Payments FinTech — No zero sum game
An analysis of how the rise of emerging FinTech in payments is not a zero sum game for banks and card associations.
Many emerging FinTech companies are taking their solutions and platforms directly to market i.e. consumers of financial services — both retail and enterprise. They are directly competing with banks and financial infrastructure companies in several lines of business like lending, payments and advisory services.
Here is an analysis of emerging FinTech companies predominantly in the retail payments and transaction services space and how they relate to the incumbent traditional payments and transaction networks. The scope of the analysis is restricted to emerging FinTech that offer payments and transaction solutions for fiat currencies and does not include those that offer solutions for crypto-currencies like bitcoin. The analysis classifies emerging payments FinTech into three broad categories based on whether their solutions:
- Are part of the traditional retail payments networks that are run by card associations and banks
- Are independent retail payments and transaction networks
- Are independent retail payments and transaction networks with strong inter connectivity with the traditional retail payments and transaction networks
- Most emerging FinTech companies in the payments and transactions space have solutions that piggy back on the traditional payments and transaction networks run by card associations and banks. They focus on enhancing customer experience, increasing convenience and streamlining the process of using bank and card payment networks with solutions like digital wallets to store multiple card details electronically, wallet platforms that can be used by companies to leverage digital wallet capabilities and point of sale technology solutions to make payments and authentication easier and safer.
- Many solutions from emerging payments FinTech that can operate as independent networks are also interconnected with the traditional networks. Most retail customers already have accounts with traditional banks to store their money and are already part of the traditional card association/bank networks. Hence most emerging payments FinTech companies, while offering more efficient payments and transaction solutions, ensure interconnectivity with traditional networks to leverage the large customer base. Most closed loop payments solutions or online money transfer solutions have a strong dependency on bank and card accounts for the initial source or final destination of funds.
- The few FinTech solutions operate primarily as independent networks are mobile money based payments networks from large mobile telecom companies, primarily in emerging markets. They leverage their massive customer bases, many of whom are not yet part of the formal financial system with no bank accounts, and offer cheap and efficient payment and transaction services on their own networks.
It is apparent that emerging FinTech solutions and business models in the payments and transactions services space are still strongly dependent on the traditional infrastructure. Their rise is definitely not a zero sum game for banks. Their solutions are improving customer experiences, streamlining processes and enhancing the value proposition of the traditional payments networks benefiting traditional incumbents like banks, card associations and other infrastructure and processing firms.
That being said, banks cannot afford to go take it easy as many of the emerging payments FinTech solutions, while providing value and convenience to a retail customer, actually take away many direct touch points that banks have with customers.
The several layers of detachment from the retail customer takes away a bank’s ability to manage customer experience by itself. Banks also loose the ability to leverage the enormous amount of data that is generated when a retail customer interacts with the touch points and may have to depend on FinTech for customer analytics and insights. Hence it remains to be seen how banks can stay relevant and not get relegated to mere financial infrastructure providers in the form of back end bank accounts and back office payment infrastructure, while emerging FinTech begins to dominate the front end touch points.