The 2023
McKinsey Global Payments Report coined the term “Decoupled
Era” as it claimed that the payments industry was entering its 4th
era (with paper, plastic, and account transactions being the 1st
through 3rd).
Characterized by a disconnect between payments and
traditional accounts, this new stage of the payment industry emphasizes user
preferences for convenience, affordability, and security.
The report postulates that technologies like platform as a
service (PaaS), generative AI, and decentralized solutions like tokenization were
the main contenders to shape this newfound reality; the underlying implication
being the result of the ongoing battle between DeFi and legacy systems favoring
the former rather than the latter.
But as the tides shift, can we rule out traditional
financial institutions yet?
The Core Tenets of the Decoupled Era
The Decoupled Era lays its foundation on convenience,
affordability, security, and a focus on user experience.
Convenience is King (and
Queen)
Convenience stands out as a primary tenet as digital
wallets reign supreme.
Gone are the days of fumbling for physical cards; digital
wallets such as Apple Pay and Google Pay enable seamless, contactless
transactions with a simple tap or wave, seamlessly integrating payments into
the fabric of everyday life.
Additionally, one-click checkouts in
the realm of online shopping are eliminating the need for laborious billing
information entries, streamlining the user experience.
Affordability Takes Center
Stage
Affordability takes center stage as fintech disruption
challenges traditional financial institutions.
Fintech companies are not only introducing competitive fees
but also innovating payment solutions, fostering healthy competition that
ultimately drives down costs for consumers.
In that regard, contactless
payments, cheaper for merchants than traditional card swipes, and
alternative payment methods like Buy Now, Pay Later (BNPL) services are also
actively contributing to making financial transactions more accessible and
affordable.
Security Concerns Drive
Innovation
Security concerns are at the forefront of innovation in the
Decoupled Era.
Tokenization, a
cutting-edge technology, replaces sensitive card data with unique identifiers,
offering robust protection against fraud even in the event of a compromised
token.
Biometric authentication, utilizing fingerprint and facial
recognition, adds an extra layer of security, surpassing traditional PIN-based
methods.
The industry is witnessing a heightened emphasis on
cybersecurity measures, reflecting the evolving landscape’s commitment to data
protection and fraud prevention.
User Experience at the
Forefront
Payments are seamlessly integrating into various aspects of
our daily lives.
Embedded finance, where financial services seamlessly blend
into other applications, makes payments an inconspicuous yet integral part of
the user experience.
Personalization is also taking center stage, with payment
options tailored to individual spending habits and rewards programs offering
discounts aligned with user preferences.
Lastly, real-time insights are further empowering users,
providing instant transaction notifications and access to real-time spending
breakdowns, enhancing control and transparency over their finances.
But We Can’t Rule out Legacy Just Yet
The jury’s still out on full decoupling as while the
industry is embracing digital wallets, contactless payments, and collaboration
between Fintechs and traditional players, a complete decoupling from accounts
seems like a longer-term prospect.
In fact, legacy systems and regulations still play a
significant role even with their expected shift to a “resilience”
mindset.
In the Decoupled Era, banks are to go beyond the account
ownership paradigm, necessitating the development of new businesses and
technology upgrades to retain clients within their service ecosystem. In preparation
for this decoupled future, Financial institutions are currently exploring 5
different routes:
1. Embracing Open Banking and APIs:
Banks are increasingly leveraging Open Banking, a system
that allows authorized third-party providers to access customer financial data
with their consent.
This opens doors for collaboration with FinTechs and other
players, enabling them to offer
innovative payment solutions and financial services directly within their
platforms.
2. Investing in Digital Wallets and Contactless
Payments:
Digital wallets like Apple Pay and Google Pay are rapidly gaining popularity.
Banks are recognizing this trend and actively integrating these wallets into
their mobile banking apps, allowing users to make secure and convenient
payments without physical cards.
Additionally, contactless payment methods like tap-and-pay
are being prioritized, streamlining the in-store checkout experience.
