Banks, Under Pressure, Must Act to Protect Customer Relationships in Payments

As Diverse Digital Competitors Vie for Parts of the Payments Ecosystem, Incumbents Must Deepen Ties to Customers to Remain Dominant Players, Says Report by The Boston Consulting Group


BOSTON, Oct. 16, 2017 (GLOBE NEWSWIRE) -- Facing growing incursion from a diverse group of rivals—including digital giants, fintechs, device manufacturers, and retailers—banks need to reinvent their retail and wholesale payments models if they hope to avoid disintermediation and remain dominant entities in transaction banking, according to a new report by The Boston Consulting Group (BCG). The report, Global Payments 2017: Deepening the Customer Relationship, is being released today.

This 15th annual study by BCG outlines recent developments in the payments market globally and regionally, analyzes the competitive threats that traditional banks are confronting, and discusses the actions that incumbents can take to adapt their payments models to the evolving digital environment. 

“Banks’ role as the main customer interface will be seriously weakened when the payments experience becomes invisible or fully embedded in the digital experience,” said Stefan Dab, a BCG senior partner, the leader of the firm’s global transaction banking segment, and a coauthor of the report. “To stay relevant, banks must respond faster and more strategically and rethink their daily banking value proposition.”

Market Outlook
According to the report, payments continues to be one of the most important and fastest-growing areas of the financial services sector worldwide. In 2016, the payments business overall, including balances on current accounts, totaled $1.2 trillion. Core payments revenue represented $0.8 trillion, or 20% to 25% of global banking revenue. The value of global payments transactions stood at $420 trillion, or 5.5 times global GDP. By 2026, BCG expects global payments revenue to increase by $0.9 trillion as emerging markets continue to grow and cashless transactions become more widespread. A comparison of average payments revenue per capita reveals the potential for significant additional growth in emerging markets. Whereas, on average, payments revenue per capita in North America is $900, for example, it is only $100 in Asia-Pacific.

Reinventing the Retail Payments Model
The report says that in order to stay competitive, banks need to look at their payments value chain to see which activities they should continue managing and which they should outsource. Most banks, for instance, will need to divest subscale businesses that cannot be differentiated from competitors’ over the long term. With the exception of the world’s largest banks, few institutions will be able to defend the payments relationship unaided: the rate of innovation is too fast, the capability gap is too wide, the advantages of the digital giants are too entrenched, and the investment needed by a single player is simply too great. But banks cannot afford to stand still. BCG says there are four key actions that banks can take to reinvent their retail payments models: redesign the customer journey, collaborate to tackle the digital wallet challenge, develop an application programming interface portfolio, and employ personalized marketing.

Remaking the Wholesale Payments Model
The report says that corporate treasurers are growing increasingly impatient with the lack of integration, automation, consistency, and customer-centricity in many bank payments platforms. To remain relevant—and profitable—wholesale banks must reassess how they do business, streamline their processes, and implement digital tools and practices that improve the experience of their customers and the productivity of their back office. Wholesale banks also face changing competitive dynamics. New entrants from inside and outside the financial services arena are taking advantage of open banking and new technologies and successfully vying for market share in high-margin niches. Despite these challenges, banks that leverage their longstanding client relationships and balance sheet strength can win in this environment. The first step is fine-tuning their strategic focus.

Responding to the Challenge
Overall, in both the retail and wholesale payments businesses, banks’ primacy is under attack, according to the report. Digital tools, technologies, and capabilities have opened the vertically integrated value chain that gave banks their dominance. Competitors inside and outside the banking sphere no longer need the same physical footprint or scale to engage customers. Nor do rivals need to provide the same variety of products. Attackers can now pick off a formerly interlocked part of the traditional payments value chain—be it the interface, the product portfolio, or the underlying infrastructure—and go after it aggressively.

“Banks can’t afford to sit back as these changes unfold,” said Dab. “Deepening the customer relationship requires that banks simplify the user experience and employ automation, artificial intelligence, and other technologies to improve decision making, compliance, cycle times, and cost performance. Banks can win in this shifting environment, but they have to act now.”

A copy of the report can be downloaded at http://on.bcg.com/2wQTYHc.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with more than 90 offices in 50 countries. For more information, please visit bcg.com.

The Boston Consulting Group
Eric Gregoire
Global Media Relations Manager

Tel +1 617 850 3783
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