As banks evaluate how they can reignite growth and best serve customers this year, they must first look at how changing consumer payment preferences are impacting market dynamics and opportunities.
Until recently, most banks have focused on traditional sources of revenue, including interchange revenue generated from card transactions, account-fee revenue, and lending programs. At the same time, they’ve allowed non-bank players and the card networks to dominate the point-of-sale environment with sleek checkout solutions and alternate payment options like Buy Now Pay Later (BNPL), which Insider Intelligence forecasted its payment value will reach $75.60 billion in 2022, growing by double digits each year to reach $143.44 billion in 2026. In doing so, banks are being replaced by other solutions that get to the customer’s point-of-need first, more elegantly, or faster.
According to a survey from McKinsey, 69% of American consumers use a digital wallet when shopping online. This mass adoption of digital payments has inspired several of the large banks behind Zelle to look at releasing their own digital wallet as another revenue and marketing stream. The move would compete against the established services of Apple Pay, Paypal and others, however if it is successful, the big banks could earn back a piece of the pie that tech companies have captured in recent years.
As these seamless payments continue to find new use cases, banks should be looking at new ways to get closer to the customer — and re-evaluating the value they bring to businesses as other financial service companies do the same.
The banking revenue model is changing
While existing payment options like ACH and emerging solutions like real-time payments don’t deliver the interchange revenue that card programs do, real-time payment adoption (RTP and/or FedNow) used in a pay-by-bank fashion will help banks overcome declining debit and credit card interchange revenue, andthese capabilities can be leveraged to put banks back at the point-of-need and be a gateway to other value creation.
Let’s look at two ways that banks can meet consumers at the point-of-need to acquire new customers (often at a lower cost), and retain existing ones, drive adoption of new services, and ultimately boost long-term growth.
Better BNPL: Banks have a chance to regain some market share by offering BNPL directly to consumers and drive incremental revenue without a major technology or capital investment. For existing customers, banks have access to rich data internally on customer payment history but are also plugged into external sources of credit worthiness to inform their lending decisions for non-customers. By looking at a more complete view of each customer’s financial picture, financial institutions can make BNPL offers that enable customers to extend their resources in a way that supports their financial journey rather than driving up debt and risk for the bank or the consumer. Banks also have an advantage over fintech players because of their robust set of operational processes and systems to handle loans, as well their regulated function to legally accept customer deposits — which are by far the least expensive way to fund BNPL loans.
This type of lending allows banks to successfully compete, driving new, profitable growth and customer retention, by supporting — rather than detracting from — financial wellness. Data shows that customers prefer to get BNPL loans from their bank, and by offering BNPL loans that are a good fit for each customer’s financial profile, banks can help customers build their financial future and qualify for future financial products that help them build wealth.
Banking-as-a-Service (BaaS): Banks can work with BaaS platform providers to offer financial services to business customers end users or employee base. By embedding payments, lending or other services into a business’s website or app, banks get to the end customer’s point-of-need and help the business increase customer engagement and loyalty and create new sources of revenue.
For example, an airline can aggregate travel and related financial services into one website and embed the ability to transact for these services via APIs. This allows consumers to choose and pay for end-to-end services — anything from travel and health insurance to car rental, hotel bookings, excursions and more — all in one spot.
Consumers could also benefit from a wide variety of payment options, such as a BNPL-type installment plan, a card payment, and emerging now, a real-time “pay by bank” option — i.e. a bank payment that bypasses the card networks rails and uses The Clearing House or the future FedNow rails to enable near instant payment.
As banks enable options for all types of payments, they can work with businesses to determine the best application for each payment type, including when payments truly benefit from real time, or when another payment method may be more beneficial. To continue with our travel example, the bank and airline would likely prioritize the ability to pay an insurance claim in real-time to a traveler whose luggage needs to be quickly replaced, but might enable traditional ACH for a booking refund on a canceled excursion.
While each payment option has a different financial opportunity for banks and their business customers, enabling these options drives more business and builds better customer relationships.
As with most facets of our lives today, we can anticipate that demand for convenient and instant money movement will only continue to rise. By leveraging payment innovations to get closer to customers, financial institutions can regain prominence and elevate their clients’ customer experience. Enabling a variety of digital banking capabilities — from BaaS and embedded payments to real-time payments gives businesses access to new sources of revenue, operational efficiencies, and the ability to delight their customers.
This year, banks must look to put themselves back at the point-of-need in highly digital ways to create these clear competitive advantages. Those that do will see the most success in 2023 and beyond.
Author: Michael Haney, Head of Digital Core, Galileo