Banks: “The threat to incumbents is not existential yet, but…”

T

he rising tide of neo banks in recent years has led to questions about whether the incumbents are about to become an endangered species, or even a relic of history.

“The solution for traditional banks is deceptively simple: they just need to bridge the gap between themselves and their customers,” Smith says.

Paymentology is a global, cloud-native issuer payment processor that gives banks access to real-time customer and card spend data.

“With fintechs slowly but surely changing customers’ expectations of banking services, it will come as no surprise that banks face a very real threat to a previously monopolised market,” Smith says.

“New entrants have seen opportunity in disaggregating the components of traditional banking, and offered targeted solutions, at lower prices.

“Consequently, many of the services that were once firmly within the remit of large banks have been reclaimed by fintechs. International bank transfer, remittance services, currency conversion and Direct debit services are just some examples.”

He says the impact of losing these additional revenue streams is one thing. “But, another real danger for banks is that these secondary services provide a gateway to complete customer disengagement and eventual customer churn.”

With neo banks able to offer free, or competitively priced secondary services, as well as hyper personalised banking for everyday use, “there is a real chance that what was initial engagement with select services, becomes complete customer reclaim”.

“Reaping the benefits that ultra-personalised, tailored services bring, customers move money to their neo bank the moment it is available, relegating the incumbent to nothing more than a temporary holding account.”

“The good news is that this threat to incumbents is not existential… yet”.

Currently, some 51% of people still prefer to use a traditional bank for their primary banking needs. “But, given how narrow that majority is, it’s clear that banks are at a cross-roads and the need to adapt is growing”.

Smith believes that properly leveraging the data that banks have access to is the key to providing a personalised experience.

“And this is where the clever application of technology for a bank’s payment processing systems is required.”

Billions of payment transactions around the world each day start in shops, ATMs and websites, that then get routed onto the Mastercard, Visa and UPI payment networks, where they in turn get redirected to an issuer-side bank for approval.

“This gives banks a treasure trove of valuable data sets at their disposal, which – if harnessed correctly – can provide insights into their customers and their spend behaviour.”

Analytics-driven processors can arm banks with the tools to improve customer experience: a critical component for them to remain competitive in an increasingly diverse banking environment.

“Equipped with AI, embedded into their payment processing, banks will even be able to offer personalised products to consumers at point of spend, like a Buy Now Pay Later option or offering of insurance on a holiday a customer has just booked.”

Buy Now Pay Later is becoming incredibly popular in the UK, with 37% already using this service and take up growing 39% per year. However, the traditional banks and their legacy infrastructure prevents them from offering these services.

“The ability to provide such services will provide the traditional banks huge new revenue streams and at the same time provide their customers a service which makes a difference for them.”

Through this, Smith says, banks can bridge the gap between themselves and their customers and deliver the promise of customer centricity.

“In turn, this will enable them to lead the way in taking back market share from nimble competitors, take advantage of monetising personalised products and services and be fit for a digital age.”

The banking environment is changing rapidly, Smith says, and the best adapted players will invariably survive at the expense of those that are not.

“The time for banks to reflect and reconsider their ways of working has never been better.”