This article is intended for those pragmatically focused on growing mainstream sustainable payments businesses now. If you want to consider sexy or outside chance plays, then perhaps this is not for you.
This article lists what we see as the top key payments industry value add initiatives for the next few years, and lists some common distractions (that appear key to some).
Our top 3 winning initiatives in payments 2017:
1. New Revenue Streams Creation
2. Customer Retention/Expansion
3. Profitability Optimisation
Yes, payments is changing radically, but every year for over 10 years now we have heard: “Next year is THE year of Mobile Payments” … did it even come yet? We do not think so, but it is certainly getting closer. So while payments is radically changing it is certainly not changing in all the ways the noise suggests.
At PayX we spend a lot of time each year with top tier Banks and Payments Organisations in markets globally working through the (trendy) subjects cutting the wheat from the chaff, or in other words, identifying what to really invest in versus what is hype (we classify hype as ideas that given time may or may not ever materialise into the sustainable business mainstream).
Clarity in the payments ecosystem helps enormously as people can then focus on achieving real net value initiatives results, rather than wasting vast cycles on hype listening to sales pitches or watching yet another promotion of a ‘PowerPoint product’.
One distinction before we start. We regard only two types of initiatives as adding real value for a payments organisation:
a) Net new revenue/profit generators; and
b) Big enough industry topics that cannot be ignored.
The real search is for the type (a) that generate directly or indirectly net new revenue/profit in a relatively short timeframe (e.g. merchant small loans offerings based on card volume). The second type (b) hold enough major (payments industry) interest (e.g. mobile wallet or P2P offering) such that a top tier organisation has to have a presence in it (i.e. marketing) or risk being branded a dinosaur. The second type (b) may or may not develop into type (a) eventually.
In some cases, a trendy subject has wide cross industry (infrastructure) meaning, like API Economy or Mining Big Data. These names cleverly catch wide mass reader appeal which then generates noise equivalent to being the answer to all things. Interpreting these into payments value is trickier, less sexy and subtle. In payments organisations we see many examples of people jumping on the trendy cross industry buzz and chirp statements repeatedly such as “we must have open APIs” but not really understanding the why or goals to set/achieve related to them. Whether we agree or disagree with the statement, the point is the topic is misleading in that it often misses the value statement to the payment organisation’s business. Many times what is of value in payments is not sexy but more subtle, takes patience, and is all about understanding the organisation’s specific business segmentation coupled with superb and consistent execution. Those payments business fundamentals have not changed and by definition are unfortunately not new and sexy to talk about.
More than ever consumers have power of choice. Business customers, who are also of course consumers, are increasingly realising options and demanding offerings that meet their needs. Gone are the days of defining 3 products and giving millions of customers a choice of a, b or c.
In fact, an accurate description of today’s product definition for a supplier is to build a product that is flexible enough so customers can “self-serve” its characteristics to shape it to their own unique requirements. The concept is the product builder provides a flexible and adaptive platform, rather than one which assumes what the end customer product looks like. This change of mentality in payments (and far wider) of product management is a culture shift and a new approach which is crucial to consistent growth.
Business payments customers, defined as either corporates or merchants, still do not typically enjoy a superb customer experience today when interacting with suppliers for payment services. Especially in applying/adding new services, the experience is often hindered by regulation (e.g. KYC) and credit risk policies to make it at best onerous and at worst very frustrating. While these checks and workflows exist for good reason there appears far too many old style one product fits all approaches by payments suppliers which could be streamlined dramatically. More commercial payments providers such as Square and PayPal demonstrate features like rapid on-boarding, staged credit risk (under a limit there is a fast and low number of checks done which slowly increase), and these organisations communicate effectively multi-channel according to the customer’s choice then keep the customer updated, almost transparently, on progress, etc.
Another league of customer experience emerging is delivered by some payments providers guiding customers to achieving a better payments capability for the customer’s own business. Examples being offering physical bricks and mortar merchants extra products like small business loans and also offering ecommerce support with a hand holding role by the payments provider to enable the customer to not only have an ecommerce merchant agreement but also linking them with web enablement, chargeback insurance/processing and essentially providing a comprehensive easy step by step route to all aspects of web ecommerce enablement of their business. From a retail merchant customer perspective this improves their revenue and profits and is a win-win.
We predict more players will take on the full customer experience perspective resulting in a dramatic upturn in merchants getting ecommerce enabled with comprehensive trading services, including payments. The winners will be those that do this a-z for customers with a superb experience.
The good old days of simple payments processing with high margins were left behind a long time ago. The best payments processing businesses are the ones that are deeply segmented, know their customers and their customers’ business dynamics really well, and are optimised for their own maximum profit at smart market pricing.
Regulators have pushed for more transparency to customers, both business merchants and consumers, but in reality, the pricing in many cases has become more complex. Certain fees have been eliminated but then new fees have been added elsewhere in the equation (to counter). Overall, the whole payments ecosystem of types of business models, players, roles, transaction types have all increased in number and have changed. Ultimately the permutations, pricing and profitability are all more complex, opening opportunity, and the winners will be the best pro-active dynamic managers of the various factors.
As the (margin) pressures inevitably continue to increase, organisations will spend more time on their business and operational analysis working out how to refine models and improve their profitability to a level of fine tuning that we have not seen before (in payments but common in many other industries). For years there have been high risk segments addressed by specialists, now we foresee a far more granular approach with sophisticated dynamic segmented models to maximise profitability.
