The battle for payments

Banks in Asean risk losing nearly $5bn in revenue unless they innovate, warns Accenture

As much as 14.3% of the revenue banks earn from payments in Southeast Asia, or nearly US$5 billion, is at risk of being displaced by the growth of digital payments and competition from non-banks as payments become more instant, invisible and free, according to a new report from Accenture.

The report forecasts payment revenue in the region to grow at an annual rate of 6.1%, from $26 billion in 2019 to nearly $37 billion by 2025. Only banks that change their business models to adopt the latest technologies and focus on providing value-added services will capture a share of the $11 billion in incremental revenue growth.

Titled “Banking Pulse Survey: Two Ways To Win”, the report is based on a revenue-risk analysis model that Accenture developed to measure trends in how consumers pay and projected changes in merchant behaviour, technology and regulation.

The research is complemented by a survey of 240 executives in charge of payments at banks in 22 countries to determine how they plan to mitigate and capitalise on the disruption in payments to improve customer loyalty, revenues and profitability.

“The world of instant, invisible and free payments is here to stay, squeezing margins further on a business that was already feeling a lot of pressure from new competition, particularly in Southeast Asia with the proliferation of e-wallets,” said Divyesh Vithlani, who leads Accenture’s financial services practice in Asean.

“As payment modernisation has already made good headway in Asean, with the introduction of instant payment schemes in many countries, revenue from the consumer space is already low or near zero, except in cards, so the push to find alternate sources of revenue and optimise costs is already an immediate concern.

“The payments market is booming and there is a multi-billion-dollar opportunity for those willing to invest in new technologies and business models based on the new digital landscape ahead. Banks that lag risk being relegated to the ‘plumbing’ of payments.”

Over the next six years, the report predicts, banks will face further pressure on income from card transactions and fees, with free payments putting 9.6% of payment revenue at risk in the region.

In addition, competition from nonbanks in invisible payments — where payments are completed in a virtual wallet on a mobile app or device — will put 3.1% of bank revenues at risk.

Card displacement by instant payments, where funds are settled and transferred in real time and banks make little to no interest, is projected to put an additional 1.7% of payment revenues at risk.

This builds on current declines in income from card transactions and fees, with regulation triggering fee compression and technology displacing the role of banks in payments. Already between 2015 and 2018, revenue from business customer credit card transactions dropped by 33% globally, revenue from consumer debit card transactions dropped 15%, and revenue from credit cards fell 12%.

The research found the industry is aware of the challenges posed by new technologies in payments. More than two-thirds (71%) of the banking executives surveyed in all markets agree payments are becoming free; nearly threequarters (73%) believe most payments are already invisible or will become so over the next 12 months; and 78% said payments are either already instant or will become instant over the next 12 months.

“The digital transformation in payments throughout the region 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,” Mr Vithlani said.

“Banks previously earned billions of dollars from some of these channels, and that will dry up eventually as competition heats up, so they’ll need to develop new digital business models to compete in this new era.”

In response to these key market challenges, 18% of respondents said the main priority for their bank is to build security into retail payment transactions. Nearly one-quarter (22%) cited artificial intelligence, robotics, machine learning and innovative payment hubs as the key platform technology capabilities they need to adapt their core systems to high-speed and continuous payment flows.