Payments have never been the sexiest area of banking. Yet they are the systems and protocols upon which much of the modern economy rests. They are a vital component in the banks’ core role in the financial system. More than any other part of banking, payments touch ordinary citizens and businesses on a daily basis.
It is not just that banks enjoy privileged access to the payments system — which they do — but that in an important sense, they are the payments system. It is banks that on an hourly and daily basis ensure the secure exchange of value and supply the liquidity that lubricates the normal day-to-day activities of households and businesses. That dominant position is now under threat.
Household and business payments generate millions of dollars in revenue for banks each year. However, most banks realise that their position in the payments system now rests on increasingly shifting sands. They recognise that new groupings and alliances are forming around technological innovations to challenge banks’ traditional payments business.
In Australia, KPMG’s new Retail Banking Centre of Excellence has continued to adopt payments as one of its priorities for research and consultation. The Centre of Excellence draws together KPMG’s leading retail banking practitioners, providing a forum in which they can develop the firm’s thinking on strategically important issues in the contemporary banking scene. The Centre’s agenda covers strategy formation, the customer experience, marketing effectiveness, channel optimisation, operational excellence, regulatory change and, of course, payments.
The work of our Centre of Excellence has already come to several important conclusions about the current state of play in payments.
- Technology companies and credit card providers are building powerful e-Wallet offerings. In the US, Google’s e-Wallet lets smartphone owners use their phones to make payments using near field communication technologies. Citibank, MasterCard and First Data are already on board. Visa is now in discussion with Google about developing its own e-Wallet. Banks that fail to move quickly in this space risk being excluded.
- Other technologies are gradually supplanting banks in the payments supply chain. For example, Square, a US startup, is distributing simple plastic devices that turn a smartphone into a card reader and payment terminal.
- Payments technology and related intellectual property no longer provides a barrier to entry to the payments system.
The likes of Apple and Google — with cash reserves of US$76 billion and US$11 billion respectively — come armed with the technological firepower and financial wherewithal to create their own extensive PoS networks and back office support. In Australia there is a clear intent by Woolworths and Coles to enter the market for financial services. It is now only a short step to take banks out of the transaction chain altogether.
This is not to say that Australian banks have not recognised the challenge. Commonwealth Bank of Australia (CBA), will shortly unveil Commbank Kaching, an NFC-based payments service that makes it easy to send money from a mobile phone to Facebook friends, email and phone contacts, and also to make payments in stores.
Examining these trends, the Centre of Excellence has developed five hypotheses about how these developments will actually play out:
- Within 5 years the volume of contactless/mobile payments will exceed cash, cheques and credit cards.
- Supermarkets, telcos and handset manufacturers will become significant intermediaries and alternatives to banks in the payments space.
- PayPal, as the leading challenger for online payments, will continue to win market share from the major banks.
- In the same timeframe, nearly two thirds of personal international money transfers will be conducted by players that are smaller and more nimble than banks.
- Consumers will be conducting a significant proportion of their payment transactions via mobile handsets within 5 years.
The Centre also hypothesises that, banks are at risk of losing their dominant position in the payments space and with that the associated revenue streams.
Nevertheless remember that these are hypotheses, not locked-in outcomes. What happens over the next 4 or 5 years will largely depend on the strategies banks develop to respond to these threats. Our Retail Banking Centre of Excellence will be exploring these issues further in the months to come.