsequently develop their knowledge through smart experimentation.

In summary, the digital transformation of payments presents banks with both an enormous opportunity and threat.   Banks need to take action as this prize will not be easily won.  Let us know what you think.