3. Building Frictionless Onboarding and Account
Management:
Simplifying account opening and management processes is
crucial in the Decoupled Era. Consequently, banks are focusing on faster online
onboarding experiences and user-friendly mobile apps that allow customers to
manage their finances easily, anytime, anywhere.
4. Offering Personalized Financial Management
Tools:
In what concerns the growing focus on user experience, banks
are developing AI-powered financial management tools that provide personalized
budgeting, savings goals, and spending insights. These tools aim
to empower customers and make informed financial decisions.
5. Partnering with FinTechs and Non-Traditional
Players:
Collaboration is key in the decoupled landscape. Banks are
forging partnerships with FinTechs and other non-traditional players to
leverage their innovative solutions and expand their service offerings. This
allows them to cater to a broader range of customer needs and stay competitive.
Conclusion: Digital Inertia is the Silent
Killer
The once prevalent narrative of constant disruption is
evolving into a neo-normal. Unlike the traditional storyline of challengers
seizing market share from incumbents, a crowded space seems to be emerging,
characterized by a convergence towards a digital endgame. Interestingly, the
dynamics of winners and losers in this new landscape transcend the boundaries
of both traditional financial institutions and disruptive challengers.
Incumbent banks are facing unprecedented
pressure as a confluence of factors, including rising customer
expectations, the emergence of agile industry newcomers, the advent of powerful
technologies, and evolving regulations, compels them to infuse meaningful
innovation into their established business models.
“If you’re going through hell,
keep going.”
The urgency for banks to catch up with their more digitally
savvy counterparts is heightened by a growing profit and market valuation gap
between the digital leaders and the rest of the industry. This realization is
driving a collective industry effort to bridge the digital divide. And while
digital maturity is not the sole determinant of a bank’s economic performance,
a discernible signal is emerging, and shareholders are increasingly taking
notice.
The imperative for meaningful digital transformation is now
more evident than ever, reshaping the competitive dynamics of the banking
sector and making one thing is certain:
digital inertia kills banks.
The 2023
McKinsey Global Payments Report coined the term “Decoupled
Era” as it claimed that the payments industry was entering its 4th
era (with paper, plastic, and account transactions being the 1st
through 3rd).
Characterized by a disconnect between payments and
traditional accounts, this new stage of the payment industry emphasizes user
preferences for convenience, affordability, and security.
The report postulates that technologies like platform as a
service (PaaS), generative AI, and decentralized solutions like tokenization were
the main contenders to shape this newfound reality; the underlying implication
being the result of the ongoing battle between DeFi and legacy systems favoring
the former rather than the latter.
But as the tides shift, can we rule out traditional
financial institutions yet?
The Core Tenets of the Decoupled Era
The Decoupled Era lays its foundation on convenience,
affordability, security, and a focus on user experience.
Convenience is King (and
Queen)
Convenience stands out as a primary tenet as digital
wallets reign supreme.
Gone are the days of fumbling for physical cards; digital
wallets such as Apple Pay and Google Pay enable seamless, contactless
transactions with a simple tap or wave, seamlessly integrating payments into
the fabric of everyday life.
Additionally, one-click checkouts in
the realm of online shopping are eliminating the need for laborious billing
information entries, streamlining the user experience.
Affordability Takes Center
Stage
Affordability takes center stage as fintech disruption
challenges traditional financial institutions.
Fintech companies are not only introducing competitive fees
but also innovating payment solutions, fostering healthy competition that
ultimately drives down costs for consumers.
In that regard, contactless
payments, cheaper for merchants than traditional card swipes, and
alternative payment methods like Buy Now, Pay Later (BNPL) services are also
actively contributing to making financial transactions more accessible and
affordable.
Security Concerns Drive
Innovation
Security concerns are at the forefront of innovation in the
Decoupled Era.
Tokenization, a
cutting-edge technology, replaces sensitive card data with unique identifiers,
offering robust protection against fraud even in the event of a compromised
token.
Biometric authentication, utilizing fingerprint and facial
recognition, adds an extra layer of security, surpassing traditional PIN-based
methods.
