Surviving the Payments Squeeze

Payments in financial services is becoming very fragmented with disruptive innovation through new business models occurring across the value chain taking the share away from the banking industry. Next generation technology players and non-financial institutions through a combination of innovative products, data analytics and open APIs have exploited market discontinuities. So what's the future of bank payment? How should the banks respond to survive this squeeze? 

Read my point of view published in the Nov 2014 edition of the Australian Banking & Finance. Please feel free to leave your comments. 

Payments initiation (consumer facing part of the payment value chain) is increasingly getting fragmented with highly competitive technology-led platform players, non-financial institutions and crypto currencies (operating as wholesale currency), taking the share away from financial institutions. Consolidation in the payments clearing space with players like EFTPOS in Australia and crypto-currencies is also slowly gaining ground. Some players will provide a shared service cross border and white labelled clearing and settlement capability at a lower price point through greater economies of scale across the industry. This will compress margins further and likely drive smaller financial institutions out of the market unless they can provide additional value-added services and capabilities.

If banks do not act fast enough within the next 3 to 5 years, this squeeze from market participants across various facets of the value chain will confine them to at best, being efficient, cost effective payment processors. To transform themselves, banks will need to reassess their engagement and participation to the wider e-commerce and m-commerce value chains.  

What should banks do?

·        Move from a ‘transaction managed efficiency’ paradigm to a ‘rich, data flow’ e and m-commerce paradigm. Today, the payments value chain does not commence when the consumer is deciding on the method of payment but commences when they think about what to purchase, where and when. The traditional benefits of greater insight around customer spend patterns banks have enjoyed are slowly getting diluted. Technology firms (Apple, Facebook, and Amazon) and telecom providers have circumvented the advantage banks have held through a deeper insight into location specific and consumer behavioural patterns. To respond effectively, banks need to move from playing the role of a payment processor to being an influencer or advisor in the e-commerce value chain. The future of bank payments will lie in the experiential partnerships they build with retailers or large businesses to understand customer behaviour demographics, items of interest, and spending correlations.

BoVA, for example, helps the car purchase lifecycle by providing customers with an estimate of the sell price of a car. By playing in the non-financial part of the buying process, BoVA increases the number of conversations with its customers and get better insight into buying patterns. Garanti (a Turkish bank) has a free M-app for personalized offers based on location and past spend, and estimates balances at the end of the month.

·        Open loop digital wallets. The digital wallet will increasingly become a reality. Some banks have responded to this trend through proprietary bank controlled apps. This however, fragments the digital experience, making it inconvenient for consumers to transact through multiple wallets. An efficient response would be to create an open loop digital wallet which is device, channel agnostic and bank product agnostic (incorporate products of various banks) - with merchant localization as necessary, to enable convergence and greater convenience. Additionally, tying open-loop wallets to an ‘individual’ merchant loyalty program will benefit both banks and merchants by providing a greater understanding of consumer behaviour. This insight can be used to roll out location specific offers for a combination of goods and payment methods. This can be done through a simple and configurable methodology, improving speed to market and allowing unique value propositions to be developed.

·        Use the information opportunity presented by real time payments. On the payments clearing and settlement side, the advent of regulation around real time payments infrastructure will strive to remove discontinuities in the payments value chain around low value payments, remittances and trade finance by reducing time for funds in transit and improving straight through processing rates. Along with that, the real time, information rich capability will help banks deliver value added services more effectively. Take for example the requirement for an enterprise-wise cash position for a corporate organization for better inventory and working capital management, or additional remittance data being provided with the payment to allow the recipient to automatically apply the payment to the appropriate invoice(s) in their accounting systems.

·        Embrace Bank Payment Obligation (BPO) trade flow to effectively integrate the trade flow and the supply chain business processes with the payments value chain.

How do you get ready for it?

Since the evolution of payments is difficult to predict, it is important for banks to embed certain key considerations and design principles in their technology implementations to prepare for the next wave of change.

·        Flexible/generic definition of payment flows. Currently, the payments landscape is dominated by a legacy IT infrastructure. There are different payment processing systems for individual products and channels like credit, debit, cross border, ACH, and cheques that reduce time to market for new products and bring in payments resilience issues. Banks will need to adapt their systems to being more channel and product stream agnostic by building generic payment flows to achieve platform stability and efficiency whilst ensuring faster product introductions.

·        Message agnostic configuration and abstraction of risk and fraud services from channel and product systems is a prerequisite. Currently, risk and fraud business rules are embedded in the product systems which will need to be extracted for horizontal integration to ensure financial crimes stay within manageable limits.

