The rise of digital payments
Digital payment is the fastest-moving, most dynamic sector in financial services today. That potential is duly recognised by the share prices of the major card networks – Visa, MasterCard Amex and others – and also by the fact that well over 80 % of all transactions are currently carried our with cash, so the potential to replace with digital is enormous.
In the developing world, the consequences of the arrival of mobile money schemes has been extraordinary and has hugely improves quality of life in those countries.
Digital payments are instant, and more secure = no longer the need to carry cash in unfriendly places. Greater ownership and use of mobile money accounts has reduces the cost of financial transactions, particularly in the area of remittances where costs have heretofore been extortionate. The need for the consumer to travel long distances – whether to bank branch, money transfer operator (MTO), counter, or government office, which may only be available in a regional capital – in order to receive a remittance or government transfer or make a bill payment, has been eliminated. This means massive savings on travel time and travel expenses, as well as income forgone while travelling and waiting to collect a payment. Meanwhile, governments worldwide are enthusiastically promoting digital payments to rein in the black economy.
The World Bank also notes that greater access to financial services has increased the incentive to save and has encouraged improved personal finance habits: “Digital payments create the opportunity to embed poor people in a system of automatic deposits, scheduled text reminders and positive default options than can help people overcome psychological barriers to saving” and these behavioural modifications brought on by digital have just as much significance for the developed world.
But the wider implications of digital are nor just flowing from the arrival of speedier, more accessible and cheaper execution of payments per se. Digital platforms allow providers to design powerful and compelling applications that harness the data underlying the transactions.
For some time payments services providers have understood that the value of the payments transaction in terms of fees is less than the potential revenue from the data it generates.
That seems accurate. An individual’s payments profile and patterns represent nothing short of that person’s financial DNA. In the right hands – and let’s call that entity a bank, although that is becoming less and less the case – such information can be analysed so as to allow for optimisation of customer behaviours to the considerable benefit of both customer and bank.
This is a worthwhile exercise. Any study on the ‘average’ consumer’s income and expenditure and balance sheet would reveal significant suboptimal behaviours.
At a P&L level it would likely reveal careless patterns of expenditure and failure to source best value in individual spending categories. At a balance sheet level it would likely show lack of liquidity, excessive leverage, sub-optimal placing of cash in low-yielding instruments (while carrying expensive revolving credit and other short-term loans). And , even more seriously: material investments in financial instruments at inappropriate levels of risk.
But nobody is suggesting that the regular banking customer be issued with a private banker to regularise his or her finances. There already exists an array of attractive and automated tools to accomplish this – the financial app.
The consumer banking revolution, and the spread and increasing depth of consumer financial services and suppliers, would seem to indicate that we are at or approaching saturation point in supply of such services. In fact, nothing could be further from the truth. Like digital payments, the business of retail banking, on back of these new technologies, is still a business of incredible potential.
True, the arrival of digital has led to a wave of disruptive new entrants but, energetic and creative as these operators are, they start from the bottom of the mountain when viewed in the context of typical bank levels of trust and access to customer profiles.
Like digital payments, the need for financial services is practically inexhaustible because of massive latent financial needs.
But while banks have major advantages in the digital age in terms of historical customer data and trust for the digital age, they also have the disadvantage, unlike new entrants, of needing to transform legacy systems for the digital age. That is why bank digital transformation strategies need to do nothing short of reimagining a centuries-old business.
Towering over every imperative for the new digital bank is customer experience. Catalysed by digital, the interconnectedness between individuals, organisations and business has led to almost instantaneous spread of ideas and expectations. This means that the effort to attain a competitive position based purely on the price of goods or services, or on product features and functions, is often futile.
When it comes to price, increasingly it’s the case that there’s somebody somewhere in the world who is prepared to offer the same thing as a bank, only cheaper. There will always be somebody out there who will copy a product, legally or illegal. Hence, delivering sustainable competitive differentiation in banking has to be about more than products and price and all to do with customer experience, often through new, digital channels.
Cracking the customer experience/product design/customer education nexus is the key to tapping into the next wave of demand for consumer banking and financial services and at the heart of these payments – the most frequent, resonant, and vital activity undertaken by bank customers. It is the banking function that most directly relates with their daily lives.
Until now, payments were merely a utility function. Digital brings it into the heart of the customer offer.
And it’s not just about financial planning. Expect in the very near future the developed world to follow the trend in emerging markets and have disclosed payment patterns of individuals to be part of the credit decision process. No doubt this will be in a strictly on an opt-in basis, but ultimately the decision will be to opt in or to lose access to credit at some level.