Student whitepaper - The future of digital payments in the finance sector

Posted by Jenni Armstrong on 13 November 2015

The final module of Squared Online sees Squares work in groups to create a whitepaper that sells their ideas on how a major digital trend will affect a specific industry.

From the whitepapers submitted, three outstanding groups are identified through a peer marking process and invited to present their projects in an upcoming live class. Students then vote on which overall whitepaper is the most viable, persuasive and creative.

They're great examples of how Squared Online grads combine an in-depth understanding of the digital landscape, the ability to identifty emerging trends and the creativity and strategic knowledge to make valuable, forward-looking recommendations that drive innovation and strategy in their organisations.

Read a recent top-voted whitepaper about the future of digital payments and its impact on the retail banking sector.

The average consumer’s banking relationship is dominated by making payments, representing the cornerstone in the next phase of digital banking (1). The future of digital payments, and its impact on the retail banking sector, has therefore been identified as a viable trend for discourse in this paper.

We discuss leading technological innovations and identify gaps in the market which this industry could seize on. This whitepaper also explores strategies to help the retail banking industry embrace digitalisation and offer customers a seamless customer journey. Our recommendations are based on the adoption of innovative digital payment solutions into a seamless branded payments ecosystem, which we perceive as key to the success of modern retail banking systems. However, it must be noted that whilst there are many benefits to digitalisation, it also carries some risks and challenges for this industry – all of which are outlined later in the paper.

We have highlighted below leading innovations relevant to the finance sector. It must be emphasised that no financial institution set forward these mobile payment innovations.

  1. Mobile/Digital Wallet - mobile wallets (8) using contactless technology are expected to reach 200 million in
    2016, representing a growth of more than 100% since 2014.
  2. Money Transfer / P2P - money transfers between individuals (Person-to-Person) will be facilitated by the adoption of new IT infrastructure.
  3. mPOS - mobile Point of Sale solutions are being widely adopted by retailers. mPOS allows customers to use their own credit card on a mobile device.
  4. Social Payments - social networks have started to dip their toes into social payments. Currently, these consist of peer-to-peer transfers and online purchases.
  5. Wearables - there are already several standalone, discreet pieces of wearable payment devices such as the BarclayCard bPay wristband (9), with singular functionality.

The above is by no means inclusive. There are several other important innovations - contactless payments, bill
payments, loyalty programs, direct carrier billing and in-app payments among others.

Gaps in the market

With the rise of digital payments, the number of people visiting branches has fallen by roughly 30% over the past three years (10). Moreover, the continual rise in smartphone and tablet usage has led to a phenomenal increase in payments being transacted through mobile apps. These apps are controlled by online payment specialists and digital merchants causing disruption and fuelling a major gap within the traditional banking sector.

Paypal alone, a pioneer in digital payments, moved $228bn across 190 markets and 26 currencies in 2014, becoming a major global player in the digital payments industry (12). IT firms, innovative outsiders and young startups are also challenging the old system by offering new digital financial services. This has resulted in a highly fragmented market, posing both threats and opportunities to your industry.

Strategy for change

A successful real-time digital payments market integration strategy is needed, based on a clear understanding of
customer needs, new payment technologies, and implications for internal operations and capabilities including systems, structures, people and processes. Banks need to diversify their digital payment infrastructure (12) by offering more options via a full mix of platforms and technologies. These platforms should include at minimum contactless cards, mobile, social payments, peer-to-peer and wearable technology. Crucially, banks should aim to join up these payment services into a holistic digital payments ecosystem, whether customers are accessing their services through mobile, in branches or on the phone. This would enable banks to provide a seamless and user friendly experience for the entire customer journey.

From strategy to action

McKinsey states that retail banks have only three to five years at most to adapt their business models around digital before losing relevancy for their users13. We have suggested below four recommendations to implement in line with your digital strategy.

1. Employ big data and analytics

Combine internal customer data with external data sources, such as social media and market trends, to better
understand how, when and why your customers are using digital payment platforms. Importantly, big data should be
used to help predict future needs and help you invest in platforms that are most likely to generate the greatest long term value.

2. Integrate all digital payment solutions into back-end systems

In order to streamline and facilitate the customer journey as well as ensuring relevant data can be collected at various
stages of that journey, full integration with existing banking systems is critical. By doing so, automation can be maximised and customer data can be more easily fed into the big data analytics cycle.

3. Partner with market-leading digital payment technology providers

Whilst payment platforms developed in-house can offer the opportunity to tailor to existing internal systems, there are
challenges and risks in doing so. These include high set-up costs, ongoing development costs as well as the rapid pace of market change which could result in the platform becoming obsolete within a few years. It may therefore be
less risky and more cost efficient in the long run to partner with specialists in the field who lead on technology.

4. Embrace digital across your whole organisation

The pace of change in digital will only accelerate so commitment to product evolution and rapid change is
essential if banks are to meet growing customer expectations. Incorporate digital at the core of your organisational culture and implement cross-functional teams to bridge siloed teams. This can foster innovation, increase efficiency and resilience during periods of rapid change.

Reaping the benefits

Retail banking has tended to lag behind its commercial counterpart in terms of innovation and evolution, but there is a distinct opportunity to harness disruptive trends and create true competitive advantage. Without a doubt digital offers
retail banking many opportunities to increase net profit, lower operational costs and improve customer experience.
Revenues can increase by 5% from innovative new offers and business models and 10% from new products,
distinctive digital sales and using data to cross-sell. Retail banks can also reduce their operational costs by 30% from
automation/digitisation and transaction migration14.

Risks and challenges

However, there are some major risks and challenges that banks will face when developing their digital payments offer:

1. Cyber security

In the UK, a TeleSign report15 found ‘the vast majority of UK consumers (80%) are worried about online security’ when transmitting confidential financial data. The challenge for banks is to find innovative ways to protect customer data, such as biometric verification.

2. Regulation

Banks are hindered by a raft of constantly evolving regulations that non banks can avoid, making them more agile digital non-bank competitors. Banks need to find ways to balance regulatory impact with customer expectations.

3. Changing customer behaviour

Customers are continually seeking a seamless digital banking experience and simple friction-free payments that are supported across a multitude of channels. Unfortunately research indicates that the banking industry still has some
way to go to deliver on these expectations and embrace technology.

4. New entrants

“The biggest threat to banks may well come from competitors targeting key parts of their business”16. Digital
payments present a significant threat to bank revenues, with potential losses amounting to 13% of net profits17. Retail
banks need to ensure that they capitalise on these innovations.

Conclusion and call to action

To remain both relevant and competitive to consumers and merchants in this arena, banks must actively incorporate this
digital evolution into their operations and fundamentally alter their approach to business.

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Topics: Expert comment, Finance, Whitepaper