In contrast to the above the following are, in our opinion, mainly distracting. It is not to say they can’t deliver value but many people are addressing them as an entire solution or change drivers, whereas we see them as tools of the trade:
– APIs have been around for decades, yes decades! Today, conversations on APIs have two levels; technology and business. On the technology level yes there have been some major advances in recent years and momentum coupled with ease/speed of implementation which now means we are in a new and very powerful place; the net result being the interconnectivity of disparate entities (internal and external) can be achieved reliably at low cost so enabling the acceleration of new products/trade. On the business level the API Economy holds a suite of clearer defined cooperation business models between parties (over 40 models e.g. referrals, affiliates, resellers etc.). Organisations like Expedia have managed to utilise these API business models to generate additional billions of revenue, literally. Both these progressions are infrastructure cross industry not payments specific.
To make the statements; “we need our payments systems to be API enabled”, or “our next generation revenue streams will use API business models” seems to be the classic solutions looking for a problem cliche. In payments yes these two solution types may have relevance to future developments of a business, but they are not going to solve any problem starting from this perspective. In fact, it would be fair to say that payments businesses adopting these starting points would generate disruption and noise that actually hurts a business rather than aids it. That is not to say gaining experience in these areas is not valuable, but APIs on both the technology and business levels are TOOLS to be used to implement a business strategy or initiative, not answers in themselves.
The capabilities and trends in these technologies, just like APIs, are gaining notable traction and fast paced evolution. Again these are wide cross industry capabilities and not just payments specific, and similarly starting initiatives off from these solutions perspectives are looking for problems to solve, and so in themselves do not drive payments organisations strategy and net new revenue/profit. In essence you need to know what you want, and when is appropriate to gain value from these capabilities before they will deliver high value. There is little doubt these will become embedded in the mainstream of businesses to come, it is the timing and expected outcomes that need to be driven correctly.
We are surprised by the global uptake of Faster Payments. At the last count there were now 5 countries with a Faster Payments infrastructure in production, and 5 projects ongoing. The reason we are surprised is that from a bank perspective there appears little business case plus a significant cost associated with implementation. We can clearly see the national interests typically driven by the central bank in that it increases liquidity in corporates and hence overall trade activity. Such large initiatives typically take many years to gain traction but it seems Faster Payments is a hot topic for nations.
The reason we put this as a distracting topic is that from an individual bank payments perspective we believe Faster Payments is an infrastructure project rather than one that will deliver any net new revenue/profit anytime soon, and in fact given its size of programme and cost levels then the initiatives will likely have a negative short term impact distracting and constraining available investment funds for operational business.
We do not dispute Faster Payments is a good thing for nations and consumers, and ultimately when matured, for banks generally. Next generation real time products like Peer to Peer payments (P2P) need a Faster Payments infrastructure, or maybe actually a Faster Payments Plus (really real time not the 15-30 seconds of many of today’s faster payments capabilities) to work properly and no doubt as payments gets consumed by commerce more and more then instant real time payments will become an expectation not a new feature. As ever it’s all about timing and Faster Payments to us is a longer term play that does not assist with shorter term challenges and opportunities.
Open banking, Open Platforms and Open interconnecting “coopertition” in our opinion are all inevitable. No one big mass anything can serve all things to all people; so for many years the direction towards selecting and reusing best of breed components was compelling, but many technological and business barriers existed. Going forward, multi parties (who cooperate and also compete) will form an almost infinite portfolio of offerings out to market that address every segment and niche with fine detailed attention servicing their customer experience and needs. The classic successes we have seen so far along these lines are Uber, AirBnB generally and Square, Klarna and Kabbage in payments. Barriers still exist but a lot of progress has been made. PSD2/XS2A to us is just a European regulator getting behind the inevitable which is great news as it means progress is fast tracked. We warn though that treating PSD2/XSA2 as merely another compliance project (especially if implemented on a bare bones basis as many are) is missing the point. Labelling the initiative Open Banking on an Open Platform would be a more appropriate title, with a suitable major initiative behind it. The simple statement going forward is that no one organisation is going to be able to have a large comprehensive offering to customers consisting of products they themselves create alone, it will all be about highly segmented multi party portfolios presented seamlessly.
The drivers should be the already mentioned quest for new revenue streams, however they are created. In our opinion driving on the basis of PSD2/ XSA2 remit will distract and likely deliver little true value, along with a lot of cost.
So far Apple Pay has taken the biggest run at getting this right, and in our opinion has so far failed. True, it has significantly improved consumer understanding and even consumer usage but you could almost argue that even Apple never thought they could get true mass. In essence the challenge with mobile payments/wallets, or whatever you want to call it, is that none of these actually add a true net new reason why any consumer should change from cash/card which they instinctively use without conscious thought. Without some net value add of mass appeal to consumers then consumer habits will not be moved.
One day the solutions in this area will come forward. In the meantime this is one of those areas where all banks have to have at least an image layer of market offering even if they do not have the right solution; so market presence but not limited investment/focus until the real winners emerge.
We believe there is substance in what we would call the “financial internet” of Blockchain, however as with many emerging trends it is all about getting the timing right to benefit. In our opinion in regards to mid/low value high volume payments Blockchain is just too new to engage with, but definitely a space to watch.
PayX works end to end from analysing market changes & developing new market propositions, through to delivery project implementations. Our global customer base plus market analyst position within payments and investment communities helps us fine tune through constant updates where true value and who the winners and losers in the payments are and likely will be. We work with our customers contrasting their environments with global experiences to assist with initiatives that make a real difference, be that of divesting from a line of business or adopting new partners/technologies.
Over the coming year we will deliver a series of focus articles/blogs on the 3 key themes mentioned in the beginning.
Contact us for more information on what we are doing, including finding out when PayX will hold the next industry seminar near you. Email us at firstname.lastname@example.org or www.payxintl.com and arrange a complementary consultation.