·        Open systems API-led payment services design where banks need to commence exposing services like execute payment, balance enquiry, etc., for better service commoditization. New regulations like PSD2 for payment services are being proposed to open customer bank accounts and payment services to third party developers and providers. This will enable banks to progressively expand their role into the e-commerce or m-commerce value chain instead of being confined to a payments processor role.

·        Pre-defined and pre-configured platforms and systems to support multiple integration points across devices and channels with ERP, finance and accounting and treasury systems. This will improve straight through processing rates as well as enable real time fraud and risk management along with RT liquidity and cash management.

The industry is going through substantial disruptive innovation and will undergo a shake-up in the next 3 to 5 years where only few will survive.

Will your bank survive the payments squeeze?

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IT Services Disruption in Financial Services

Disruption in Financial Services technology - Interview with Len Rust (Click Link)


Feel free to leave your comments and thoughts
 

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The Innovation Paradox

A common concern of customers is that their sourcing partner has failed to deliver innovation over the life of the contract. When I go into a presentation with a prospect, I am often asked – how will you be different from our current supplier in driving innovation into the engagement. There could be one of several answers why this is the case -

·     Current partners lack the capability or are culturally inept in bringing innovation to their clients

·     The customer has squeezed the partners so hard that they only  commenced making money  in Year 3 or Year 4 of a 5 year contract. Profitability or lack of it is the issue

·     Customer organization / stakeholder interest prevented an innovation culture

·     Complexity in sourcing makes idea generation difficult because of the lack of complete visibility of the business value chains

While all these are valid justifications to the conundrum, there may be a completely different perspective of the source of the issue. Let me explore the root cause by explaining the potential dimensions around innovation value zones -

The perception of innovation influenced and delivered decreases as we move from Zone 1 through 4. There are three reasons why technology sourcing partnerships fail to deliver innovation.

Firstly, more often than not, I have seen cases where the customer intrinsically expects the technology sourcing arrangement to deliver the Category 3 or Category 4 innovation given the competitive pressures or evolving business models contracting or threatening their market share. For them the innovation value zone is them and their consumers, while most technology sourcing partners understand their influence to be in a different value zone – between them and the customers division they influence or the overall customer process chain. The partners positioning of their innovation attempts lie predominantly in Category 1 or at best Category 2 innovation. Though these may have an indirect influence towards Category 3 or 4 innovation themes, most customers fail to appreciate their partner’s contribution and are dissatisfied with their performance on this dimension during the lifetime of the contract. This may stem from either a lack of understanding of the impact or more so a fundamental dichotomy in expectations between that parties involved. The further a technology partner’s offering is to a Category 4 value zone, the greater is the probability of disconnect on innovation delivered or influenced due to expectation mismatch.

Secondly, technology partners have a limited understanding of how to deliver parameters of success to help their customers excel in their innovation zones across the four categories. Most providers are unable to understand the impact of their services across various innovation zones coupled with a limited capability in how to engineer value creation for their customers.

Third, customers do not have scorecard metrics in place to measure engagements to periodically monitor alignment to the innovation zones. It’s important to define the impacted value zone clearly for the right outcome. This creates ambiguity between the customer and the partner in the quantum of innovation influenced and delivered.  

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Do you have Sales X-Factor?

In part 1 of my blog on what makes star sales professionals, I discussed the need to understand the human mind – how do they react under different situations and make decisions as key to being successful. While that’s important, its only one piece of a two part puzzle. The other is how do a set of human with different minds of their own interact in an organizational set-up and under different situations? What behaviors from you will drive an entire ecosystem to work alongside you and who/what will they depend on to make their decisions? The answer to this lies in a deep understanding of organization psychology and how different divisions come together to achieve various objectives.

Doing these things well will give you enough time to formulate your pitch, sharpen the articulation and leave behind those one or two key messages which will linger on & get you in the reckoning.

Let me give you an example

A large telecom provider is facing a tepid business environment which drives a radical change towards productivity and efficiency improvement. There is a huge focus across business and technology on cost reduction through rationalization of people, automation and process improvement. The organizational structure was streamlined removing several layers.

Understand the organizational context

There is huge sense of insecurity across the organization. Given the focus on productivity and efficiency, the historical operating model carries a negative context and everyone associated with that is perceived adversely. This includes the people within the customer organization as well as those outside linked to the legacy ways of working.  The new team is goaled with challenging the ways of working.

