For several decades, incumbent banks have held an appropriate leadership position in payments. But the rapid growth of digital payments has signalled opportunity for new market entrants to attack this status quo.
To develop effective ways of stay ahead, incumbents must understand who their competition is now, and assess how their weaknesses and strengths compare in the key competitive battlegrounds of information, trust, cost, innovation, scale and alternative payment methods.
Who are incumbent banks competing against?
Incumbents are facing increasing competition from card networks, payment platforms, challenger banks and large tech players, which is upending the payments ecosystem.
Incumbent banks' market position is underpinned by strong consumer trust and large scale, but these historic advantages can no longer be taken for granted.
Take trust. This can be a layered concept, ranging from transactions being reliably processed, responsible data use and, increasingly, an expectation that organisations are acting within their customers long-term interests. And demographic trends are showing that customers increasingly trust non-bank and alternative providers to deliver financial services.
A recent Oracle digital banking survey focused almost exclusively on Gen Z and Millennial customers showed that 64% would recommend their bank for various spending, savings, borrowing, and investing products, but 56% said they would be willing to switch to banking solutions offered by one of the big tech companies. And at the end of 2021, 15% of Gen Z and millennial consumers considered their 'primary' account to be with a challenger, up from 4% at the beginning of the year.
Elsewhere, banks are sitting on a goldmine of customer data but must start using it more effectively to gain a benefit. In itself, data has no real value, so it's the ability to effectively organise, translate and leverage this data as meaningful customer insight and cost add products and services that has emerged as a key competitive differentiator.
Legacy infrastructure also makes it difficult for banks to compete on cost, which is more important than ever as margins evaporate, and payments become instant, invisible and free. This hampers the ability to realise partnerships to drive innovation and limits the opportunity to explore alternative payment methods.
And as incumbents look to bolster their strengths and address these challenges, they must also recognise the areas in which the competition excel.
Card networks – moving beyond 'just' cards
Card payments are trusted by countless consumers and businesses worldwide, with card networks managing massive volumes to understand huge scale advantages. This is combined with recent mergers and acquisitions to aid end-to-end payment services and multi-rail offerings. Take Visa's Crypto APIs, for instance, which enable banking clients to gain access to and integrate crypto features easier and demonstrates the innovation that is happening in this sector. Mastercard has also confirmed it will enable crypto flow across its network in the near future.
Payment platforms – creating ecosystems
As the payment ecosystem has expanded and digital volumes have increased, organisations like PayPal, Stripe and Square have evolved from single specialised propositions into comprehensive payments platform businesses, providing previously bank-led offerings such as SME lending, corporate treasury services and credit.
Payment platforms work well at managing high volumes and have the capacity to scale and drive innovation in specific areas. Platforms are fast to adopt new payment methods for example digital currencies, and their utilization of data is improving consistently, offering some personalisation to customers.
Challenger banks – the brand new(ish) kids on the block
Challenger banks can best be described as banks without the baggage, unburdened by 50-year-old legacy infrastructure, sprawling bureaucracies and siloed departments.
Challengers have built market momentum and presence through their track record of customer-centric products and services, having made consumer behaviour and experience their focus. Revolut for example offer in app purchase of stocks, crypto and commodities, as well as vaults allowing you to save money in almost any currency or commodity.
Challengers also benefit from a low-cost infrastructure to bring products to market quickly, and have been more prepared to explore alternative payments than traditional institutions. Again, take Revolut for instance, who offer free and instant transfers in 28+ currencies, crypto and commodities. AndFirst Boulevard neobank will be among the first to pilot Visa's Cryto APIs to enable their customers to buy and sell bitcoin through their digital accounts.
Big tech – the wild card entrants
The big tech GAFA (Google, Apple, Facebook, Amazon) players would be the 'wild card' entrants that represent potentially the best competitive threat to incumbent banks. One look at China, where Tencent and Alibaba have established dominant positions and massive payment volumes through WeChat and AliPay, is sufficient to keep bank executives up during the night.
Big tech enjoy massive scale but, so far, have been content with relatively limited plays, for example overlaying services through their mobile wallet platforms or partnering with financial institutions on limited offerings. Don't be surprised continued investments and acquisitions to support data-driven, experiential products and services.
A potential roadblock is that regulation will make it difficult for big tech to undercut your competition by subsidising services below cost. Regulators have also shown their teeth in blocking Facebook's considerable crypto ambitions, forcing a rebrand from Libra to Diem.
How can banks compete in payments?
It is apparent that incumbent banks are under significant and sustained attack from various competitors and the reality is, this competition is only likely to intensify. As J.P. Morgan CEO Jamie Dimon notes, incumbent banks should \”expect to determine very, very tough, brutal competition in the next 10 years.\” When asked why JP Morgan intended to focus on buying FinTech and tech firms, Dimon noted, \”our new competition is Apple, Amazon, Google, WeChat and AliPay\” – rather than other banks.\”
Incumbents must therefore concentrate on combining a clear, executable strategy with flexible technology solutions and expert partners to enhance data-driven propositions, promote trust, reduce costs, realise scale advantages, drive innovation and support alternative payment methods.