Context
Payments play a vital role in customers’ purchasing experiences and contribute significantly to financial institutions’ bottom line. The global real-time payments market processed over 70 billion transactions in 2020, and this number is rapidly increasing. Banks, particularly, can enjoy a return on assets (ROA) of 5.2% through payments and treasury services, compared to a mere 1.5% for all commercial banking activities.
However, there is more to payments than just money. Financial institutions can create a closed loop by offering seamless payment solutions that integrate well with other products and services. The up-and-downstream impact can lead to positive user experiences, increased customer loyalty, and a more comprehensive ecosystem of offerings. Leading technology companies and super-apps like Gojek and Alipay have already capitalised on this phenomenon, incorporating payments as a cornerstone of their successful business models.
As the payments ecosystem continues to shift towards personalisation and data insights, players must adapt to remain relevant and profitable. Traditional payment participants can also take advantage of this halo effect by creating a network of complementary financial products and services. Credit card companies, for instance, can leverage this by offering other loan types, such as auto or mortgage loans, or banking services to their customers.
In this article, we will dive deeper into how the payments industry is evolving to take advantage of current circumstances and explore new opportunities for growth and profitability.
Introduction to Real-Time Value
In the world of non-cash payments, there are six important players: the customer, issuing bank, settlement entity, payments network, acquiring bank, and merchant. Each player pays transaction fees to keep things running smoothly. It was easy to understand how payment companies fit into this ecosystem in the past, but the landscape is changing with evolving customer needs and technology. It is essential to keep up with these changes to stay ahead in the game.
In the world of payments, three key variables determine their value today: Speed + Scale, Convenience as defined by access, and Risk management. Speed + Scale represents how quickly and efficiently payments can be processed, while Convenience is about making payments easy to access and use. Risk management is crucial in reducing the likelihood of fraud.
The increased competition has decreased the value derived from each transaction, making human-centric experiences a primary investment area for companies looking to prioritise customer satisfaction. Additionally, Risk management remains a crucial concern as companies face cyber threats, identity theft, and data breaches. However, these variables are now table stakes as cloud, mobile, and digital solutions deliver Speed + Scale.
While these variables are essential in the current environment, they are unlikely to drive additional value in the future. It is time for companies to prioritise financial, economic, and political considerations that drive accurate results for their customers and their bottom line.
Financial, economic, and political trends are transforming the payments landscape. Digital payment methods such as contactless cards, QR codes, BNPL, and digital wallets are on the rise. Additionally, next-gen core banking infrastructure, digitisation, and distributed ledger technology are reshaping the value of payments. As a result, the payments industry is experiencing minimised product differentiation and decreased transaction margins. New risk management strategies are emerging to be proactive, not reactive, to these shifts. In light of these changes, players will need to reconfigure their infrastructure, redefine what it means to be a “payments company,” and find new revenue streams.
Payments over the Horizon
The future of payments hinges on four key factors: Speed, Scale, Accessibility, and Holistic Risk Management. Speed and Scale are essential due to the high volume of transactions, while Accessibility and Holistic Risk Management have become fundamental customer expectations. Risk management is now moving towards a customer-focused approach, covering all services they utilise. To compete, organisations will need to differentiate themselves by focusing on Personalization and Insight. Personalisation will be achieved by offering customers different payment options that are easy to access, along with the ability to customise payment terms. Insights will be gained from payment companies analysing data to uncover actionable findings, such as preferred payment methods and financial product gaps. Ultimately, the value of payment companies will be determined by why and how customers make payments.
To stay ahead of the payments game, companies must invest in the key drivers of success: speed, scale, accessibility, and risk management. Nevertheless, to truly differentiate themselves, they must also focus on personalisation and insights. These strategic underpinnings require investments in modern payments infrastructure, robust data management, and strategic partnerships. Do not wait – make these investments today to secure tomorrow’s relevance. Payments leaders must make strategic investment choices in the next year to ensure future success.
With an increasingly competitive landscape, there is a pressing need to act immediately. Financial institutions, both traditional and non-traditional, are already investing in technology, launching pilots, and making venture investments to explore new ideas. Meanwhile, start-ups are also joining the fray, offering potential solutions to address customer pain points.
Traditional Banks are also taking gigantic leaps to maintain relevance in a rapidly changing world; adapting to changing market realities by implementing a strategic transformation plan proves logical. Payment companies in emerging markets are poised for exponential returns if they can securely address payment and banking needs with speed and accuracy.
Being a future-ready entity prepared to undergo a transformation strategy enables the organisation to make radical shifts. Consider a traditional bank evolving into a platform organisation. In doing so, the bank intends to expand its scope and reach by penetrating new markets and tapping into networked business models. By embracing this approach, banks like Standard Bank aim to create new value streams that go beyond the traditional interests and transactional fees that have sustained the bank’s growth in the past.
Conclusion
The platform strategy is a revolutionary departure from the current payments model. It involves significant investment in key areas discussed in this article. Payments are critical in the envisioned ecosystem, facilitating the exchange of value and information between participants. However, implementing such a major shift will be challenging. It necessitates a cultural and mindset overhaul for traditional players and a significant investment. Regulatory compliance and data protection concerns surround data sharing, necessitating careful risk management among parties. Despite Africa’s continued embrace of non-traditional payments, Ripae predicts that traditional and non-traditional spheres will converge at the customer level. The convergence presents enormous opportunities for innovation and growth on the continent, benefiting other regions with similar needs.
