See full Infographic

The financial industry is arguably the most lucrative industry on the planet. So it’s no surprise that, as technology lowers the barrier to entry, entrants from big tech giants to well-funded startups  have their eye on the pie and are quickly penetrating the space. There’s been a continuous flow of disruption in the banking industry, and it looks like things aren’t going to be slowing down any time soon. As consumers flock to their mobile apps for all of their daily needs and interactions from social and GPS to streaming and search, it makes sense that their banking needs will also soon migrate more heavily to becoming mobile-centric.

We can get a glimpse of the future as countries like China pave the way for a whole new system of banking. China is seeing an “explosive growth of mobile payments. With a record $12.8 trillion in mobile payment transactions from January – October 2017, China far surpasses the U.S. at only $49.3 billion.” 1

The Chinese digital ecosystem “blend[s] social media, commerce and banking—all run by two of the world’s most valuable companies [Alipay and WeChat Pay]. That contrasts with the U.S., where numerous firms feast on fees from handling and processing payments. Western bankers and credit-card executives who travel to China keep returning with the same anxiety: Payments can happen cheaply and easily without them.” 2

In China, as big tech companies like Alipay and WeChat Pay continue to transform consumers’ perceptions by redefining what it means to be a bank, financial institutions are “only seen as a place where you deposit money and link it to [these tech giants]. The trust is aligned more with the platform than the bank.” 3 This is a worrisome scenario for banks because  “they don’t own the customer relationship. They’re being disintermediated.”

Ultimately this transformation of the banking model significantly “limits the transaction data banks get to help sell other products and services, such as wealth management, insurance or even loans.” 3 Dana Nino, an executive vice president at Geoswift, a Hong Kong payments firm said, “banks need to be aware that there’s a different model’s the platform that gets the direct data from purchases, not the bank.” 3

Where US and China Differ in this Scenario

In China, “consumers go straight from cash to smartphones, skipping the use of credit and debit cards.” 1 Whereas in the US, consumers  depend “on banks for most non-cash payments, and all are tied to consumer bank accounts. With multiple firms involved in the process, from banks to credit card companies to payment processors, the cost of transactions goes up with their handling and processing fees. As a result, U.S. merchants lose substantial amounts of money to these fees on purchases made with cards or mobile payments in the U.S.” 1

Furthermore, in general “Americans are more guarded about privacy than the Chinese, and the technology standards — the mobile platform and the reliance on QR codes over more-secure NFC technology used in the States — are different.” 3 And perhaps even more importantly, “Americans don’t perceive mobile payments as superior to a card-based system that works well — and provides lots of points and miles.” 3

However, financial institutions in the US should pay attention to what big tech giants like WeChat Pay and Alipay are up to because “both are already operating in the States — efforts that, for now, target Chinese tourists in Las Vegas casinos or New York’s Chinatown.” 3 But if things were to shift and these types of apps were to gain popularity among American consumers “banks stand to lose $43 billion dollars…[which is why] “China’s payment apps give U.S. bankers nightmares.” 3

Are financial institutions ready to face big tech giants?

In 2018, Alipay “announced a deal with Atlanta-based payments processor First Data under which more than 4 million US merchants will accept payment via the service…[which] puts AliPay in the same league as Apple Pay, which is at 4.5 million.” 1 And AliPay doesn’t plan on stopping there. The company “recently partnered with FreedomPay, a global leader in protected commerce technology. The partnership will provide Alipay with new customers focusing on the travel and hospitality sector and an ability to capitalize on Chinese tourists.” 1

As Alipay’s presence continues to grow in the US, “bank executives won’t have to travel far to see China’s systems up close.” 2 The company “has spent the better part of the past year inking deals with payment processors that will allow it to bring its technology to America. Already, many New York taxis offer it as a payment option to customers.”

What would happen if American’s embraced cashless system?

Fees and dispensing cash are just a few of the ways that financial institutions earn revenue.  “If payments apps were to replace paper money—as they have in many situations in China” it could be a big hit to financial institutions’ bottom line. 2

According to Bloomberg News, it seems that the “clearest opportunity lies in siphoning off some of the fees that U.S. merchants pay to accept cards and mobile payments—about $90 billion a year. That money gets parceled out to card networks such as Visa Inc. and Mastercard Inc., payment processors and banks, which pocket the largest share. In China, analysts expect third-party payment providers to earn about 40 percent of such fees by 2020. If apps were to start grabbing market share in the U.S. at roughly the same rate they did in China, it would take a $43 billion revenue bite out of a business banks count as among their most profitable.” 2

When it comes down to it, what big tech giants, like Alipay, bring to the table can’t be denied.  “The level of convenience, 24/7, is well beyond what you can deliver through a traditional banking model.” 3 And although, “for now, no company in the U.S. commands the kind of clout that Alipay and WeChat Pay wield back home” you better believe that tech giants are working to create the same type of success. 2 According to Jamie Dimon, chief executive officer of JPMorgan Chase & Co., “this is going to be the battle of all time...everyone wants to be the place that is the one place you go to do that.” 2

How Can Financial Institutions in the U.S. Prepare?

Although China has leapfrogged the US and other countries around the world when it comes to mobile-first and cashless payment ecosystem, big tech companies in the US might not find it as easy to realize the same success. Tech giants like “Facebook, Amazon and PayPal, are attempting to embrace ecosystem strategies, though success on China’s scale would be tough to duplicate. Regulators would take a heavier hand, and the U.S. market isn’t “mobile-first” like China.” 3 Furthermore, American consumers “ love credit card rewards programs and other perks, which have gotten sweeter in recent years, as well as the ability to charge back purchases that don’t go well. And U.S. bank deposits are backed by the Federal Deposit Insurance Corp.” 2

Even so, Thad Peterson, senior analyst with Aite Group in Boston, believes that  “what we see with China is that the evolution of payments is not going to be a linear extension of what we’ve seen in the past, where countries move up the curve and adopt our card-based system.” 3

Moreover, in an “interconnected world, “bankers in the U.S. need to start thinking about the impact of another payments process that could disrupt their business models and affect their customers.” 3 Bankers should take China’s mobile payments revolution as an educational lesson with great insights into how they can “keep pace in a world filled with smartphones and third-party “ecosystems” eager to encroach on traditional bank space.” 3 Darren Buckley, head of Citigroup’s consumer bank in China, advices bankers in the US to “become forward-compatible...otherwise you will be disintermediated.” 3

At MX, we create innovative products and solutions that ensure financial institutions can always provide the delightful, seamless, and convenient experiences their customers have come to expect in the ever-evolving financial industry.  We can help you create a customer experience that rivals even the biggest tech giants, and turns your customers into raving fans. We’ll help you deliver on all your customer demands—from a 5-star mobile app experience that’s as good if not better than the best, to next-gen money management tools that leverage AI-assisted technology and machine learning to provide accurate and proactive notifications and advice.