A revolution in the making: how digital transformation is changing P2P payments

“Gradually, then suddenly.” Payment companies have been on a digital transformation path for years.

Banks must optimise their digital customer experience to retain customers

However, to quote Hemingway, the pandemic catalysed a rapid digital drive that in the space of less than two years has accelerated developments at almost breakneck speed – and is shaping up customer experience in new ways like never before.

In the new landscape where banks, established payment companies, and dozens of new providers such as new fintechs, neobanks, mobile wallet providers, and other innovative players are coming into the fray, where are the opportunities and where will the market find its equilibrium point between innovation, trust, and reliability? And how can banks stay relevant against the new kids on the block?

The Chase example

Not long ago, JP Morgan launched a digital bank in the UK, Chase. The new digital bank takes advantage of the immense resources available to an institution like JP Morgan to build a solution that mirrors the nimble, digital-first, customer-savvy, cool-factor of digital banks making their debuts across Europe, but still has the backing of the trusted Chase consumer banking brand.

In the debate to build or partner to create a custom experience, JP Morgan has the size and resources to create the digital bank they want to be and bring together the features and functionality from across their massive enterprise to serve customers in a new way.

The Chase scenario is unique – not many other players in the industry have the scale and discipline to build something new without being dragged down by legacy systems or ways of thinking.

This means that for most financial institutions, when faced with the option to build a whole new system or partner with fintechs to incorporate the features they need into their solution, partnerships can bring that vision to life much more quickly and cost-effectively.

Let’s take a closer look at bank-initiated international P2P payments. This use case of digital, account-to-account cross-border payments is one that many fintechs across the region are attempting to own – and the market opportunity is significant.

In the past, more than 95% of cross-border P2P payments were initiated from bank accounts. But the majority of those transactions started with a customer physically walking into a bank branch to send money.

As digital transformation has sped up, that is no longer how customers what to transact, and they are taking their P2P payments business away from banks and to more digitally focused money transfer providers.

In order to stem and reverse this rapid decline in market share, banks must optimise their customer experience and keep customers transacting in their ecosystem.

Those customer experience challenges with wire transfers generally come down to three things: price transparency (each bank in the correspondent network may take lifting fees, reducing the total principal delivered to the receiver), unpredictable delivery speed (can be up to 10 days), and online experience (or lack thereof).

To improve price transparency and speed of delivery, the sending bank could invest in more correspondent relationships to guarantee a shorter journey for the funds, reducing lifting fees, lowering the error rate, and increasing delivery speeds.

But there’s cost and effort related to building a larger correspondent banking network, including compliance and regulation management, which may not deliver a return that banks need to justify the work. An optimised online experience can also be built – with time and money.

So, what is the alternative to building and maintaining a P2P cross-border payments system? Find a provider whose cross-border payment solution can seamlessly integrate into your banking platform.

But if you’re going to partner, be sure that the partnership offers more than what you could build on your own. Any bank looking for a solution provider for cross-border payments should consider these factors:

• Global reach – How many countries, how many real-time countries, and what variety of pay-out methods are possible?
• Global compliance – Select a partner with a robust global compliance program that has been pressure-tested by regulators in your send market and all receiving countries.
• Flexible integration options – Can you build the UX with an API integration to your system, or maybe you prefer to pass the customer seamlessly to a solution hosted on the partner’s system? Either option can deliver a great customer experience while maximising your resources.
• Customer experience – Offer real-time transaction speeds and transparent pricing on all transactions. Transactions should be funded directly from the customer account, rather than submitting a payment to a separate entity. Provide customer support in dozens of languages.
• Licensing and commercial model – Can the partner offer a white-labeled solution for banks who want to use their own brand and license, or provide a co-branded option where regulatory responsibilities are shared?

As the worldwide digital transformation accelerates, banks and fintechs face the decision to work together to advance shared interests and offer more features and functionality to customers or separately build bespoke features into their online systems to keep customers transacting in their ecosystem.

About the author:

Massimiliano Alvisini is general manager and senior vice president for Europe, CIS and Africa at Western Union.