Take time to understand your key stakeholder’s current context of decision making

It’s very important to understand what objectives each organization unit within your customer serves. What is the current context of the key stakeholders within those divisions? What are their alignment and interaction mechanisms with other divisions?

What should be your strategy?

If you are the incumbent partner, how should your strategy change?

-          Acknowledge the change first

-          Understand the organizational structure, get a sense of individual measures of success

-          Critical to understand your customers new org culture since that will be a derivative of how and who they decide to go with.

-          Has the org culture changed? How are people rewarded? Is it conservative or taking risks is good

-          Depending on your understanding of how different divisions within your customer interact, your strategy and execution structures will need to vary.

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Banks Move with Data Natives

My comments in Sydney Morning Herald

Read the article

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Star Sales Professionals - Are you wired right?

Many have wondered what makes successful sales professionals. What’s the key to this magic formula which can help companies unlock millions, even billions of dollars in value? Different personas come to mind - Successful sales people should have extrovert personality traits – outgoing, ability to make connections and sustain strong relationships or the consulting sales avatar.

All with the intent to get into the minds of the decision makers and the organization one is selling to. How do you do that? Ability to have a strong understanding of human psychology is perhaps now more than ever the most important characteristic in successfully converting sales opportunities.

Let me explain this with an example

I recently came across a scenario where a mid-sized retailer has gone through a major leadership change – new CEO who brings in a new leadership team to arrest sagging business performance and market share loss to larger Tier 1 players.  

Understand the decision context

The new CEO starts off aggressively addressing the market share issue –

·         Focus on acquisitions – makes select acquisitions in blue ocean market segment consolidating the retailer’s position

·         Places bets on few products – assesses the product value chain across operations and technology, identifying gaps like slower time to market, low business automation etc.

·         Change the culture to an inclusive one with greater ownership and accountability to employees and investors

Technology and operations has been seen as laggards and growth inhibitors. The new leadership team was tasked with a larger transformational agenda to make the business process efficient and change its own culture.  

Take time to understand your key stakeholder’s current context of decision making

Past context - In the previous role, this CIO has balanced risks with business model transformation – selectively taking risks in areas which required significant change, leaving others on existing models which were under acceptable levels of outcomes.

Current Context – The CIO had to bring in a new leadership team and create a culture of accountability and ownership. The mandate was to radically transform technology – deliver key business outcomes and ensure stability & resilience.

What clicked?

From analysis of human psychology, it was found that the CIO forms an own opinion rather than rely on the team, but takes them along on every step. Using the right language with the right words resonating with the CIO’s decision making philosophy was important. Also, engaging in conversations around the challenges which will come and how to prepare the organization to face them was critical. Analysis also showed that the CIO expected transparency and honesty, even if that meant compromising your organization’s revenue prospects in the short term.  

It’s important for sales professionals to have a strong understanding of human psychology of their stakeholders at various levels within the prospect organization – it’s a skill more important than anything else.

In my next post, I will reveal another key attribute in star sales professionals.

 

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Is your bank future ready?

This article was published in the March 2014 edition of Australian Banking and Finance magazine.

While productivity and cost efficiency dominate conversations in board-rooms across the globe, banks need to have a view of how the industry will change over the next five years. In continuation of my last article published in November 2013, I focus on new models banks should experiment with to increase their market share, but this time through on customer experience lens.

HCL and AB&F conducted a survey of industry executives to determine the themes behind the key priorities. We found that providing differentiated customer experience is akin to innovation with IT underpinning it. However, delivering this is a challenge under current business models.

Consider three broad categories of customers – (1) who require help to do research and identify their needs, (2) Who have identified their needs, but are unaware of how to address it (product selection), (3) know exactly how to address their need and want their bank to make it faster and more convenient for them to satisfy? Most banks today address the smallest of the categories – the third, and are negligent in addressing the bigger market opportunities around categories (1) and (2). They engage lower in the customer experience value chain and are removed from customers' day-to-day lives. Their product development and bundling strategies thus tend to hinge on an average to poor understanding of customer behaviour. This makes them susceptible to the threat of new entrants from industries like retail, telecommunications and even technology firms (e.g. Google and Apple). These competitors have a greater ability to provide mass retail financial services due to a more intimate understanding of customer needs (at least addressing the category (2)). Which brings us to the question: how long will customer trust and security serve as good enough entry barriers to the banking industry?

WHAT'S NEXT?

Conventionally, banks have focused their attention on improving customer retention and experience through innovations in ‘their own’ channels - branches, internet and mobile. This myopic view of their sphere of influence will only drive incremental growth and customer satisfaction.

