My morning ritual on days when I work in Manhattan is to get off the train at Grand Central Station, use my phone to order my coffee on the Starbucks app with an invisible pre-funded payment, and then join the crowd at the pickup line. I’m not alone: Mobile Order and Pay represents 12% of Starbucks’ U.S. payments and more people use Starbucks’ proprietary payment system than use Apple Pay. After loading cash onto the app, payments are instant, invisible, and free: three words that are a chilling combination for any high street bank in the payments business.
The problem for banks is that Starbucks isn’t in the payments business — it’s in the latte business. Its payments app is just an enabler of a great coffee-buying experience. Similarly, the biggest originator of small business checking accounts in the U.S. today is not a well-known bank, but Uber, which opens bank accounts for new drivers so that payments to them can be instant, invisible, and free.
As a growing number of companies learn from Starbucks and Uber and focus on payments as an enabler of their core business model, banks will face significant disruption. If some banks are currently complacent, perhaps that’s because things haven’t changed much for banks in the U.S. — yet.
Over the past 13 years, 3,000 new fintechs have sprouted up in major banking markets (60% of them are licensed payments companies such as Stripe, Square, Klarna and Revolut) and they now make up 17% of active financial institutions. However, despite about $29 billion worth of venture capital pouring into new payments ventures over the last 7 years, these new entrants have only captured 5% of revenues and even less profit. In the United Kingdom, the most disrupted developed market, new entrants take about 15% of total retail financial services revenue, but in a stable market like Canada, the number is less than 2% and less than 1% of payments revenue.
However, things are moving much more quickly in the developing world. Looking at China suggests that banks elsewhere should gird for disruption. China has quickly transitioned from cash to mobile, bootstrapped via the QR code systems of Ant Financial and Tencent, completely skipping the card-based payment systems that are still ubiquitous in the West. In 2017, over half a billion people in China made at least one mobile payment transaction, processing nearly $13 trillion worth of mobile payments. To put that number in perspective, it is two thirds of all mobile payments globally.
In some technologically advanced coastal cities in China, 90% of consumer payments are now mobile, and it is not uncommon to see beggars on the streets with QR codes in front of them because they know spare change is becoming a thing of the past. And the growth is likely to continue, with Alipay building a system that can process 100 billion transactions daily. By 2021, 624 million people in China will make regular mobile payments, according to eMarketer. While China is a beacon for how fast mobile payments can take hold, it is not alone. In India mobile wallet penetration is now at 50% of consumers and mobile grew 22-fold last year, enabled by the new UPI payments interface.
As this disruption comes to developed economies, banks must adapt because, as we’ve seen in other areas of the economy, the spoils of disruption are not evenly shared. Yes, Google, Apple, Facebook, and Amazon are thriving, but 90 of the top 100 consumer brands in the U.S. lost market share in 2017 – and with the number of retail store closings accelerating, the term retail-apocalypse has entered into the business vocabulary. The tough lesson from China is that in a digital world, privacy in social platforms, retailing, and lifestyle management creates strategic control for everything else, including payments. As a result, if banks become the dumb funding platform for other people’s payments businesses, value will migrate to the likes of Tencent, Starbucks and Amazon.
Banks that want to stay relevant in payments have three choices:
- focus on upfront payment initiation,
- add value around individual payments,
- develop services based on overall payment flows.
Banks focusing on upfront payments can embed their payment solution in third-party products and services, build Request-to-Pay services that shorten the cash cycle for businesses, or create services to reduce fraud. Those that try to add value around individual payments can focus on rewards, digitizing merchant-funded coupons, or by offering point-of-sale services, such as purchase insurance or installment credit. Banks can also develop services based on overall payment flows, such as cashflow management and advice for consumers and businesses, extracting insights from payments and selling them back to merchants in the way American Express, Visa and Mastercard already do, or by selling insurance and payment protection services underpinned by those same insights.
Banks that are complacent will fall victim to more proactive enterprises. One vision of the future can be seen in two blockchain patents that Walmart has filed — one to manage vendor payments and the other for digital customer payments through Walmart Pay. The patent filings suggest Walmart might be about to disrupt itself, changing into a consignment store where vendors are only paid when their product leaves the store. At the same time, Walmart will capture a rich information stream on every customer transaction, while the information flow to traditional payment intermediaries will be limited in the same way that Starbucks turns the gap between mobile account funding into an information black hole for the banks.
Banks paying attention to China and Walmart know that the payments business is changing at an accelerating rate towards being instant, invisible, and free. It won’t happen tomorrow, but the trajectory is secular and inexorable. Thinking through these issues – and working back from instant, invisible, and free – will make banks better prepared to protect the economics of their payments business that will otherwise shed revenue at an alarming rate in the coming years.
)