The industry is witnessing a heightened emphasis on
cybersecurity measures, reflecting the evolving landscape’s commitment to data
protection and fraud prevention.
User Experience at the
Forefront
Payments are seamlessly integrating into various aspects of
our daily lives.
Embedded finance, where financial services seamlessly blend
into other applications, makes payments an inconspicuous yet integral part of
the user experience.
Personalization is also taking center stage, with payment
options tailored to individual spending habits and rewards programs offering
discounts aligned with user preferences.
Lastly, real-time insights are further empowering users,
providing instant transaction notifications and access to real-time spending
breakdowns, enhancing control and transparency over their finances.
But We Can’t Rule out Legacy Just Yet
The jury’s still out on full decoupling as while the
industry is embracing digital wallets, contactless payments, and collaboration
between Fintechs and traditional players, a complete decoupling from accounts
seems like a longer-term prospect.
In fact, legacy systems and regulations still play a
significant role even with their expected shift to a “resilience”
mindset.
In the Decoupled Era, banks are to go beyond the account
ownership paradigm, necessitating the development of new businesses and
technology upgrades to retain clients within their service ecosystem. In preparation
for this decoupled future, Financial institutions are currently exploring 5
different routes:
1. Embracing Open Banking and APIs:
Banks are increasingly leveraging Open Banking, a system
that allows authorized third-party providers to access customer financial data
with their consent.
This opens doors for collaboration with FinTechs and other
players, enabling them to offer
innovative payment solutions and financial services directly within their
platforms.
2. Investing in Digital Wallets and Contactless
Payments:
Digital wallets like Apple Pay and Google Pay are rapidly gaining popularity.
Banks are recognizing this trend and actively integrating these wallets into
their mobile banking apps, allowing users to make secure and convenient
payments without physical cards.
Additionally, contactless payment methods like tap-and-pay
are being prioritized, streamlining the in-store checkout experience.
3. Building Frictionless Onboarding and Account
Management:
Simplifying account opening and management processes is
crucial in the Decoupled Era. Consequently, banks are focusing on faster online
onboarding experiences and user-friendly mobile apps that allow customers to
manage their finances easily, anytime, anywhere.
4. Offering Personalized Financial Management
Tools:
In what concerns the growing focus on user experience, banks
are developing AI-powered financial management tools that provide personalized
budgeting, savings goals, and spending insights. These tools aim
to empower customers and make informed financial decisions.
5. Partnering with FinTechs and Non-Traditional
Players:
Collaboration is key in the decoupled landscape. Banks are
forging partnerships with FinTechs and other non-traditional players to
leverage their innovative solutions and expand their service offerings. This
allows them to cater to a broader range of customer needs and stay competitive.
Conclusion: Digital Inertia is the Silent
Killer
The once prevalent narrative of constant disruption is
evolving into a neo-normal. Unlike the traditional storyline of challengers
seizing market share from incumbents, a crowded space seems to be emerging,
characterized by a convergence towards a digital endgame. Interestingly, the
dynamics of winners and losers in this new landscape transcend the boundaries
of both traditional financial institutions and disruptive challengers.
Incumbent banks are facing unprecedented
pressure as a confluence of factors, including rising customer
expectations, the emergence of agile industry newcomers, the advent of powerful
technologies, and evolving regulations, compels them to infuse meaningful
innovation into their established business models.
“If you’re going through hell,
keep going.”
The urgency for banks to catch up with their more digitally
savvy counterparts is heightened by a growing profit and market valuation gap
between the digital leaders and the rest of the industry. This realization is
driving a collective industry effort to bridge the digital divide. And while
digital maturity is not the sole determinant of a bank’s economic performance,
a discernible signal is emerging, and shareholders are increasingly taking
notice.
The imperative for meaningful digital transformation is now
more evident than ever, reshaping the competitive dynamics of the banking
sector and making one thing is certain:
digital inertia kills banks.
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- Source: https://www.financemagnates.com//fintech/payments/the-decoupled-era-how-it-started-vs-how-its-going-for-banks/
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