Payments play a critical role in financial institutions’ overall customer value proposition and generate, directly or indirectly, up to 30 percent of the typical bank’s profits. But with shifting customer behaviors and FinTech competitors with innovative business models that have grown revenues and valuations at significantly faster rates., financial institutions’ payment solutions and revenues are under threat. Financial institutions risk losing important income streams and customer relationships without the payments business.
2021 Consumer Banking Survey
The 2021 EY Global NextWave Consumer Banking Survey reveals customer behavior shifts, including increased “neobank” and “FinTech” engagement. According to an EY analysis, valuations of FinTech firms in the payments space grew at an annual compound rate of 27 percent between 2016 and 2020. Over the same period, financial institutions experienced a market capitalization decline of 1 percent.
Other key findings from the report include the following:
- Of consumers who have chosen neobanks for their Primary Financial Relationships (PFRs), 37 percent are aged 18 to 34, which includes Gen Z.
- Consumers no longer expect one financial firm to meet all their needs and expect highly integrated experiences among all providers.
- The rise of "super apps" and consumer preference for much greater personalization provides a strong impetus for traditional banks' transformation programs and ecosystem development.
- As payments become more central to PFRs, the competitive playing field will tilt in favor of neobanks. Still, the need to integrate multiple financial services providers is a significant opportunity for incumbent banks.
“The goal for banks should be to make payments the center of how their companies run and grow their business – moving away from a commodity solution toward business-critical value-added services,” says Sara Elinson, EY Americas FinTech M&A Leader and EY Americas Payments M&A Leader, Ernst & Young Capital Advisors, LLC US Financial Technology Investment Banking, Senior Managing Director.
Equally important to note, credit card profitability continues to decline as alternative payment options grow, mainly "buy now, pay later" (BNPL) alternatives, according to this year’s annual survey on credit card satisfaction by consumer research firm J.D. Power.
As noted in the survey:
- Primary card share of spend declines: Credit card customers are now allotting just 42 percent of their monthly spending to their primary credit cards, down from 47 percent in 2021 and 2020 and 50 percent in 2019. During the past five years, the average monthly cash spend is up 49 percent, and debit card use is up 80 percent.
- BNPL emerges as a hot alternative, especially for large purchases: When making a large purchase, 44 percent of credit card customers say they would consider other financing options, such as BNPL, flexible financing/installment loans, or personal loans. BNPL is the most popular of these lending alternatives, considered by 28 percent of customers entertaining a large purchase. Reasonable fees and competitive interest rates are drivers for considering BNPL.
McKinsey & Company, in its article, “Reinventing Credit Cards: Responses to New Lending Models in the US,” makes this observation: “Buy now, pay later could pose a challenge to credit cards’ leading position in US payments. To sustain profitable growth, issuers may need to rethink their products, economics, and value propositions.”
Credit cards have long been one of the most popular methods of making payments and accessing unsecured borrowing in the United States, accounting for 37 percent of consumer purchases by dollar value in 2021. Still, their market position is gradually being undermined by the growth of point-of-sale (POS) financing offerings that combine installment lending with the convenience of card payments. US issuers could, by 2025, lose up to 15 percent of incremental profits to newer forms of borrowing, based on our simulation of the potential impact of buy now, pay later (BNPL).
Also a consideration, legislation introduced in the House and Senate would expand the Durbin Amendment to credit cards, thus further cutting into revenue. The bill generally prohibits credit card issuers from restricting the number of payment card networks on which an electronic credit transaction may be processed. Credit card issuers are prohibited from imposing certain limitations on the routing of electronic credit transactions, such as through penalties for failure to meet a specified threshold of transactions on a particular payment card network.
What This Means for Financial Institutions
The growing popularity of BNPL, the overall decline in credit card usage, proposed legislation in the House and Senate, and more suggests that financial institutions could potentially lose a substantial share of volume and profits over the next few years. But armed with the correct information, strategy, planning, and implementation, financial institutions can position themselves for success, both now and in the future, as the payments industry evolves.
For financial institutions to maintain and, in some cases, regain payments leadership and market share, they will have to innovate, adopt new business models and collaborate with FinTech competitors.
NEACH’s The Future of Payments Symposium II, Dec. 1, will show you how with sessions like these:
- Rebounding From the Revenue Recession with Ron Shevlin, Cornerstone Advisors
- Payments Strategy Session with Peter Tapling
- Engaging Cardholders in These Inflationary Times with Jeff Manchester, MyGini & Mehmet Sezgin, MyGini
Click here to learn more about this virtual event, including additional sessions and speakers, or register.
 Source: EY, https://www.ey.com/en_gl/banking-capital-markets/how-banks-can-win-at-payments, accessed 10/4/2022.
AUTHOR: Joe Casali, AAP, NCP
Executive Vice President
As the EVP of Payments Innovation for NEACH, Joe focuses on exploring innovative solutions and technologies that will help position members for success, both now and in the future. Connect with Joe to read more of his blogs, articles, and posts.