Few topics in retail banking have generated as much attention as digital payments—transactions that don’t involve physical cards or cash. The emergence of payment systems that are designed to function seamlessly with mobile devices, in-app methods, or browsers has prompted wide-ranging innovation from banks, digital giants, and fintechs. The volume of digital payments is soaring and by 2020 is likely to approach $5 trillion worldwide and $800 billion in the United States. 

That growth brings new opportunities and risks for retail banks. Banks that fail to keep pace with market leaders in digital payments will lose share to nonbanks—and any reduction in payment interactions will have a ripple effect on the rest of the business, since payments often serve as the primary relationship gateway between banks and customers. Consequently, ceding ground in the payments arena can result in lower revenues elsewhere. This shift is already hurting banks in China and India, which are rapidly losing ground to the leading fintechs. Best MBA admissions consultants in Bangalore, Mumbai and chennai 

To combat this threat, banks need to redesign and personalize the payments experience, collaborate strategically to keep pace with the digital giants, and substantially improve their approach to protecting and monetizing data.

THE IMPACT OF DIGITAL IN PAYMENTS

Smartphones are now ubiquitous worldwide, and consumers use them for a multitude of daily transactions, from buying groceries to paying for public transport. With NFC payment terminals now commonplace, more and more consumers prefer to conduct contactless transactions, through phones in close proximity to the terminal. And as digital user interfaces have improved for apps and websites, consumers are finding it easy to forgo cash when paying for a wide range of goods and services. The result is rapid growth in digital payments. In the US, for example, digital payments are likely to increase from 10% of total payment volume in 2017 to 15% in 2020. (See Exhibit 1.) 

The continuing move to digital payments will powerfully affect retail banks because payments remain central to their customer relationships. Although continued low interest rates, reduced transaction fees, and margin pressures have made the business more challenging, payment-related revenue (including revenue from accounts, noncard payments, debit cards, and credit cards) still accounts for a third of banks’ top line. As transaction volume for digital payments in large and small amounts continues to grow, the payment provider stands front and center to the customer.

Nonbank providers have jumped at this opportunity. Many of them now play a mainstream role in storing value or enabling exchange. This crowded space includes digital giants such as Apple and Google, fintechs such as PayPal and TransferWise, and merchants such as Amazon and Starbucks. Companies like WeChat and Grab, which began as nonfinancial service providers, have amassed so many users that they now offer payment services to support their wider e-commerce ambitions. 

Three types of digital wallets—the devices that allow people to perform electronic transactions—will be on the front line of the battle for users. Visa, MasterCard, and American Express offer different flavors of card network wallets that largely preserve the status quo for issuers, while offering consumers a better experience than manual cards can. Device wallets, from the digital giants, can hold multiple cards and may eventually provide independent value storage (as with Apple Cash) or link directly to the customer’s bank account. Fintechs such as PayPal/Venmo and Paytm are offering P2P wallets, which completely remove banks from the consumer interface by performing direct account-to-account transfers. (See Exhibit 2.)