Is Payment Traffic on the Verge of Upheaval?
Developments in the Market
Account-to-account payments prevail
Regulatory requirements for opening up payment traffic according to the principles of open banking and open finance are on the political agenda[1] in Switzerland and are likely to manifest themselves from 2024 onward. At the international level – in the Anglo-Saxon region, in the Scandinavian countries, the LATAM countries, but especially in Southeast Asia and North America – account-to-account solutions are already gaining shape and acceptance among customers as well as market impact. In Europe as well as Switzerland, the steadily increasing number of transactions via such solutions suggests that the breakthrough of blockchain-based and account-2-account payment solutions is imminent in the near future[2].
Competition between payment solutions intensifies
Global players in the credit and debit card business are vying for customers’ favor with new bonus program and loyalty approaches, in order to secure or win back market share and participate in transactions and transaction volumes in the growing e-commerce market[3]. In the competition for the position of preferred payment method, there are signs of a “race to the bottom” in terms of transaction fees. In this case, merchants in particular are likely to benefit from lower costs. Both banks and providers are required to implement even more efficient solutions and cost-effective, scalable technologies in order to maintain margins and revenues.
Apple Pay, Google Pay, Samsung Pay, and many others are gaining more and more users. Customers are increasingly using digital solutions via their cell phones at the POS instead of the traditional debit and credit cards[4]. The “wallet” is increasingly taking center stage.
It is hard to imagine the everyday life of Mr. and Mrs. Swiss without TWINT, with its advantages of instantaneous transfers (peer-2-peer). On the other hand, functional design approaches , the current lack of cross-border payment options and the as yet untapped potential with regard to the integration depth[5] argue against the solution establishing itself as a market standard in the long term.
Payment transactions become more innovative
The introduction of the SIC5 standard (Instant Payment) is leading payment traffic into a new era and fosters – even if not primarily intended by the regulator – innovation in payment traffic. The dominant market players (big techs, global credit card providers, SIX and PostFinance) are keen to consolidate their role as payment traffic infrastructure providers or network partners.
Adoption gains momentum
In addition, customers are more willing to use new digital payment methods on a daily basis[5]. This can be attributed to the tangible added value provided by the simplicity of the customer experience as well as the lower costs.
The cloud and blockchain are catching on
Next-generation payment solutions are based on cloud-native applications or blockchain-based technology approaches, which entail relatively much lower costs and are scalable as required.
Payment Transactions in Combination with Identity and Consent Management as Nucleus
In addition to further technological development, the linking of payment solutions with identity and consent management (self-sovereign identity approaches) is central, whereby new – previously impossible – business models can develop, such as embedded finance solutions in the healthcare sector or in mobility ecosystems. For example, payments at the doctor’s or pharmacy could be automatically transmitted to the health insurance company, or services within the scope of a car club membership (e.g., breakdown service, travel insurance, skidding course, etc.) could be debited directly from the account without first having to register separately with the various partners. This supposedly trivial combination is the enabler for banking business models that go beyond payment transactions and will also become apparent in the medium to long term in the other value-added areas of the traditional banking business (asset management as well as lending business, i.e. peer-to-peer investing and lending). In our view, this development therefore deserves further and increased attention.
Customer-centric Considerations – A Look Ahead
The establishment of new payment solutions is likely to occur via defragmentation along the payment value chain.
Customers can expect not only lower transaction costs and fees[6], but also simplified, virtually “barrier-free” access and a unique shopping and customer experience. In the future, it will make little difference to customers whether they are registered/logged-in users or guest users, or whether they use an express checkout functionality, as new payment solutions will offer everyone a high level of convenience. This convergence, in turn, offers the opportunity to actively promote the customer interface while sharing customer-identifying data and linking to bonus and loyalty programs.
Further Development of Payment Transactions – And Beyond
The account-2-account solutions will become an integral part of the expansion of open finance solutions in the sense of invisible payments or embedded banking due to the de facto functional convergence of standing orders, e-bill functionalities and standing approvals.
Banks are in an excellent position to map this functional convergence in their mobile banking solutions and thus integrate payments regardless of origin, purpose or type.
Strategic (Re)Orientation and Positioning Opportunities for Banks
Possible strategic implications can be derived from these developments and must be clarified as part of the bank’s positioning and as a participating partner in the various payment traffic systems.
Strategic goals and added values for banks can be:
- Securing the customer interface (house bank) as well as the position as the payment method of first choice
- (Re)gaining market share and transaction volume (in response to the creeping churn and loss to neobanks and payment solutions)
- Participation in earnings in the growing e-commerce and card business
- Leverage of the existing (retail) customer base
- Further development of customer loyalty programs
In summary, we currently see great market momentum and attention from market participants. Trend-setting decisions and investments in technology or partnerships are pending, which must be made in the near future in order to secure the basic business of the banks and to sustainably occupy the customer interface.
[a] The fact that the solution cannot share identity data means that it cannot be used for quick registration for online shopping, for example. The lack of additional services such as insurance, loyalty programs, buy now, pay later, etc. limits the added value of the solution for customers compared with alternative offerings.
In addition to the sources cited, this article is based on Daniel’s many years of practical & implementation experience in the areas of strategy consulting, project management, and digital transformation at leading banks and at BEI.
Sources
[1] Der Bundesrat will Open Finance voranbringen (admin.ch)
[2] See e.g. What’s behind the rise of account-to-account (A2A) payments? | FinTech Magazine
[3] Schweiz – Umsatz im Online-Handel 2021 | Statista
[4] Mastercard-Studie zu Bezahltrends in Deutschland 2021 | Mastercard Newsroom
[5] 220224-bericht-swiss-payment-monitor-2022.pdf (zhaw.ch)
[6] Die Entwicklung des Zahlungsverkehrs im digitalen Zeitalter – eine Zentralbank-Perspektive (snb.ch)
- Is Payment Traffic on the Verge of Upheaval? - 12.01.2023