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Banks Risk Losing Billions of Dollars in a Few Years

In a world where people learn to use their thoughts and brain chips to control technology, plastic cards and 2-day transactions still prevail. Such a strange combination, don't you think? It often seems that time slows down when it comes to payments. Because even when you read news about the next big thing in paytech, it may take years to hear about its success, if you even hear about it.

The problem of long-lasting digital transformation initiatives

Let's remember the launch of Express Elixir in Poland and its long way to success. In 2014–two years after the official launch–the transaction volume totaled 1 million PLN. In 2015, Blik introduced mobile P2P payments powered by Express Elixir and boosted the adoption rate. Consequently, the transaction volume reached 3M in 2016 and 13M in 2018. 

Another recent case is the launch of FedNow in July 2023. According to Dragonfly Financial Technologies, only 4% of banks have already added FedNow to their portfolios, and 24% will likely add it in 2024. The rest of the executives either won't add it or harbor doubts. So, we see the problem, but what's actually the problem?    

The difficulty is that payment innovation is mainly fueled beyond the bank's wall. Hybrid payment solutions, new configurations, and next-gen product categories spring up like mushrooms. However, they are offered by anyone but not banks. In Europe payment innovations are driven by regulations, governments, and competition. In the USA, banks are in the 'waiting mode' because, except for general US regulations and internal legacy tech, they must consider the laws of fifty states. Most importantly, all those changes and advancements are initiated or demanded by consumers because they expect better service. Expect and don't get or spend years waiting for the implementation.

What it boils down to is that banks must regain the initiative. Otherwise, sticking to legacy payment technologies will result in further customer outflow, growing tech debt, and over $57 billion spending on mere maintenance with little to no innovation.

The case with banks: strive or die?

So, we've defined the problem; what's next? Obviously, we can't expect financial institutions to sunset all their technologies and replace them with new ones. It's risky, not to say impossible. My experience proves that the best approach to safe upgrades is partnering with fintechs and offering payments-as-a-service (PaaS) or banking-as-a-service (BaaS) solutions. Such an approach is win-win for everyone. Fintechs bring expertise, innovations, and agility that most financial institutions are missing, while gaining an opportunity to scale, expand their partner networks, showcase innovations, and offer products to more people locally and globally.

Though the IDC study states that PaaS products are currently used by only 5% of FSIs globally, those numbers may change quickly. Customers get more tech-savvy, and soon, financial institutions will have no choice but to change. In Asia and Europe, a cashless society is already a reality, so is there still a place for banks? Definitely yes and that's what should be added to their business growth strategies ASAP:

  • Benefit from modern SaaS financial platforms to improve offerings and be able to compete with other market players. It includes APIs, engines, ready-made back-ends with necessary payment functionalities, and more. SaaS removes the burden and operational expenses related to developing, maintaining, and constantly updating the system. You may choose any solution relevant to your business and audience, but it should be future-ready and easy to integrate.

  • Tap into crypto and tokenized assets to foster collaborative ecosystems and unleash new investment strategies. Big banks warm to digital currencies, and governments are starting to see them less as threats and more as opportunities. The upcoming EU’s MiCA regulation is the best example here, and it’s likely to bring CBDCs, stablecoins, tokenized deposits, and other digital forms of money to the top of the global agenda again. And nobody wants to be left behind the competitors, right? Eventually, we shouldn’t forget about blockchain as its distributed system of records may finally be well appreciated in the context of PII management and real-time transaction processing. 

  • Leverage generative AI to optimize daily activities and improve customer experience. Artificial intelligence in the payments industry has different use cases, depending on the bank's maturity and needs. However, among the most effective implementations are 24/7 virtual support, automated client call assessment, and paperwork related to technical documentation, account plans, and proposals. Automating these activities can help free up internal resources and focus them on more strategic and future-proof initiatives. In other words, leveraging technologies empowers financial institutions to do more with less, as many say in their sales pitches. 

  • Develop PaaS/BaaS solutions for merchants and non-banks to grow your market share, maintain competitiveness, and challenge fintechs. This option will work well if you consider a gradual update of the internal infrastructure, as it may result in revenue loss from more profitable payment options, including cards. Additionally, it requires an engineering team, a development plan, and massive investment compared to SaaS solutions. 

Some may argue and say that there is still one more option: leave everything as it is. However, it's not an option but a choice to die slowly. We must admit that society won't roll back because people seek and appreciate convenience. For instance, 58% of people opt for biometrics over passwords at least half the time, and 33% always do that. The dominance of biometrics over passwords best illustrates the tendency where people strive to eliminate repetitive activities and accelerate any process. 

You're mistaken if you think all the recommendations above apply to individual clients only. SMEs are also seeking better service and support. For instance, McKinsey's 2023 SME survey found that the top 4 reasons why they would consider switching banks are: 

  1. Easier access to credit – 39%
  2. Client servicing support – 33%
  3. Digital experience – 32%
  4. Wider product suite – 30%

So, the moral of the story is that financial institutions need to consider and satisfy client expectations but not expect them to leave their comfort zones for the sake of a business. The competition is too fierce, so decisions should be quick. 

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Ross Kolodyazhnyi

Ross Kolodyazhnyi

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DCM

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This post is from a series of posts in the group:

Banking

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