As much as 13.7% of Australian banks' payments revenue, or US$3 billion, is likely to be displaced by the growth of digital payments and competition from non-banks, as payments become more instant, invisible and free, according to a new report from Accenture.
The report found payments revenue in Australia will likely grow at an annual rate of 3.7%, from $18.7 billion in 2019 to more than $23 billion by 2025.
Only banks that change their business models to adopt the latest technologies and focus on providing value-added services to customers will capture a share of the $4.6 billion in incremental revenue growth.
The report is based on a revenue-risk analysis model that Accenture developed to measure trends in how consumers pay and projected changes in merchant behaviour, technology and regulation.
The research is complemented by a survey of 240 payments executives at banks across 22 countries to determine how they plan to mitigate and capitalise on the disruption in payments to grow customer loyalty, revenues and profitability.
The report showed global payments revenue will likely grow to more than $2 trillion by 2025, from $1.5 trillion in 2019, creating a $500 billion opportunity for banks around the world.
“The world of instant, invisible and free payments is here to stay, squeezing margins further on a business that was already feeling a lot of pressure from new competition,” says Accenture lead of banking practice ANZ Alex Trott.
“The payments market is booming and there's a multi-billion-dollar opportunity for those willing to invest in new technologies and business models based on the new digital landscape ahead,” says Trott.
“Banks lagging behind risk being relegated to the plumbing of payments.”
The report notes that over the next six years, banks will face further pressure on income from card transactions and fees, with free payments putting 8.3% of payments revenue at risk in Australia.
In addition, competition from non-banks in invisible payments — where payments are completed in a ‘virtual wallet' on a mobile app or device — will put 4.8% of bank revenues at risk.
Card displacement by instant payments, where funds are settled and transferred in real-time and banks make little to no interest, is projected to put an additional 0.6% of payment revenues at risk.
This builds on current declines in income from card transactions and fees, with regulation triggering fee compression and technology displacing the role of banks in payments.
Already between 2015 and 2018, revenue from business customer credit card transactions dropped 33% globally, revenue from consumer debit card transactions dropped nearly 15%, and revenue from credit cards dropped almost 12%.
The research found the industry is aware of the challenges posed by new technologies in payments.
More than two-thirds (71%) of banking executives surveyed in all markets agree that payments are becoming free; nearly three-quarters (73%) believe that most payments are already invisible or will become so over the next 12 months; and even more (78%) said that payments are either already instant or will become instant over the next 12 months.
“The digital transformation underway in payments will have a deep impact on all industry players and banks will have to fundamentally change how they think about their revenue in this area,” says Trott.
“The billions of dollars banks previously earned from some of these channels will dry up, so they'll need to develop new digital business models to compete in this new era.
“These models must be developed with security and governance at the core, bringing together human and machine to ensure the integrity and safety of high speed and continuous payment flows.”
In response to these key market challenges, nearly 18% of respondents said the main priority for the bank is to build security into retail payments transactions.
Nearly one-quarter (22%) cited artificial intelligence, robotics, machine learning and innovative payments hubs as the key platform technology capabilities they need to adapt their core systems to high-speed and continuous payment flows.