In just a few years, major advances in technology, massive shifts in consumer buying behavior, changes in government policies and regulations, sharp ecommerce growth, and the global proliferation of connected devices have driven significant changes in digital payments.
The continued rise of fintechs has led to a major shift in how customers choose financial services. According to a recent study by McKinsey, 42% of financial services organizations agree that digital disruptors that support new digital experiences, offerings and alternative business models are encroaching on their customer base.
Pair that with rising demand for convenient, low-cost services delivered through customers’ digital channels of choice, the stage is set for widespread disruptive innovation.
What was once the domain of a small number of long-established financial institutions and payment pioneers has become a breeding ground for nimble innovators, agile fintechs, and consumer brands.
The result is an increasingly crowded digital payments space, with an ever-growing number of names all vying to meet changing demands and grab their piece of a growing industry.
For traditional payments providers, their reassuring name alone is no longer enough to ensure success.
Innovators are redefining the market and already tight margins are shrinking further — those that don’t adapt face extinction.
The impact on monetization and value creation
The total global transaction value for the digital payments market was $5.44 trillion in 2020. Driven by the ongoing wave of innovation and rising customer demand, that number is projected to more than double to $11.29 trillion by 2026.
But surprisingly, that massive projected growth isn’t necessarily good news for incumbent payment providers. According to Citibank, small and medium-size payment enterprises are contributing to a growing share of value-added services, with most revenue growth in merchant services coming from small and medium-size enterprises.
As the payment market grows, increased competition is eroding margins for traditional providers. And new digital services created by innovative new market entrants are creating a new service paradigm that traditional providers are increasingly forced to keep pace with.
This new wave of innovation and competition is challenging traditional payment providers to undertake value-driven digital transformation — evolving their offerings to create new value for customers, partners, and themselves in innovative and engaging ways.
The good news is that some of the most globally prominent traditional payment providers have already made big leaps to get ahead of these shifts. Both Visa and Mastercard have recently made huge investments in data aggregation and insights, to help them deepen their services, create value in new ways, and plot a clear path forward in today’s shifting payments landscape.
Three emerging paths to digital payments success
To adapt to these shifts, traditional payment service providers face a tough choice. There are three primary paths forward that can help them stay competitive:
Diversification: Changing how services and platforms are monetized
Partnerships: Building value-driven partnerships and ecosystems with adjacent organizations
Advancement: Offering stronger customer experiences than the competition
Which path — or combination of paths — is right for an organization will depend on its current market position, capabilities, and technology. Each option carries its own advantages and drawbacks, which is why Thoughtworks uses a solid framework to help organizations navigate the process, and ultimately make decisions that are right for them.
Path #1: Monetizing payments data
The opportunity: Today’s digital payment services and gateways generate and gather huge volumes of data that can be monetized. Payments data can be used to help understand customer needs, contextualize other customer journey data, analyze and hyperpersonalize customer experiences, and even fight fraud through the detection of malicious authorizations and fraudulent payments.
Value created: Payments data holds insights into both customer and merchant activity, helping to bridge the gap between the two. These insights are not just helpful for buyers and sellers but also helps other players who need to come together to make the B2C transaction happen. Insights are extremely valuable to payments providers and any organization that wants to better understand commercial activity, fraudulent activity, and even exposure to financial risk.
Insights are also a highly-valuable strategic asset that can help organizations understand and uncover further opportunities to expand their offering and meet new and emerging customer needs. For example, both AliPay and WeChat Pay have used payments data to build and drive strategic services, including credit and lending businesses, and credit rating services.
Challenges: Monetizing this data, or using it to create new services is one of the clearest opportunities payment providers have to drive revenue today. It enables them to sidestep the issue with eroding margins for traditional services, using data and assets they already have.
However, it does carry several challenges. Monetizing data is very different from providing payments services, and brings its own requirements and compliance demands. Depending on where an organization operates, and the terms outlined in its service agreements with customers and partners — including privacy arrangements — directly monetizing data might simply be unviable.
