By Richard Steggall, Urban FT, May 10, 2021
When it comes to digitization and technology adoption, banks and credit unions have been thrown into the lion’s den. Sparring with tech giants and innovative startups to defend increasingly disputed territory in financial services, much of the threat to traditional financial institutions (FIs) lurks in the payments sphere.
To maintain market share in payments, banks and credit unions will need to find a way to digitally transform the “customer journey” within 18 to 24 months, according to a recent report from McKinsey. As the report points out, transaction banking is nearly a decade behind the technology industry in its customer management and sales practices, making the successful digital transformation of payments for banks and credit unions a very formidable – but certainly not impossible – task.
Is payments’ ground zero’ for the technocratic raid of financial services?
The good news for traditional FIs is that big tech’s approach to financial services is not flawless and total domination is not a given. The cracks in the plan are already showing. For consumers, the overreaching claws of the big tech lion threaten our privacy, as the likes of Google and Facebook are exposed for their close eye on our online behaviors and transactions – converting us all from consumers into products.
As insidious as the tech giants’ growing influence may be, digital payments continue to surge amid the mass digitization triggered by the COVID-19 pandemic. Subsequently, the fierce pack of the ‘Fantastic Four’ (Paypal, Stripe, Square, and Adyen) are luring new customers from banks and credit unions in droves, each with their unique concentration.
For example, Paypal, the largest player in payments, focused on combining its ubiquitous payments gateway with online wallet capabilities. The conglomerate’s universality allows for endless partnership opportunities, including prized deals with Mercado Libre, UnionPay, and Google.
In operating a similar model of combining payment gateways and online wallets, Square, is developing its unique differentiator by targeting the millions of independent merchants and consumers traditionally underserved by conventional banks.
In contrast, Adyen and Stripe are online acquirers with no consumer-facing brand. While Stripe aims to attract startups and microbusinesses, Adyen seems focused on becoming the payment processor for large concentrated brands, including Subway, Netflix, Airbnb, and eBay. Notably, the latter was poached from PayPal, who may not mind so much since this concentrated large-brand client base isn’t PayPal’s focus anymore.
As each of the Fantastic Four carves out its niche within the payments space, their distinct targets mean they likely won’t compete head-on with each other for some time. In the meantime, their fervent focus on providing convenient, user-friendly financial services will mean more short-term competition with thousands of regional and local banks that service millions of businesses and consumers.
Are the ‘Fantastic Four’ aiming for the lion’s share of financial services?
As “Kings of the Jungle” in delivering customer-focused mobile pay convenience, the ‘Fantastic Four’ firms compete to grow their suites incrementally. They will soon hunt well beyond just payments – invading aspects of full-service banking. Interestingly, PayPal already boasts having the most customer accounts globally in the entire financial services industry.
The threat of big tech is giving brick-and-mortar FIs a swift run for their money. Simultaneously, tech’s growing presence in payments could (and rightfully should) trigger concerns among consumers about who they trust with their money. We’ve already seen gross breaches of consumer privacy in the tech industry’s other forays into financial services.
In November of 2020, Google redesigned its contactless payments service Google Pay, infusing the services of traditional banks with the seamless, convenient experience users expect from the likes of big tech. As with practically anything Google does, there’s a catch, of course. How else does a company earn $1,954 per second? Despite the elaborate smoke and mirrors that Google puts up about Google Pay and its suite of products, one fact remains: Google is an advertising company with ads representing 71% of its revenue sources in 2019.
A successful attack on financial services may work for Google shareholders. Still, consumers must address the following important question. What happens when an advertising company – fortified with the terabytes of our data points it has seized from our emails, location data, song preferences, and shopping lists – now wants to be our bank? The answer is potentially unsettling, especially considering the astonishing disregard for user privacy shown by big tech.
A similar scenario could easily play out among the payment giants.
For example, while most of PayPal’s revenue comes from traditional transaction fees, it also generates revenue through partnerships, referral fees, subscription fees, gateway fees, and ancillary services to merchants and consumers. With enough market share, PayPal also owns terabytes of consumer and business data and is actively gaining more, putting it in a position of power like Google, Facebook, Amazon, etc. After all, this transaction data is incredibly valuable, and the company will inevitably see the opportunity to capitalize on it – sooner rather than later.
Here’s how FIs pounce back
FIs – especially smaller regional banks and local credit unions – struggle to digitize in the current environment, a challenge faced even before the pandemic. According to data from Accenture, after investing more than $1 trillion in new technology from 2016 through 2019, the majority of banks globally have yet to see any financial boost from digital transformation programs.
In the world of digital payments, the adage “with great power comes great responsibility” rings true. Customer data is a potent tool, allowing banks to cater to all consumers wherever they fall on the financial spectrum. For example, by analyzing a customer’s spending habits, a bank can offer tailored solutions that help consumers save, invest or spend money more strategically.
As consumers become more aware of how their data is used and rebel against it, trust and transparency emerge as the weapons of stealth that traditional banks use to protect their territory. In a recent Ponemon study on privacy and security, 86% of respondents said they are “very concerned” about Facebook and Google using their personal information. The payment giants won’t be able to hide behind buzzwords like “convenience,” “personalization,” and “user experiences” much longer.
Responsible digitization is key for safe, secure payments
The financial services industry has reached a crossroads, with consumers and businesses given a choice to leave traditional FIs and hand over their transactional data to big tech conglomerates. But there’s also an unprecedented opportunity for FIs to capitalize on big tech’s failure to value consumer privacy and security truly. By digitizing efficiently – with trust and transparency at the top of priorities – banks and credit unions can still win back customers.
Agility is key. FIs must team up with responsible fintechs that understand the sensitive balance between ethical data usage and superior UX. For example, suppose banks combine their banking core and payments processing systems with a fintech core. In that case, their digital ecosystems will be immeasurably more malleable, efficient, and scalable in the long term. Rather than digitizing processes piecemeal as many FIs do today, all functions and suites will be brought into one succinct ecosystem – providing the agility to digitize faster and compete better with big tech, digital banks, and startups alike.
At the same time, while big tech collects consumer data to support its other revenue-generating streams, FIs can court consumers by stepping up to the plate and using data to drive responsible personalization and superior UXs that protect consumer privacy. By delivering genuinely personalized interactions while ensuring data collection is secure and transparent, banks and credit unions can win back the hearts of customers.
When done right, banks and credit unions of all sizes can level the playing field. At the same time, consumers will have more options for safe, secure digital payments.
In other words, everyone wins – except the big tech elite.
Australia native Richard Steggall is the CEO of Urban FT, a New York-based fintech company. The company serves more than 500 financial institutions handling more than $18 billion in annual transactions. Richard has more than two decades of experience in fintech, capital growth, mergers and acquisitions, and strategic IPO advisory.
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