Framing the Global P2P Payments Platform Build vs. Buy Debate for Financial Institutions
When Venmo first introduced free, domestic person-to-person payments in the U.S., it was a tough wake-up call for banks. What became clear is that while banks have the strongest right-to-win in domestic P2P payments (given the sheer proportion of retail banked consumers), disruptive fintech offerings like Venmo were by passing the bank offerings at an extraordinary rate with their streamlined, customer-friendly P2P payment solutions. In what has gone down in history as one of the world’s greatest bank-fintech push-backs, a group of major banks rallied and responded by forming Zelle, a bank-led fintech solution for P2P, which, by mid 2019,outpaced Venmo as the U.S.’s leading P2P domestic payments provider and now partners with more than 1000 banks and credit unions. What can we conclude from this? That banks do indeed have the incumbent’s right to win, but only if they can pull-up their customer experience and digital offering bootstraps.
Will this story continue with fintechs taking more of the experiences typically owned by banks, or will banks embrace partnerships to keep their market share? Only time will tell. It’s clear that the threat posed to banks by fintechs is widely understood by banks themselves (Jamie Dimonof JP Morgan said that banks should “be scared shi****” of fintechs in January this year), but what precisely they plan to do about the threat - with what focus and urgency - remains to be seen.
One significant use case that is up for grabs is bank-initiated international P2P payments. This segment of totally digital, account-to-account cross-border payments already serves as the anchor customer use case for many fintechs. According to recent research, just 7 years ago, banks held a 95% share of cross-border P2P transactions, but that has declined to just 75% representing $500 billion in annual principal. Without an intervention, this is on track for banks to have only 50% market share by 2024.
The cause of banks’ loss of share in this segment is exactly what you might suspect – a customer experience that has been neither optimized nor digitized. Most banks do offer some form of international consumer payments, but nearly all of them are only offering traditional bank wires – an antiquated solution in the era of customer as king. Wire offerings at banks are often only available in bank branches, with very limited country reach, they have extreme unpredictability on when the money will arrive (could be ten days later, or longer), and a complete lack of fee transparency (each bank participating in the correspondent network may take out its own lifting fees, reducing the total principal deposited for the receiver). The result is one of the more painful consumer financial experiences on planet earth.
So the question is less about whether banks should innovate around cross-border payments, but more about how. International payments can be extremely complicated. Global sanctions, privacy and fraud prevention capabilities and hundreds of local regulations are in play. Banks must comply not only with their own country’s rules, but every receive country where funds are being sent/passing through. Foreign exchange and liquidity must be managed, as well as customer service operations for both the sender and the international receiver – in as many languages. The adage rings true here: sometimes the most spectacular customer experiences are the ones with the most behind-the scenes complexity. Offering an amazing international P2P service can be cost prohibitive for many banks.
What then, is the solution? I would suggest that any bank facing this challenge scrap the idea of building a cross-border consumer offering themselves (which could literally take decades and billions in investment to create a comprehensive global offering) and instead opt to buy. In the same way U.S.banks rely on Zelle’s platform and technology to power P2P domestic payments, a provider should be selected for international consumer payments as well.
Providers of cross-border consumer payments are entering a crowded space, as banks rise to the occasion and seek solutions. Any bank looking for a service provider for their cross-border consumer business should ask five important questions in their decision-making process:
• Customer and tech orientation: Does the offering put the digital customer needs first?
• Global reach and coverage: Can integration with a single partner reach a global audience, including traditional bank account payout and other emerging payouts, like digital wallets?
• Commercial models: Depending on the bank’s strategy, can the partner offer a fully white labeled offering for banks that want to use their own brand and license, or a co-branded offering where regulatory burden and branding are shared?
• Real-time payments: Does the provider offer real-time payouts at scale?
• Regulatory and compliance credibility: Does the provider have a credible, reliable, audited and regulator pressure-tested compliance controls environment?
I have been asked if I think banks will eventually go the way of Blockbuster Video or Kodak, given the momentum and investments of fintechs worldwide. Will traditional banks eventually become obsolete? I much prefer the Banks-Zelle comeback story to the alternative, and my money is on the banks.