Author: Thomas-Frank Dapp (+49) 69 910-31752
February 14, 2013
For many months, a heated debate has raged across a variety of sectors on the question of which web-based payment technologies people are going to use in future when they go shopping. Not only players from the financial sector are intensively searching for an answer.
Besides traditional financial institutions and established credit card providers, telecommunications companies and internet services such as Google, PayPal and Apple are also throwing their hats into the ring. Competition is fierce in the market for mobile payment methods. The traditional financial institutions could face the threat of painful, cut-throat competition if some of the players – especially the non-banks – were to boost their efforts to form powerful strategic alliances. Given the rapidly rising adaptation rate of mobile devices, look for mobile and web-based payment technologies to establish themselves (internationally) in the near future. In Germany alone more than 30 million people now have a smartphone – and the numbers are rising.
Digital mobility with internet-enabled devices is the next logical stage in the evolution of the World Wide Web – smartphones, tablets and lately also "phablets" (functionality of a phone and a tablet combined) are taking over the mass markets and will fundamentally change (internationally) not only the way products are bought and sold but also financial services, especially (mobile) payment systems, in the coming years. Mobile devices can provide links between the in-store and digital channels as well as advertising, with far-reaching consequences. The option for users to access information, consume products or services and pay for them electronically wherever they are and whenever they want also requires an urgent response from the traditional banking sector. The market for digital and mobile payment solutions in particular is in a state of flux, but also the deposit-taking and lending businesses are faced with (digital) challenges, as evidenced by the spread of peer-to-peer (P2P) platforms and a (still) minor number of crowdfunding and crowdinvesting providers entering the market.
There is also a clearly visible trend towards non-cash transactions. The Bank for International Settlements looked at sample readings for 22 countries and found that the number of cashless transactions increased by roughly 7% per year between 2001 and 2010. Many analysts forecast strong growth for the mobile payments segment. Despite the particularly robust growth in the emerging markets, nearly 70% of cashless transactions are still accounted for by the US and European markets. Changing consumption habits, e.g. the trends towards e-commerce and m-commerce, are also boosting the acceptance of non-cash payment methods.
In addition to the growing administrative and regulatory requirements that will become more exacting on account of the global financial and sovereign debt crises, financial institutions are struggling against the increasing evaporation of confidence and growing reputational risks. Moreover, many of them are at risk of becoming less innovative, while the adaptation rate of new web-based technologies continues to rise across a variety of industries. Established banks are being forced to adjust their business strategies to embrace digitally driven structural change. It cannot be ruled out that net players such as Google, Apple, Amazon, PayPal or Facebook will expand their existing service offering in order to enter, for example, the market for standardised financial services. The net players are doing exceptionally well in integrating changing patterns of consumption and media use – especially of internet-savvy consumers – into their offerings. Above all, some of them have sufficient liquidity at their disposal to experiment in the market for web-based technologies. If one project fails, it takes no time to pick another one from the pipeline and arrange its funding. So this raises the question for traditional banks as to whether they (will) play a relatively active role or more of a passive one.
The new contestants thus represent serious competitors, also in the (future) market for standardised financial services. To avert the threat of predatory competition banks would be well advised to take account of digitally driven structural change in their respective business processes in order to offer mobile financial services that are not only appropriate but above all deliver what the consumer wants, besides being secure and easy to use (the best solution would be everything from a single source). Traditional financial institutions' many years of experience in dealing with security and data protection issues mean that specifically in this area they enjoy a comparative advantage which they ought to exploit in their strategic planning to compete in the mobile payments segment.
In any event, traditional financial institutions (still) have several options for responding to digitally driven structural change. The main challenges consist of converging proven, traditional expertise with new market requirements that are adapted to the digital age, as highlighted, for example, in the dispute about striking a balance between data and information security on the one hand and the growing demand for convenience and efficiency on the other. Multi-technology and multi-channel strategies could indeed prove beneficial in today's dynamic innovation phases, which are marked by shorter product life cycles and growing product complexity. One further option would be for incumbents to enter strategic alliances with established and new competitors.
The decision about which strategy to prioritise should, however, be made in a timely fashion, because every form of action brings with it challenges of an organisational nature and concerning corporate philosophy (culture) that cannot be implemented overnight. Therefore, it remains to be seen whether current developments will give rise to a further episode warranting the title "Pay Wars – Return of the traditional financial institutions". After all, the battle to secure the much sought-after market shares in the areas of mobile and web-based payment systems has only just begun.
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Author: Thomas-Frank Dapp (+49) 69 910-31752
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