The eighth World Payments Report (WPR) was released last week, and so far we have summarised Part One, the Non-Cash Trends, Part Two, the Regulatory Trends and Part Three: SEPA. This final part summarises the final section of the report on innovation.
Banks Need To Seize Opportunity Of Customer-Centric Innovation
Many banks are increasingly shifting their innovation focus to customer-centricity, after sustained success in driving internal improvements for better efficiency and cost-effectiveness in existing operations. This shift will bring banks, possibly through partnerships, more squarely into today’s horizon of innovation, where non-bank players like M-Pesa and Octopus have been successful at capturing mindshare. Non-banks, with new platforms and no legacy- system constraints, are leveraging unique business models to drive innovation around specific customer solutions to generate revenue.
- Hurdles to innovation remain but customer retention and acquisition are the critical outcomes. Innovation in payments faces ubiquitous barriers related to governance, technology, and regulation, but probably most challenging is the need to build a strong payments-specific business case, even when the return on investment is difficult to measure. Financial returns are not the only objective of payments innovation. For PSPs, the most important dividends in today’s evolving payments space lie in customer retention and acquisition.
- Many banks are targeting innovation in specific areas of the payments value chain. Targeted innovation is likely to be more cost-effective than attempting to innovate across the entire value chain, as, if deployed successfully, it promises customer-focused innovation in areas of core competency and existing demand. Accordingly, our survey confirms, banks are likely to increasingly focus on proposition development, payments instruction, operations processing, and account reporting and invoicing.
- Regulation can also pave the way for innovation. In general, regulations designed to drive payments evolution through systemic changes such as competition, standardization, and social inclusion support innovation, while those that address business models, by targeting market entry or price regulation for example, have potential to slow or deter innovation. But in cases where payments innovation has thrived, the dividends have typically been distributed among many industry participants.
- Successful payments innovators will have a
granular understanding of the needs of their target customer segments, and
their own innovation capabilities. This type of innovation strategy, which is
driven directly by customer needs, and properly leverages innovation
capabilities, will have a more compelling business case, and a greater chance
of success. More specifically, innovators will need to understand:
- The key success factors (KSFs) for customer-centric innovation by segment. There are common KSFs such as ‘interoperability’ and ‘security,’ as well as client segment-specific KSFs such ‘multi-currency management’ and ‘multiple instrument choice’ among others.
- Their own innovation readiness, measured in terms of their capability on ‘Innovation Bricks.’ To succeed, PSPs will need to identify and fill gaps in their innovation construct in four key areas: financial; stakeholder engagement; culture/governance; and internal process and technology.
- To innovate successfully going forward, while still improving the efficiency of processes over time, banks will need a systematic approach: first assessing and strengthening their innovation foundation elements, which includes selecting/creating the most relevant proposition based on various ‘value spaces;’ then improving specifically on the capabilities that are ‘must-haves’ for their innovation strategies; and then pursuing value-added capabilities. Notably, innovation might involve looking outside the banking industry to find partners with which to collaborate on specific, niche, customer-focused propositions.
You can order a copy of the full report from EFMA, and the summary of each section is below: