Incumbent banks must focus on combining a clear, executable strategy with flexible technology solutions and expert partners to improve data-driven propositions, promote trust, reduce costs, realize scale advantages, drive innovation and support alternative payment methods.
Jamie Dimon notes that incumbent banks should “expect to see very, very tough, brutal competition in the next 10 years.” When asked why JPMorgan Chase intended to focus on buying fintech and tech firms, Dimon said, “our new competition is Apple, Amazon, Google, WeChat and Alipay” — rather than other banks.”
Card payments are trusted by millions of consumers and businesses worldwide, with card networks managing massive volumes to realize huge scale advantages. This is combined with recent mergers and acquisitions to support end-to-end payment services and multi-rail offerings. Take Visa’s crypto APIs, for example, which enable banking clients to access and integrate crypto features more easily while demonstrating the innovation happening in this sector. Mastercard has also confirmed it will enable crypto flow across its network in the near future.
As the payment ecosystem has expanded and digital volumes have increased, organizations like PayPal, Stripe and Square have evolved from single specialized propositions into comprehensive payments platform businesses, providing previously bank-led offerings such as SME lending, corporate treasury services and credit.
Payment platforms are effective at managing high volumes and have the capacity to scale and drive innovation in specific market segments. Platforms are fast to adopt new payment methods such as digital currencies, and their use of data is improving consistently, offering some personalization to customers.
Challenger banks can best be described as banks without the baggage, unburdened by 50-year-old legacy infrastructure, sprawling bureaucracies and siloed departments.
Challengers have built market momentum and presence through their reputation for customer-centric products and services, having made consumer behavior and experience their focus. Revolut, for example, offers in-app investment in stocks, crypto and commodities, as well as vaults allowing you to save money in any currency or commodity.
Challengers also benefit from a low-cost infrastructure to bring products to market quickly, and have been more willing to explore alternative payments than traditional institutions. Again, here, Revolut offers free and instant transfers in some 28 currencies, crypto and commodities. And the neobank First Boulevard will be among the first to pilot Visa’s crypto APIs, enabling their customers to buy and sell bitcoin through their digital accounts.
The big tech GAFA (Google, Apple, Facebook, Amazon) players are the wild-card entrants that represent potentially the greatest competitive threat to incumbent banks. One look at China, where Tencent and Alibaba have established dominant positions and massive payment volumes through WeChat and Alipay, is enough to keep bank executives up at night.
Big tech enjoys massive scale, but so far, it’s been content with relatively limited plays, such as overlaying services through their mobile wallet platforms or partnering with financial institutions on limited offerings. We can expect continued investments and acquisitions to support data-driven, experiential products and services.
A potential roadblock would be regulation making it difficult for big tech operators to undercut the competition by subsidizing services below cost. Regulators have also shown their teeth in blocking Facebook’s considerable crypto ambitions, forcing its recent rebrand from Libra to Diem.
It’s clear that incumbent banks are under significant and sustained attack from various competitors and the reality is, this competition is only going to intensify.
