Banks and Payments: Fortune Punishes the Timid
Banks' resistance to payment modernization will leave them eating fintech's table scraps.
Banks and payments are more a story of “fortune punishing the weak” than “favoring the bold” because most banks have done nothing but resist payment modernization.
Banks have protested against most efforts to modernize the payment business, including, but not limited to, their resistance to the Real-Time Payment system FedNow in the US, their opposition to the digital euro in Europe, or their laughing off the need for payments for internet purchases in China.
It’s simple: find a nation trying to modernize its payment infrastructure, and you’ll find banks and bankers proclaiming that there is no need for change.
It’s a pattern I’ve seen repeatedly, and while a few banks may be standouts, the majority deserve to be replaced by fintechs in payments and feed on whatever crumbs are left them.
Strong enough?
👉TAKEAWAYS
Banks are losing ground. Fintechs are rapidly outpacing banks in the payments space, forcing banks to pivot. To stay competitive, banks must aim to achieve at least 50% of their new growth in payments from offerings outside their core business.
Tech modernization is non-negotiable. Payments companies must upgrade outdated systems to remain profitable. A modular, scalable, cloud-ready architecture is essential for improved unit economics and will help companies adapt more efficiently and cost-effectively to evolving requirements.
Revenue growth will halve by 2028. Global payments growth will slow significantly over the next five years, with CAGR dropping from 9% to 5% by 2028. This will take revenues from $1.8 trillion to $ 2.3 trillion.
Profitability is center stage as the industry’s investor base shifts. With 33% of the payments industry’s investor base now value-focused (up from 26% in 2021), expectations for returns have sharpened.
GenAI is paying off for early adopters. Leaders are deploying GenAI in key areas across their business— from customer service to software development and coding—and seeing improved customer and business performance, sometimes reducing cost-to-serve by up to 70%.
Organizations must become “instant payments ready.” Instant payments systems are now live in over 60 countries. In response, payments companies must go beyond transaction processing to adapt their operating models for deeper engagement.
Digital currency adoption requires collective action. More than 90% of central banks are developing central bank digital currencies, some of which are already live. But widespread adoption of these and other digital currencies will require improved architecture, use cases, and regulation to unlock their innovation potential.
👊STRAIGHT TALK👊
I am stunned that this report from BCG left the editor’s desk with the line:
“the shift from cash to digital payments is reaching its peak.”
This shows a profound lack of understanding of how far digital and real-time payments, including CBDCs, have to go in transforming our society.
One thing BCG is correct about is that bank payment revenues have peaked because all new payment methods are driving the cost of payments to new lows. The days of fat payment margins are gone.
Banks do need to modernize, but they are, for the most part, their own worst enemies.
Banks lack of vision in payments has left them reacting to payment modernization forced upon them by governments rather than leading the modernization themselves.
That they need to do more with payment modernization is a given, but in the end this is a game they’ve already lost to fintechs and to governments forcing modernization upon them.
Let their punishment begin!
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