The payments industry is in the throes of a perfect storm – the traditional payments business is at risk from excessive rising costs and disruption which calls for radical payments transformation
(Content for these thoughts are Gerard Hergenroeder’s solely, not his employer IBM)
Below are a list of proof points that bankers and payments people should be aware of as they think about their operational business models and future roadmaps. Today’s models are doomed for financial failure in the future. They just will not survive the
test of time. It is time to chart a radical new course for banks to continue returning value to shareholders.
- In mature economies check and ATM volumes are decreasing while costs continue to increase which implies much higher unit costs.
- 3rd rails to support new Faster/Immediate payment schemes will increase total payment costs further and accelerate declines in existing channels and schemes
- ATM and check declines will accelerate rising unit costs
- Wire transfer and SWIFT revenue will be threatened due to new lower cost B2B alternatives.
- Corporate treasurers will think twice about the costs and value of traditional of traditional payment schemes. Why pay $35 for a wire transfer Vs $1 for a B2B transaction?
- ACH/SEPA growth will moderate due to new alternatives.
- Traditional card volumes could decrease as new C2B payment models attack the high cost of traditional interchange.
- New Blockchain technology and its subsequent productivity improvements will impact the cross border payments business.
- McKinsey estimates unit revenue could decrease from $35 to $1 per item.
- Ongoing regulatory change
- PSD2 initiatives in Europe will give consumers new payment alternatives and will threaten existing payment revenue streams.
- Traditional interchange models will continue to be threatened with extinction
- Europe and Australia have already experienced regulatory actions to lower interchange revenue
- In the U.S. debit interchange rates are now regulated.
- Regulation of credit card interchange is still on the table for lowering the cost of traditional retail payment transactions globally.
- Surprising disruptions via Fintechs
- Fintech innovation is the wild card for disrupting retail transactions at the front end. PayPal, AliPay, Square and others have successfully captured consumers.
- Perhaps one day banks will be paying Fintechs to source new accounts and transactions.
As a former banker who developed all of today’s payment schemes many years ago I’ve seen the rise of siloed IT applications and servicing operations.
Just think if banks had one payments application with one servicing platform, my hypothesis is they could take out 75% of their payment costs. Now that’s a prize worth going after!
Now, the question is what should banks be doing in response to these trends, and just as important
how should they transform their business models? What do you think? Radical application convergence? New digital servicing models? Cloud processing? API's everywhere?