Issuing banks’ payments divisions were already under pressure pre-pandemic due to intense competition and regulatory burdens. The last six months have put a further strain on their operations as they have had to support shifts between payment types and the migration of service, ops and change, and implement remote working, all while continuing to shape the future of the payments services they will provide.
New measures introduced in many countries over the last few weeks in the fight against the pandemic have made a review of their payments strategy a top priority for issuing banks. Any revised payments strategy will need to acknowledge a lot: changing consumer needs, new payments standards and regulations, and fierce competition from traditional and new payments business models.
Issuing banks must have a clear strategy for how they will compete in payments and how they will get there.
Six levers for a winning payments strategy
1. Your customers’ needs have changed. Have you asked them how?
Customer-centricity has always been pivotal for issuing banks. Banks that are still basing decisions on pre-pandemic customer insight risk getting it wrong. Voice of the customer (VoC) exercises must be refreshed, and the strategy update must be based upon recent data and insights. Customer segment-level analysis, for example, will need to consider questions such as:
- Is ATM usage declining across all segments?
- In the move to online commerce, have customers switched to debit and credit cards equally?
- Which customer groups are evidencing a higher direct debit or ACH (automated clearing house) fail rates?
The findings may drive the bank’s payments strategy into an entirely different direction or lead to a focus on different product offerings.
2. Innovative products and new customer journeys
New customer habits necessitate a review of customer journeys and experiences, and new journeys will potentially need to be created for the bank to be able to compete in the market and stay relevant for customers.
Many banking institutions have put regulatory initiatives such as Request-to-Pay (where a payee requests a specific payment from the payer) on hold due to the sizeable amount of work required for their setup. Forward-thinking institutions, however, could take the initiative now, and provide a set of dial-turning, innovative services to their customers, especially those who are vulnerable and struggle to manage their money through direct debits.
Hybrid payment-credit products are another innovation worth investigating. In this scenario, issuing banks build on Curve’s model of retrospectively moving transactions between cards after the event and applying ‘buy-now-pay-later’ (or other credit models) to what were originally customer debit card purchases. Access to data at account and transaction level through open banking allows more accurate and efficient credit decisions in support of this.
Virtual cards, the instantly created card numbers that can be used while shopping, and the controls that can be wrapped around them, also offer considerable benefits – particularly online safety – in a world where many customer segments may be new to operating and paying online.
3. A booming e-commerce development: account-to-account (A2A) payments
Of the many consumer payment options being provided (including ‘buy now, pay later’, instant credit at checkout, cash-on-delivery, closed and open loop e-wallets, virtual cards, etc.), paying via account-to-account push payment (also known as ‘PISP’ or ‘pay-by-bank’ payments) is gathering momentum quickly. These transactions are doubling every two months in the UK. A2A payments are growing due to mandatory open banking regulations (in the UK and Europe) and independent market innovation (in the US, for example). They allow customers to pay online from their trusted mobile banking app, without having to enter payment details, create accounts or logins, or remember additional passwords.
A number of FinTechs have compelling propositions that compete directly with traditional issuers. Here are two notable examples:
- Payconiq is an omnichannel, smartphone-enabled payment solution originating in Luxemburg that lets consumers make payments in shops and restaurants or to friends.
- Trustly’s partnership with Paybymybank allows some ‘push’ payments to be performed internationally.
Furthermore, card giants Visa and Mastercard are hedging their cards businesses, evidenced perhaps most notably by the Visa acquisition of Plaid and Mastercard’s acquisition of Nets. Amex also supports open banking journeys for its merchants with its ‘Pay with Bank Transfer’ functionality.
Strong customer authentication requirements in Europe further emphasise the importance and future potential of A2A payments, which are better suited to 2FA in e-commerce channels than card flows.
Are you clear what the strategic role of A2A payment initiation journeys will be post-pandemic, beyond mandatory compliance? How will you protect your customers on this new digital journey? How will you encourage multi-banked customers to use your institution to pay and not a competitor or a FinTech? How can you enable this journey for P2P and in-person transactions, as well as POS?
4. Monetising commercial opportunities and augmenting the role of payments
Banks have always perceived payments as a necessary cost to ensure that their core banking products such as accounts, loans, and mortgages can operate effectively. Monetising commercial opportunities of payments has long been a challenge for issuers. However, as the digital shift accelerates, now is the right time to consider a step change and to reposition payments within issuing banks.
Untapped commercial opportunities could be found in:
- Scheme connectivity: Do you have direct scheme connectivity, and can you monetise this?
- New revenue sources: In the age of APIs, should you be doing more to create payments services and distribute them through third-party platforms to non-customers?
- Extras for customers: Are you giving your customers access to the best-in-class, value-adding tools (categorisation, financial management, etc.)?
- Rewarding loyalty: Can payments become the reason why customers bank with you, and can a loyalty programme support this aim? Players like Monzo are already doing this by partnering with rewards program Tail.
Are you clear on the role payments will play in your wider strategy and how much it will cost to achieve and run this?
5. Baking cost reduction into your payments strategy
Cost reduction must feature prominently in any issuer’s strategy, given the low net interest margin environment and consistent pressures on interchange. The recent Supreme Court decision in the Sainsbury’s vs ‘the card schemes’ case and the crackdown on uncompetitive market interchange fee practices will have further ramifications on issuer revenues.
Opportunities for cost reduction are wide-ranging, e.g.:
- Cash processing and ATM estate: Innovative solutions – such as multi-tenant branches or hubs – that support UK government measures to ensure access to cash could enable a material reduction in cash processing and the size of a bank’s ATM estate.
- Operations: An end-to-end review of current failure-demand resulting from payment processing errors can still release material benefits.
- Technology: Rationalising the technology stack, removing duplicate components, and moving to flexible, lower-cost, cloud-native solutions underpinned by appropriate outsourcing approaches could all reduce costs.
- Change management: Customer-value-centric and agile change approaches – including DevOps – should be applied to mitigate the high costs of change and deliver outcomes rapidly and efficiently. Any newly delivered business and technology changes should adhere to an automation-by-design principle.
Where have you already focused your cost-reduction efforts? Which cost levers will you prioritise as you move into 2021?
6. Increased adoption of digital payments requires channel resilience
As payments migrate to digital channels and consumers increasingly depend on associated card and A2A flows, a high level of availability and resilience of those channels becomes a necessity. Service outages rapidly make headline news and can result in severe customer detriment and lasting brand damage. Think TSB in 2018, where nearly 2m customers were locked out of their accounts for weeks (costing the bank $330m, U.K.), and Chime in 2019 (5m customers left without payments services, US).
Operational resilience is at the top of the banking agenda, and investments in maintaining service in the short term – to avoid the kinds of incidents listed above – are critical, as is moving to a more resilient infrastructure in the medium term.
Is there a need to increase operational and technology resilience in your operation as a result of changing transaction profiles? How far away is your next outage, and how confident are you that you’ll be able to rapidly resume service when it happens?
For issuing banks, now is the time to review, update, and upgrade your payments strategy. We are entering a new era where payments can be both a hygiene factor and a differentiator. Your strategy should be clear on which of these approaches you will take.
Baringa’s Banking practice has extensive experience helping clients with defining pragmatic and innovative strategies. Please contact Ben Matthews and Neil Winkworth to start the conversation.
The authors would like to thank Andrew Wilkie, Manager in Baringa’s Banking practice and expert on payments and organisational change initiatives, for his contribution to this article.