Alternative payments and new players – what’s next for the payments industry?

Guest blog post by Philippe Eschenmoser, head of business consulting, SIX Payment Services

The payments industry is undergoing a period of overwhelming change, both in technological terms, but also with regards to increased regulation. Furthermore, a growing number of new entrants are threatening the status quo by looking to capitalise on this changing landscape. This has been recently highlighted by what seems like daily announcements of new funding rounds for payment start-ups, such as Stripe, which recently closed a $20 million funding round. Naturally, this has led many to question what these developments mean for the traditional payment players – what chance do the new market entrants have of dominating this market and should our mainstream financial service providers be concerned?

The current drivers of this trend are complex, but ultimately can be broken down into three categories: the financial crisis, regulation and technology. As well as preoccupying banks’ agendas, the financial crisis has eroded public confidence in the traditional players, which in turn has opened the floodgates for new and innovative start-ups to take advantage. The entrance of new payments players has been further facilitated by ever increasing regulatory initiatives such as the Payment Services Directive. Combine this with the significant advances made in technology and the ubiquity of internet and mobile, and it is unsurprising that we are experiencing this state of flux within the payments space. 

Yet, despite these threats, the traditional players still have it all to play for. For one thing, the payments business is essential to banks from a revenue point of view and has become more so since the financial crisis, which has made other previously lucrative revenue streams unviable. At a time when falling interchange fees and customer loyalty is impacting on banks’ profits, financial institutions should be capitalising on technological advances to offer alternative payments as a value-add service. This could increase customer loyalty, brand awareness and provide a boost to revenues.

As consumer interaction decreases, with branch visits on the decline, the transaction business and the ATM withdrawals remain one of the few modes of communication with customers. Therefore, the behavioural insight banks can gather from payments can create opportunities to up-sell and cross-sell. In addition, this market data is crucial from a regulatory perspective just as much as it is for the bottomline. There are huge regulatory demands on banks to harness this data to treat customer fairly, both for UK and European banks, so why not use this opportunity to comply with legislation to also improve margins?

This is an incredibly exciting time for payments – but that does not mean the end of the road for traditional players. Banks should be attentive to the trends, keep an eye on them, but not be a slave to them. The ball remains firmly in the banks’ court – now it’s up to them to decide how they want to play the game.