The Payment Model In Banking: From Stasis To Dynamic Change

The payments landscape is in flux and changing fast. Ahmed Michla of Sopra Banking Software explains what might come next – and how to cope

New technology is altering the way payments are made. As a result, what was a very dependable, perhaps staid business model is changing before our eyes into a deep structural challenge to banks. The problem is, what to do about it?

To answer that question, let’s review the context of the problem. Increased competition between banks and new market entrants are seeing shrinking margins with payment costs on a par with any revenues gained. Added to this, regulatory changes also mean lower direct revenues from payments, such as reducing card interchange fees. We are also witnessing unexpected new players entering the market – technology giants such as Google, Apple and Microsoft, and a host of others that none of us will have heard of, most likely. These challengers see huge opportunity in the digital payment space, as traditional payment methods have started to decrease in popularity – and they want in.

Both old and new guard are both trying to seek a new form of online relationship with consumers. There’s a lot of valuable customer data out there, and the route to getting access to it seems to be by offering digital innovation and appealing new services.

Low-hanging fruit

Banks have been taken a little by surprise by all this. They need to respond quickly, or be left in the role of back office processor, helpless as an ever-widening gap opens up between the customer and themselves, a gap increasingly filled by non-traditional competitors with deep pockets and huge technical resources to try new things. 

Consider Apple, for example, whose Apple Pay electronic wallet has quickly taken hold in both US and European markets. While Apple says it is happy to work with banks, the relationship may not necessarily be in the banks’ best interest. If Apple gains enough Apple Pay users – and given its brand credentials, this may not be difficult – it may be strong enough to start to govern the pricing structure. It may also start siphoning payment revenues away from banks, establishing itself as a retail banking power house, in the same way it’s done in other markets it’s entered like entertainment and so on.

Banks should see this as a very real threat, and they must move quickly to consolidate their current position of strength by introducing some radical changes to their payment model. For example, a great area for development is new services in the card arena, as well as innovative loyalty programmes, ticketing and buying advice. Integrated payment and credit facilities are some of the value-added services that can be attached to a digital wallet, and which are easy, ‘low-hanging fruit’ that they should be developing now, not in two years. 

Be aware that caps on interchange fees can help retain cards as a payment method. Why? Because, due to low overhead, merchants may continue to favour cards over other payment methods. In response, banks must also keep automating processes to keep as agile and competitive as possible.

While doing all this, financial services firms must keep a constant eye on regulation. Regulatory authorities are pressing for new modes of payment to be introduced, in order to minimise the risk of monopolies: the European Retail Payment Board, for example, is working to create a pan-European instant payment scheme, based on credit transfer as opposed to cards. At the same time, the upcoming Payment Service Directive 2 will give third party providers the right to initiate payments, obligating banks to allow them access to their customer accounts.

With all that in view, it seems that just concentrating on defending a strong position in the card arena is not going to be sufficient. Banks must be careful they don’t engineer a situation where they, together with the card networks, control the industry to such an extent that new techno-savvy entrants simply go out and create a competing model banks can’t gain access to. Banks should therefore prioritise the development of new payment models where they can establish a pivotal role, ideally with systems based on credit transfers and real-time payments.

Don’t let the gap become fatally large

In five years, the payment landscape will look radically different, have no illusions. Expect a rapidly changing payment ecosystem with increase convergence, integration, mobile technology and e-commerce.

As a result, many players will struggle. Nonetheless the future for banks is bright – despite the non-traditional bank threat – but only if they rapidly develop the right new payment structure for the market of today. If that means tearing up the rule book about your card business by creating new payment services around it to get there, then do it you must – or risk getting left behind.

The author is Sopra Banking’s Global Head of Content Strategy