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.
Source: Temenos’ Whitepaper “Open Banking and the Rise of Banking- as-a-Service”
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.
Source: Temenos’ Whitepaper “Open Banking and the Rise of Banking- as-a-Service”
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.
