Published on the 18/02/2020 | Written by Heather Wright

There’s a billion dollar opportunity for local banks if they’re prepared to adopt new tech and business models…

The growth of digital payments and competition from non-banks could cost local banks billions in payments revenue over the coming years, but it’s also opening up a new multi-billion dollar opportunity – if banks are brave enough.

Accenture’s recent Global Payments Pulse Survey estimates global payments revenue is likely to grow at a compound annual growth rate of 5.5 percent to more than US$2 trillion in 2025.

But Accenture says Australian banks could lose as much of 13.7 percent – or US$3 billion – of their payments revenue through the growth of digital payments and competition from non-banks as payments become instant, invisible and free (IIF).

“The potential for data monetisation remains strong.”

Alex Trott, who leads Accenture’s banking practice in Australia and New Zealand, says banks across Australia and New Zealand are facing both big risk, and big opportunities.

“The world of instant, invisible and free payments is here to stay, squeezing margins further on a business that was already feeling a lot of pressure from new competition,” Trott says.

“Globally, the payments market is booming and there’s a multi-billion-dollar opportunity for those willing to invest in new technologies and business models based on the transforming digital landscape ahead. Australian and New Zealand banks lagging behind risk being marginalised as least cost provider of value transfer services.”

While New Zealand figures weren’t available, Accenture is forecasting payments revenue in Australia to grow at an annual rate of 3.7 percent, from US$18.7 billion in 2019 to more than US$23 billion by 2025.

It’s coming as the world turns to instant, invisible (with payments in third party apps and devices such as wearables, digital wallets, IoT devices and smart contracts) and free payments. For banks, it’s a multi-pronged attack they’re facing: Reducing income from card transactions and fees from free payments, which will put 8.3 percent of payments revenue at risk in Australia, and competition from non-banks in invisible payments, pushing 4.8 percent of bank revenue at risk. Card displacement by instant payments, with funds settled and transferred in real time and banks making little to no interest, completes the trifecta and is projected to put an additional 0.6 percent of payment revenues at risk.

“While the volume/value tradeoff is still driving growth in total payments revenue, our survey results clearly show an acceleration towards IIF,” the Banking Pulse Survey: Two Ways to Win report notes.

“The impact of IIF payments will be significant. Based on our analysis, it is likely to decrease the payments revenue pool by 15 percent by 2025 and may cost complacent banks up to $280 billion in revenue opportunity lost, globally.”

At the same time, Accenture estimates IIF payments could push operating margins for payments down to 4.3 percent.

“With such compression, margins may become razor thin and even negative for the least-efficient players.”

Reiterating a message banks have heard before, Trott warns that with the billions banks have previously earned from some of those channels drying up, business models must change and banks must adopt the latest technologies and focus on providing added value services to capture a share of the growing payments market.

“The digital transformation underway in payments will have a deep impact on all industry players and our banks will have to fundamentally change how they think about generating their revenue from their payments and transaction banking services to stay relevant to their customers changing needs,” Trott says.

”These models must be developed with security, trust and governance at the core, bringing together human and machine to ensure the integrity, safety and business relevance of high speed and continuous payment and related information flows.”

Accenture says banks have two options when it comes to extracting more payments value: Scale technology to reimagine how core payments operations can be done to ensure they can continue to benefit from the volume/value tradeoff, or differentiate themselves by adding value in a low-margin, high-volume business.

Among the options for customer-centric value-added services are becoming an aggregator in the online, mobile and instant payment segments, and developing cross channel payment platforms, for example PoS, APIs and microservices.

It cites Spanish financial services company BBVA and other banks which are launching apps for ordering ahead and paying through the app.

Capitalising on open banking and zeroing in on last mile of connectivity to offer solutions to corporate customers as part of open banking ecosystems is also suggested.

The selling of raw data is being eyed up by many banks as a key way to adapt to an IIF payments world: 69 percent of those surveyed admitted they aspire to sell raw data within three years. Twenty percent already monetise data delivering actionable insights – something 75 percent aspire to do in the next three years.

It’s an area where customers, however, remain wary, and data protection concerns and operational complexity were cited as key barriers to monetising customers’ data.

“Fraud management is a good example of a data-driven service,” Accenture says.“Other forms of data monetisation, such as offer presentment and redemption, are far less developed.

“The potential for data monetisation remains strong but will evolve over the long term with services more loosely aligned to core processing while other data monetisation services progress more slowly from concept to revenue generation.”