Banks and payments: take your pick

Being too lazy to visit an ATM, one of the ways I typically source cash (for those increasingly rare occasions when you can’t use a card or phone) is by picking up a lunch tab, paying by card, and then being reimbursed by my fellow diners in cash.

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It’s an easy and free way to source cash - as long as you remember to pay the credit card bill on time.

"What’s new is simply the means by which to facilitate the choice of paying before, paying now or paying later.”

Lately though the ruse has been less successful. Too often fellow diners don’t have cash either and want to reimburse you electronically through a service like PayID on a mobile phone.

It’s a Brave New World… but how much does this anecdote reflect a truly new world of payments? True, my cash out scheme doesn’t work so well and yes it is a demonstration of a new payment universe.

But what is actually different here? In our typical group of diners, some are electing to pay now - those who give me cash. Some are electing to pay later - those who promise to PayID me. The merchant is opting to lessen the risks of theft, cash handling and delayed payment by accepting my credit card.

So what’s new is simply the means by which to facilitate the choice of paying before, paying now or paying later.

I want it now

The traditional “pay before” mechanisms are products like gift cards or positive balances in a public transport card or tollway system. Paying before is not free, typically around 30 per cent of the value of gift cards is never spent; money paid in advance to a tollway is dead money, providing no benefit or return before it is used.

Cash is the obvious “pay now” system but so are debit cards, which take money immediately from your account, and direct debits.

Credit is the fundamental method to “pay later”. Maybe with a loan, a credit card or a “buy now, pay later” scheme like AfterPay, Zip or Klarna.

Regardless of the tool, be it crypto, physical, digital, bank, non-bank, any payment fits one of these types. Pay before, be that gift cards, pre-paid telecoms, subscriptions, is growing but the other tenors are not disappearing. In pay now, while cash and cheques are declining, debit is growing. Credit cards may be ceding ground to debit cards but buy now, pay later has emerged and household indebtedness is at record levels - which means more people are electing more often to pay later.

So where is this payments revolution taking place? It is in the process of paying, the institutions which produce payment instruments, monitor security, authorise transactions, manage merchants and customers, settle payments.

In the plumbing of the system.

$US500 billion

According to Accenture’s Alex Trott “the payments market is booming and there’s a multi-billion-dollar opportunity for those willing to invest in new technologies and business models based on the new digital landscape ahead”.

Incumbents beware: “banks lagging behind risk being relegated to the plumbing of payments. The digital transformation underway in payments will have a deep impact on all industry players and banks will have to fundamentally change how they think about their revenue in this area.”

Accenture’s latest Global Payments Pulse Survey forecasts global payments revenue is likely to grow at a compound annual growth rate of 5.5 per cent to $US2 trillion over the next six years.

Consumer payments account for 58 per cent of this total revenue and are expected to grow at 5.1 per cent by 2025; corporate payments comprise the rest and are expected to grow at a slightly faster 6.1 per cent. Non-cash transactions are expected to grow at 5.0 per cent over the same period.

This projected growth is offering banks that operate in the payments industry the chance to grab $US500 billion in incremental revenue.

The challenge is - and this is where many see revolution - banks are not the only institutions looking at this profit pool; nor are they necessarily the natural incumbents.

Historically, payments systems required both physical mechanisms, be they cash trucked in horse drawn coaches or super high speed electronic networks, and trust. Banks had the scale and the technology but also the customers and the trust.

Yet banks have never had a monopoly. American Express dominated the old travellers’ cheque market (a form of pre-paid coupon), Western Union was a huge player in wire transfers, in the Middle East an amazing, trust and relationship-based, manual system called hawala has operated for centuries.

Moreover, even where banks have controlled markets, such as in credit cards, they have typically set up utilities to grow the network. Both Visa and MasterCard were originally associations of tens of thousands of banks.

Yet it is also true banks still have much to lose as payments evolve. Accenture reckons only the banks that change their business models and adopt the latest technologies and focus on providing added value services will capture a share of this growth. If Australian banks don’t rapidly evolve, they risk losing $US3 billion in payments revenue by 2025 due to the growth of digital payments and competition from non-banks (up to 13.7 per cent of payments revenue).

That’s a global story: “[Accenture] sees a mix of progressive and disruptive market drivers at work. These include customers’ and merchants’ rising expectations for speed and convenience; technical innovations like open APIs, Internet of Things and high-speed mobile connectivity; AI and blockchain; digital and regulator-driven fee compression; national infrastructure upgrades; and new providers entering the market, such as third-party payment initiation service providers.”

Demanding return

Accenture describes this new world of payments as “instant, invisible and free”. That’s a bit misleading because nothing is free - the cost of these networks, if not captured in explicit fees for buyers and sellers, will show up in the prices of goods and services. This new world is capital intensive and that capital demands a return.

Deutsche Bank believes the return on capital - as it already does with social networks - might come from the value of data: “Digitalisation will give businesses extra incentive to smooth the payments transition. For starters, when customers are comfortable with a payment technology, they tend to think less about how much they spend. Furthermore, as the data gleaned from payments becomes increasingly valuable, payment fees will approach zero.”

Deutsche makes its case in a new three part analysis called “The Future of Payments”.

The bank argues an ongoing shift to digital payments “will be encouraged by governments, banks, corporates, and payment providers who all stand to benefit from the digitalisation of payments”.

Yet, for all that, cash will survive according to Deutsche. While that broad array of powerful stakeholders wants to get rid of it, either to stifle the black economy or grow revenue, too many people in too many major countries still prefer cash.

I suspect Deutsche overstates that preference. After all, consumers just wanted faster horses until Henry Ford came up with the car.

Yet it’s true cheques – the horse and cart of payments - are still with us.

What all the research shows is innovation in payments will continue, new players will enter the market. Some incumbents will miss out. The “plumbing” of the global plumbing system will change. Banks long gave up owning their own printing presses for cheques, they have never physically made credit cards. Increasingly organisations with global scale have taken over “utility” business like authorisation or processing of merchant transactions.

But the choice fundamentally will remain: pay before, pay now, or pay later. And I’ll have to come up with new ways of getting cash because maybe even ATMs are endangered.

Andrew Cornell is managing editor of bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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