To address the bigger market of category (1) & (2) customers, banks need to adopt Xperiential Platforms - constructed around buying life cycles through collaboration with diverse industries across points of touch. These platforms will be built around delivering enhanced customer experience through strong customer insights providing customers what they want. To realise this, there are four options:  

Lifecycle Aggregators – 63%+ of executes we surveyed, rated investment in tools to gather strong customer insights and in merchants/brokers/service aggregators amongst their top 2 customer acquisition strategies. However, why should investment be restricted only to the sales end of their product lifecycle? Why do banks not extend this to behave as platform led aggregators of business functions across the customer lifecycle to gain proximity to customer’s daily lives? They will need to build different aggregator ecosystems for customer need chains like wealth and advisory, mortgages and transaction banking. This model is centred on prioritising process value chains and establishing the right partnerships in those value tiers.

At the peak of recession, USAA launched home circle as a one-stop shop to service the home buying life cycle. The platform allows potential customers to search for homes and real estate agents, create their personal profile, researching a neighbourhood’s demographics and listings, online community to share experiences, provide movers’ assistance and finally finance and insurance services. They have set this up through an end-to-end partner aggregator ecosystem giving them in-depth, individualized insights on each customer, improving their retention rates.

Should banks be in the business of addressing a need by helping customers through the journey of buying a house or maintaining status quo of simply financing the buy? Though provision of finance is their core business, ignoring the process up until the decision point of buying a house can prove detrimental for their market share.

Point of touch industry collaboration – Banks will need to collaborate with other industries on joint research, customer profiling and behavioural analytics to create new innovative and convenient products delivered by the host at the point of touch.

McDonalds’s has tied up with PayPal to enable customers place their orders using McDonald’s mobile app or online through PayPal Here mobile payment service. They can then pick up their order through a dedicated line set-up for this service. PayPal has signed up more than 15+ retailers including Home Depot and Office Depot, while Starbucks has a similar arrangement with Square using the Square Register. Banks need to play in the wider e-commerce value chain instead of only the payments value chain (their core competency).

Bigger successes will come from triangulation across multiple industries such as a Bank, Telco and Retailer coming together to create complex products.

Industry solutions through technology ventures – with technology players providing superior value through involvement in the wider expanse of the business process, not just their ‘current’ core business. U.S. Bank and mobile money solutions provider, Monitise, are co-developing an advanced digital commerce and experience solution for big retailers to help consumers interact with them and buy consumer brands through mobile. Key capabilities include product selection, instant checkout payments and leveraging digital and scanning technologies for product discovery. This solution covers a greater spectrum of retailers’ customer value chain by providing an end-to-end shopping experience. U.S. Bank is participating in non-financial activities helping consumers discover, learn, buy and share products they want – a much bigger value!

Consortium with competition within the industry – Much like the airline industry consortiums across countries (e.g. Star Alliance, One World), we will see greater functional collaboration between banks on specific business processes like payments to reduce high transaction costs and alleviate threat of new entrants. One example is cross border sharing of payment gateway / processing infrastructure for seamless, immediate and low cost execution. Customers can get preferential payments transfer, mortgage or savings bank rates between partner banks.

HOW CAN IT BE DONE?

Key to delivering this change is technology and a customer experience framework encompassing the following tenets:

·         Customer interaction journey maps to optimise decision-making on key business drivers. E.g. ClickFox analyses touch-point data across channels creating customer interaction journey maps.

·         Complex Event Processing (CEP) is essential. To illustrate, a customer walks into a branch to get a printed bank statement. As soon as he reaches the counter, his bank statement is ready along with a discounted 100 bps home loan pre-approval (not stated, but was looking for). How did that happen? The bank had an app for customers to add preferences and pre-refer branch visits purpose. In addition, the bank developed a CEP-based application that monitored significant deposits and correlated that to important life events such as having a baby. They matched it with rental payments, combining it with behaviour information gathered through listening posts to form the basis of the cross-sell recommendation.

·         Dis-intermediate core through distribution in/core out strategy. Since access to fresh CAPEX is rare, banks will have to use their existing investment slate utilising regulatory and other mandatory investments to dis-intermediate core and extricate pricing and product rules from core systems. 

·         Channel wide, device agnostic listening capability is required to cover customer correspondence, conversations in branches and phone, surveys and campaigns instead of just social media.

In essence, while the journey to an experimental consortium model is incremental, the underlying technology building blocks need to be in place from day one.

Are you ready for the journey? 

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