The Payments Blindspot That Could Cost Banks Billions

Quick — what’s the most interesting part of banking right now?

There are as many answers to this as there are bankers in the world. Right now, I suspect many would point to generative AI’s impact on the industry or the ongoing impact of high interest rates.

But I’d wager that almost no one leading an incumbent bank today would say “our commercial payments practice.”

Commercial payments has been the sleepy backwater of payments for years, with innovation and user experience both badly lagging advances in consumer-facing payments.

Moving to a new payments provider is much more complicated and expensive for a large business than it is for an individual consumer. That inelastic demand has let banks and other incumbent payment providers get away with investing less time and resources in keeping these clients happy. Most banks see commercial payments as a cost center rather than a source of growth.

But that was only true when interest rates were at or near zero. The real value of commercial payments for banks is their role in attracting and retaining business deposits. Now that interest rates have linked deposits with revenue again, banks should see commercial payments as tremendously valuable.

After all, the size of the market dwarfs consumer payments. The total volume of B2B payments in 2022 was estimated at $88 trillion, and projected to grow to $111 trillion in 2027. Treating commercial payments as a low priority made cold-blooded business sense as long as the cost of switching was high and the level of competition was low. This is no longer the case. Commercial payments have become a blind spot for incumbents that could see them miss out on $371 billion of revenue growth.

New industry research from Accenture confirms that competition in commercial payments is growing. 56% of payments incumbents today report that they are losing share of wallet – and the associated revenue – to bigtech and fintech competitors.

The good news for incumbents is that they are not out of the race yet. Dissatisfaction and willingness to switch providers are not hard to find among commercial payments clients today. Any provider, whether fintech or incumbent, who can give commercial payments clients what they want is positioned to win big. In fact, more than eight out of 10 clients would like to use a single payments provider for cost reasons – but very few can find everything they want from one provider.

What do these clients want? The research shows that fraud prevention is their single biggest pain point, followed by the lack of value-added services like accounting system integration, biometric payments, and bill payments tools like automated invoicing.

Most commercial clients would actually prefer to access these services through a bank or incumbent provider – but many banks are not positioned to provide them. Close to six in 10 banking and payments executives say their organizations struggle with quickly offering new payments solutions due to their legacy tech stacks.

So where does this leave banks? Business-as-usual will not let them keep pace with competition or rising customer expectations. But there’s no silver bullet that will solve the challenges they face.

In my view, there are three broad strategies that every incumbent needs to consider and, probably, pursue in parallel:

• Modernize the core. Aging payment cores, often built on ancient COBOL code, have been a problem for banks for years. The best time to replace an old core, of course, was 10 years ago, but the second-best time is right now. New technology like generative AI makes core modernization less painful and more powerful today. (Fortune link)
• Forge ecosystem partnerships. Fintechs and bigtechs don’t have to only be competitors in this space. The right agreement with the right partner can shore up a bank’s flank and unlock new markets for growth.
• Become obsessed with the client-centricity. Research shows that clients value solutions tailored to their individual needs. A shift to integrated offerings, personalized pricing and bespoke solutions will let banks capture a greater share of wallet.

Commercial payments has been a blind spot for banks and other incumbent providers for years – and competitors today are taking advantage. With the market set to grow and customer expectations rising, perhaps the most important decision any bank leader needs to make in this space is whether the bank wants to compete at all.