Despite the devastating impacts of COVID-19 on the global economy, the payments industry was able to power through the early days of the crises and adjust to rapid changes in consumer behavior, not only weathering the storm, but roaring back as strong as ever.
This success is critically important for many financial institutions, as payments have grown to account for nearly 40% of overall banking revenues. Unfortunately, payments also can represent as much as 30 to 40% of a typical bank’s operating cost base.
“Because of the high technology spend associated with providing payments services, a disproportionate share of effort and resources is required to maintain and improve infrastructure, manage upgrades, implement rule changes, and rationalize legacy technology.” - McKinsey
Meanwhile, it continues to be difficult for financial institutions to stay ahead of technology disruptors. This concern was called out by Jamie Dimon, CEO of JPMorgan Chase, in his 2021 letter to shareholders:
“Banks… are facing extensive competition from Silicon Valley, both in the form of Fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart) and that is here to stay."
“Fintech companies here and around the world are making great strides in building both digital and physical banking products and services. From loans to payment systems to investing, they have done a great job in developing easy-to-use, intuitive, fast and smart products.”
It should also be concerning to other financial institutions that a bank as large as Chase is worried about technology companies. Chase spends significantly more on IT every year than any other bank, but that is still less than half of what Amazon invests. It therefore seems highly unlikely that any other bank is going to be able to outspend these disruptive competitors for control of the payments domain.
Mr. Dimon is not alone in voicing this concern. In recent years, many bank CEOs have begun to express fears that technology companies – and not other banks – would become their major competition over the next few years.
The Need for Speed
In fact, in many ways, Fintechs are already well ahead of most financial institutions. One of the key reasons for this advantage is the speed at which Fintech and BigTech organizations operate.
Organizations like Amazon and Alphabet are able to develop and deploy changes to their customer facing environment thousands of times per day, much more quickly than many financial institutions can even imagine. As Mr. Dimon indicated in his shareholder letter, this gives these companies a platform to quickly develop and refine “easy-to-use, intuitive, fast and smart products”. In other words, what consumers want now.
This growing speed differential means that many institutions will fall farther and farther behind, losing both revenue and market share to more nimble competitors. Given both the size and value of the payments franchise at most banks, there is clearly a need for both concern and some alternative thinking.
While technology can be a competitive differentiator, it can also be a great equalizer. High performing banks know how to harness the power of technology and data to make better decisions. However, given the relentless and rapidly accelerating pace of change that drives the payment industry, every organization must invest and adapt or risk face a long slow decline into irrelevance.