There has been a whole raft of innovations announced in
the last few months from an explosion in mobile apps enabling
services such as P2P payments, a seemingly endless number of NFC
pilots through to the quickly expanding open payment/commerce
platforms. John Chaplin, President of Ixaris discusses how can
banks can respond
Go deeper with GlobalData
In tough economic times, you might expect payments innovation to
take a back seat. But just the opposite seems to be happening.
But if you lift the hood you see that many of
these innovations are not being driven by the traditional players,
but by new entrants to the market who are making their presence
felt by competing aggressively for a share of the payments profit
pool. This puts the traditional players in an increasingly
precarious position.
Who drives innovation?
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By GlobalDataThe growing role of the new entrants at the
expense of traditional players should not come as a surprise.
Earlier this year, Ixaris convened the ‘Global Innovation Jury’,
which brought together 22 leading figures from the payments
industry from 15 countries and across 5 continents. They shared
their views on challenges facing the payments industry and their
impact on innovation.
One of the principle focuses of the Jury was
to identify how well certain groups drive innovation.
Retail banks were identified as the least
likely grouping to drive innovation, with one jury member (himself
a banker) describing such institutions as “prisoners of the status
quo”. At the other end of the scale were new entrants such as
Facebook, Apple and telecoms companies, who were cited as the most
disruptive group.
No big shocks yet, you might say. What is
surprising, however, is just how many developments have been
announced in the few months since the Jury was convened. From
Google launching its platform that turns Android smartphones into
digital wallets, to PayPal announcing a deal with NCR to facilitate
P2P payments from ATMs, the list goes on.
The report also found that geographic location
has a significant impact on banks’ propensity to innovate. Asia and
North America are the regions most likely to create innovation and
Africa is increasingly prominent in developing new business
models.
M-PESA in Kenya, who according to recent IMF
stats are now processing more transactions domestically than
Western Union does globally, is the most talked about example, but
there a host of other, lesser known developments too. Unfortunately
for European banks, however, Europe was also seen to be the lease
likely geography to foster innovation in payments.
Why is innovation so
challenging?
Macroeconomic problems are resulting in a lack
of budget and low organisational morale, two things which are not
exactly conducive to innovation. Regulation is another factor, but
this combination alone is not a comprehensive explanation; there
must be other factors at play.
The Global Innovation Jury identified a number
of ‘innovation inhibitors’ in the banking and payments sector,
including the following:
- The financial hurdle for achieving return on
new investments is set so high that almost none pass the test. In
fact the target for rate of return is often higher than for
existing business units, hence it is incredibly hard to achieve,
and - The need for conclusive proof of customer
uptake. Research programmes and focus groups abound, but in
reality, what works and doesn’t work in retail financial services
usually isn’t that predictable.
For every rule there is of course an exception
and it would be wrong to say that all banks make innovation look so
hard.
First Direct has shown how seriously it is
taking innovation by appointing the marketing director who
spearheaded the firm’s earliest efforts in social media, Mark
Mullen, as its Chief Executive. Citibank is also taking its online
experience to new levels and rolling out some great tools,
initially for its US consumer clients.
There is more to life than
mobile
One very disappointing aspect of banking and
payments innovation is the ‘me too’ or herd approach. For many
players, innovation currently means only one thing….mobile, and
mobile and NFC pilots are springing up like crazy. In a recent KPMG
International survey, almost 85% of bank executive respondents said
that mobile payments will have significant importance to their
business within the next one to four years.
It will be interesting to see what happens in
this area because at the moment it seems we are building a hype
curve, which is bound to have some reality injected into as it
becomes clear that not every financial institution is going to do
well from mobile.
An alternative view is that mobiles,
especially in the developed markets, are the front-end delivery
vehicles for payment services and that it is the underlying
‘digital payment world’ that really matters. If you subscribe to
this view, it is the platform that creates and manages the virtual
accounts that is the linchpin, supporting both mobile and online
payments.
The ability of these platforms to handle quite
complex transactions, that solve real customer pain points, creates
some interesting revenue earning opportunities for banks. Not
surprisingly these open platforms are being developed by new market
entrants, so most banks will have to partner and accept a revenue
sharing model. But that is the new market reality.
Final Score
Looking ahead, it seems inevitable that much
of the running in the innovation game will be made by new market
entrants, either by major players such as Google, or by
entrepreneurial start-ups.
Established major players, whether they are
banks or payment networks, will always have their innovative hands
tied by the desire to protect existing business models.
However, the pace of innovation is only going
to increase and the convergence of physical and online payment
worlds is going to force banks to think hard about using open
platforms to ensure the underlying account structures is right,
rather than just bolting mobile capability onto legacy
architectures.
In such an environment and facing such
challenges it will be interesting to see how banks react. Whereas
the last six months have been notable for the increase in activity
from new entrants, I believe that for all but the bravest of banks,
the next six months will be marked by an increase in partnership
announcements between then old and the new players.