Path #2: Building high-value partnerships
The opportunity: As retailers and other organizations rush to join the payments boom and create their own services to enhance customer buying experiences, new opportunities are emerging for payments providers to partner with them, build ecosystems together, or provide them with white-label services.
For large conglomerates, creating a payments organization provides an opportunity to connect diverse business lines. It’s a major step forward in their push to unite business lines and services into a single ecosystem. No matter what you buy across the company, you receive a predictable, consistent payment experience, with no need to recapture payment information — helping to increase customer loyalty, value, and retention.
Crucially, these conglomerates are not payment experts.
And while the growth of new payment platforms — from Apple Pay to WeChat Pay — has given organizations the confidence to build their own offerings from scratch, many will need support, expertise, and technology to build platforms their customers enjoy using.
Value created: By partnering with those consumer organizations, traditional payments experts can create a steady stream of revenue, opening up their services to new customer groups. Close collaboration between partners can extend payment services to new consumers in a way that’s tailored to them, enabling customization based on region, industry, customer segment and more.
Building shared digital ecosystems can also help fundamentally transform and evolve the services offered by traditional payment providers. When Thoughtworks helped replatform DBS Bank’s payment platform in 2018, it saw a 78% increase in transactions, and reached more than 1.7 million users in Singapore.
Challenges: Building advanced ecosystems between partners represents a significant technical and compliance challenge for most payment organizations. Integrating environments and offerings between organizations is a complex undertaking, which is why many institutions partner with organizations like Thoughtworks to navigate it effectively.
Path #3: Delivering superior customer experiences
The opportunity: In any market, no matter how competitive it is, one surefire way to retain customers and drive revenue is to offer better experiences, or meet customer needs more effectively than your competitors.
Customers expect fast, convenient payment services, delivered consistently across their channels of choice. So organizations that can deliver services faster or more conveniently than the competition by removing points of friction across customer journeys can win long-term market share and customer loyalty.
Value created: We recently got to see first-hand how much of an impact improving customer experiences and accelerating payment journeys can have on revenue, during a project with the National Payments Corporation of India.
The project involved the modernization of one of India’s largest payment apps, BHIM. By reimagining customer journeys, redesigning screens, creating new product features, and rebuilding the app on the nation’s flagship real-time Unified Payments Infrastructure (UPI), we saw transactions and user penetration surge to 14.4 million transactions per month, and more than 50 million app downloads.
Another of our projects with the NPPA (New Payments Platform Australia) yielded similar results. By establishing strong CX guidelines for the platform, we put users in control of their experiences, while delivering consistency across the institutions that use the NPPA — ensuring high uptake across all stakeholder groups.
Today, the two platforms are recognized as among the best real-time payments systems in the world.
Challenges: Delivering superior customer experiences is no simple task. It requires a commitment to both continuously listening to and acting on customer feedback, and a commitment to innovation, setting a new standard for customer payment journeys before customers even demand it.
Five key questions for the future
However you choose to adapt to the shifting conditions in the global payments market, the most valuable thing you can do is keep a firm eye on the future, to stay ahead of how the payments space is evolving.
The changes we’ve seen in recent years aren’t going to slow down, and if you invest heavily into responding to today’s landscape without considering what tomorrow’s will look like, you’ll only ever see limited long-term value.
As payment facilitators and platform providers build strategies to increase revenue and ensure their survival, they need to look beyond current conditions, and ask the right questions about what may happen tomorrow. Questions like:
What could enterprises creating a payments organization for the first time do to differentiate themselves?
When does it become more beneficial for an enterprise to partner with a payment provider rather than building a service from the ground up?
How well prepared are our systems and services for the new ways that customers want to make, clear, and settle payments? Can we support cryptocurrency transactions, for example?
If a dominant design for digital wallets emerges, can we quickly adapt to remain competitive?
What’s next for customer demands, and how can we learn more about their changing preferences to proactively meet their new needs?
By answering those kinds of questions, and thinking critically about what the next stage of digital payments evolution could look like, you can plan the right path forward, in both how you monetize your services, and how you evolve them to meet rising customer demands.