What is the optimal mix between banks and FinTechs in the payments architecture?

Abstract

The lack of innovation in financial services can be explained by the market domination and regulatory protection that incumbent banks have hitherto enjoyed, meaning that they have not needed to defend disruptive forces from FinTechs, third parties or other banks. However, the era of lightweight innovation and limited advancements in payments technology is coming to an end. The revised Payments Services Directive (PSD2) gives third parties the opportunity to develop, launch and become the preferred payments channel in regions where no alternative exists. Increasing smartphone adoption and internet access will see mobile become the dominant channel for everyday purchases. As payments are commoditised, the value of this channel is no longer limited to transaction fees. Instead, it is derived from user volume and data. Tech giants, such as Facebook, Google and Apple, recognise that data equal power and have made evidential steps toward becoming payment powerhouses. Banks bring formidable strengths to the payments arena. There are considerable benefits and revenue sources available to those that mobilise their long-term payment channels. Partnering with FinTechs allows banks to quickly become agile and launch cost-efficient minimum viable products and to test new ideas. To retain relevance in payments post-PSD2, banks must make mobile payments their top priority.