Payments winners and losers

Banks cannot ignore customer expectations in the competitive payments arena

By Rob Dewar

Payments are no longer business as usual for banks. Evolving mobile and online payment options have created customer expectations for more convenient and timely payment services.  However, many banks have not seized the opportunity of using this trend to create a competitive advantage - a huge risk given the increased competition from new non-bank payment providers.

Customer expectations for more convenient payment services will change the global payments industry. The decisions a bank makes now will separate the payments winners from the payments losers in 2010. The stakes are high – payments constitute 35 to 45 per cent of total bank revenues and 30 to 40 per cent of operating profits.
Globally mobile payments account for approximately five to seven per cent of total payment revenues for banks which offer the service.  Based on industry discussions, information services provider Unisys predicts Australian banks will reach the five to seven per cent level within the next three years.

These new channels bring new security risks as customers continue to expect their bank to protect them from monetary loss, privacy intrusion or inconvenience. All of this affects a bank’s transaction revenue and cost models.

Australian consumers will embrace mobile transactions once they are confident that the transactions are secure. Banks, retailers and other providers offering mobile transactions must clearly communicate the security systems that are in place to protect customer data. Mobile transactions will need to be seen as safe, if not safer, than using a credit card.

Customers who do not find a bank’s systems convenient will turn to other payment providers to pay bills, invoices and other debts safely and quickly. In Australia, non-bank providers such as PayPal are highly competitive and offer innovative, secure services. Even Woolworths has started offering payment services to customers.
A bank will continue to open the door to increased competition if it fails to respond to the shift in customer behaviour.

Here are five critical actions banks must take in order to survive and prosper in the payments revolution.

1. Collaborate with “payment service providers” to achieve scale and innovation
Ten years ago, a bank would never have considered putting its brand and reputation at risk by teaming with competitors. Yet tomorrow’s winning bank will explore new collaborative business models with the likes of mobile carriers and telecommunication providers. By ‘keeping its enemies close’, a bank can be more responsive to customers.

A contactless payment trial is currently underway between Telstra, National Australia Bank and Visa using a SIM card loaded with a Visa card application to let customers pay by waving their mobile phone over a contactless reader.

While such collaboration may have a short-term impact on revenue, it will bring new value through shared analytics, improved security and broader access to customers for marketing other services such as loans.

2. Invest in business intelligence
A bank needs to possess the right information to offer a competitive payments service – one that customers will value as much as other banking services. To understand customers’ needs and anticipate how those needs will evolve, a bank must aggregate and interpret large volumes of data.

Information about customer profitability and preferences can be tapped to provide customers with products and channels tailored to their needs. These new channels can help to grow the relationship with customers as well as retain them. For example, Unisys research has shown that mobile banking customers are not only more profitable, but are more loyal than other customers.

3. Employ service oriented architecture to modernise legacy systems
In the current environment banks are confronted with legacy platforms that are becoming more costly to support.  Technologies such as Service Oriented Architecture can help integrate existing platforms into a flexible foundation and migrate legacy systems over time to reduce operating costs and make it easier to collaborate and integrate with other solutions and providers.

4. Make investments in regulatory compliance a growth opportunity
Wouldn’t it be nice to see regulatory changes as an opportunity rather than just a cost? The winning bank will leverage its compliance investments to create flexible service-oriented payment infrastructures and consolidate redundant processes from payment silos, which will enable it to respond more quickly and efficiently to regulatory change. The bank can then leverage regulations to introduce new payment services.

For example, a bank that implements online identity authentication checks which comply with the new anti-money laundering requirements, will be able to increase the conversion rate of online account acquisitions.

5. Consider smart sourcing to optimise your payments strategy
Collaboration is not the only way for a bank to become more flexible and responsive to market demands. Smart sourcing can help a bank stay ahead of the competition while lowering capital expenditure and allowing it to focus on strategic initiatives, such as getting new services to market faster. In a sourcing model, the service provider takes care of technology decisions as well as ensuring that any regulatory changes are reflected in the system. Smart sourcing frees up the bank to focus on new, innovative solutions and business models.

Banks must plan for a world in which they are no longer the sole payments providers and in which customer demands are increasing. If not, banks will be left with a commoditised back-office processing role. The key success factor will be ongoing engagement in the transformation of payments, investment in a flexible, maintainable payment infrastructure, and innovation to meet customer demands. The bank which embraces these new challenges in 2008 will become payments winners in 2010.

Rob Dewar is Managing Partner with Unisys Asia Pacific