Banks face new wave of disruption warns report
Following years of mistrust and rivalries, the time has come to reimagine the payments relationships between banks, retailers and fintech firms, according to a joint report from analyst firm Celent and payments systems company ACI Worldwide.
In the report, Banks, retailers and fintechs: reimagining payments, Celent and ACI Worldwide argue that significant disruption lies ahead and that banks should not be complacent about the threat of disintermediation.
The key threats come from the potential relegation of banks to the role of utilities, losing access to customer relationships due to PSD II and XS2A (Access to Account); the rising profile of Apple, Google and other technology companies in payments; the impact of blockchain on financial services; and the longer-term possibility of central banks deciding to issue government-backed cryptocurrencies, which would enable broad access to central bank money.
“We believe that now is the time to reimagine the payments relationships between banks, retailers and Fintech,” said Paul Thomalla, SVP global corporate relations and development at ACI Worldwide. “Banks need to enter into a new era of cooperation with retailers and the new players entering the market. They need to understand that the requirements and interactions with consumers and businesses are changing. Rather than seeing the regulators and the new Fintech players as a threat, banks should embrace the opportunities that the new payments landscape will bring. Only by combining the best aspects of both worlds can they offer today’s savvy customers the services they want.”
According to Celent, the most significant part of PSD II is that it requires banks to open up access to their accounts to third parties. Third parties will be able to access customer accounts for information such as account balances; they will also have the right to initiate payments on behalf of their customers directly from the customer’s bank account. This disadvantages the banks greatly, since while they still have to bear the burden of cost of providing the accounts, they will have to compete with third parties over who can provide the best customer experience.
“It is hard to predict what the end game will look like, but we can certainly expect personal finacnail management on steroids apps that aggregate a customer’s data across multiple providers,” said Zilvinas Bareisis, senior analyst at Celent and co-author of the report. “Like financial concierges, they would act in the customer’s interest, advising which accounts to keep, when to move money from one account to another, where to invest, etc.”
Changing consumer expectations provide another challenge to banks. For example, in its report Celent notes that consumers expect to be able to send and receive payments instantly. They also increasingly have choice over how to pay, particularly in e-commerce but also in retail businesses such as Starbucks where mobile payments are accepted.
The entry of non-bank players into payments could be a real problem, particularly since according to the Millennial Disruption Index survey, 73% of the millennials in the US would be more excited about a new offering in financial services from Google, Amazon, Apple, PayPal or Square than from their own bank.
Apple’s activity is singled out in the report; Apple published a patent in January 2014 for a system where customers can pay for purchases using Load ID obtained instantly from a financing partner. “At the heart of such a system is the financial system integration engine, which integrates POS, online store checkout platforms and other customer interfaces with financing partners,” said Bareisis. “The customer could apply for a loan, automatically be approved, receive Loan ID, and use it to complete a purchase. Apple positions such a system in direct competition with credit cards, which would certainly have an impact on banks’ revenues.
The rise of blockchain is already well-understood by banks; nine of the largest global institutions including Goldman Sachs, UBS and JP Morgan are already working with technology company R3 on the application of the blockchain to financial services. The final possibility for disruption is research at the US Federal Reserve and the Bank of England into central bank cryptocurrencies. Should central banks issue cash directly, banks would have to compete with the central bank for accounts based on the quality of their services. In a worst-case scenario, banks would end up starved of deposits, leaving them unable to continue their business.