Cashing-out: the challenges of navigating the new payments landscape

People have been using less cash for years. But the COVID-19 pandemic has massively accelerated this trend, seeing customers swap cash for a range of digital and touchless payment methods. It’s a shift in habits that is only likely to grow as consumers value the convenience and security that digital payments provide. In fact, Accenture estimates that nearly 420 billion transactions worth US$7 trillion will shift from cash to cards and digital payments by 2023. By 2030 the total could reach US$48 trillion. The scale of this opportunity has not gone unnoticed by a whole range of businesses from outside the traditional banking sector.

Banks’ focus needs to shift

In response to this fast-changing landscape, banks are looking to make multi-year investments to compete with non-bank digital-payments providers and comply with new regulations. And the pressure for change is increasing. Accenture research found that three-quarters (75%) of bank executives report that COVID-19 has increased the urgency of their plans to modernize payment systems. However, traditionally, these investments have largely focused on meeting the needs of national payments infrastructure changes and regulation, including improving bank-to-bank payments systems, new industry standards and Open Banking.

So while bank executives cite revenue growth as a key objective for their payments modernization programs, only 13% say their bank’s payments revenue has increased by more than the average market growth rate of 6% in the last three years. Only 16% expect to grow payments revenues more than the anticipated average growth rate of 5% over the next three years.

To create long-term value from modernizing their payments architecture, banks will need to shift the emphasis decisively to changing consumer needs and delivering an experience to satisfy them. In the emerging ecosystem, products and services are accessed through new channels and platforms and threatens to relegate banks to the background. As a result, it’s critical that banks take a bank-wide, business-led approach to payments modernization rather than focusing on technology and operations in a silo.

Different speed, but the same direction

The rate and pace of change in the payments landscape varies from region to region. For example, in China, the relative low penetration of credit cards enabled tech players there to launch digital mobile payments. By 2019, nearly 76% of online transactions originated from mobile wallets, up from around 12% in 2014. In contrast, in the Netherlands, e-wallets are not hugely adopted. However major banks have created a consortium for online payments, which accounted for 60% of market share in 2019. Whatever the specific trends in individual markets, the disruption facing banks is set to increase.

As consumers increasingly expect the convenience of being able to transact though devices such as phones, tablets and smart speakers, Big Tech players have a greater opportunity to further embed themselves in consumers’ lives and everyday experience. Other emerging technologies, such as voice payments enabled through the Internet of Things and connected devices, are likely some way off mainstream adoption – but they are on their way. We could soon see a world where, for example, a smart fridge will be able to learn when milk is in low supply and make an automatic order online and process payments automatically. I predict that barriers to trusting these payments will come down as consumers value the convenience they offer, just as they did with contactless payments or even direct debits.

Navigating a fast-changing landscape

To succeed in this changing landscape, every bank will need to both retain its unique relevance for customers while also participating profitably in the new digital ecosystems that are forming around the customer. To do that, banks will need to carefully define their rules of engagement, ensuring that they retain control of customer relationships and, crucially, data. We are seeing different approaches between banks to achieve that relevance and own the customer relationship. Digital attackers are seeking to position themselves at the heart of customers’ digital and financial lives. Big tech players are nursing similar ambitions.

Winning the battle for the consumer

To compete and win in this increasingly intense battle for the customer, successful banks will be those that embed modern payments into the heart of their digital transformation. They will need to take advantage of cloud and flexible IT architectures to create and own the best possible customer experience. If they don’t, there are plenty of challengers eager to take their place.