Winds of disruption in consumer payments and retail banking are stronger than ever in the wholesale payments and cash management businesses of banks, which generate annual revenues of more than $ 250 billion. This activity offers payment solutions for suppliers and liquidity management for treasurers.
Until recently, banks as the incumbent enjoyed a return on equity of 20-40% and used this activity as an anchor for relationships with large companies (with cross-selling opportunities) . Fintechs and other non-banks have reduced the market share of these banks, and other banks like Goldman Sachs are also entering this space.
To protect their territory, incumbent banks must be ready to serve emerging online business models across different industries by innovating at the intersection of digital lending and digital payments.
The automotive sector is an increasingly digitized field. Let’s look at the agenda for the next five years. We are starting to see changes in investments towards the manufacture of electric cars. In Asia, non-banking players like SP Mobility and Oyika are focusing on installing charging stations. Non-bank platforms like Cazoo, Carvana, CarMax, Cars24, CARRO and olx focus on converting motorcycle owners to used car owners in India, Latin America and South East Asia, where less than 12 % of the population owns a car (compared to over 50% in the United States). Other priorities include reducing distribution costs by 10-20% by eliminating traditional dealership models and revolutionizing the concept of car ownership.
In many areas like Western Europe and Singapore, we may pay monthly subscriptions for car registration, road tax, round-the-clock assistance, general inspection, repairs and insurance . This allows customers to make multiple payments in a single transaction. Customers can access transparent pricing and choose from a menu of services to include in monthly payments. This subscription model is expected to record a compound annual growth rate of over 80% and increase its market share to 22% by 2025, from 3% currently.
As subscription offerings multiply, especially in selling cars online, this will transform traditional leasing and rental models. Innovative platforms like Carvana have seen loans contribute almost 50% of gross profit per car unit and increase the transaction size of purchased cars. In 2020, leased and financed vehicles represented 28% of Volkswagen’s vehicle sales. Growth in financial services activities helped offset the contraction in new vehicle sales. The recent purchase by JP Morgan of a controlling stake in Volkswagen’s payments business is likely to have a significant impact on the industry and beyond.
The recent acquisition by personal finance company SoFi of the Galileo banking and payment platform and the acquisition by payment company Saltpay of the third-party payment platform Tutuka have drawn attention to issuing processors. I expect to see more innovation in these processors, with new features introduced such as the ability to freeze or unfreeze customer cards and real-time alerts. We will see new models of Buy It Now, Pay Later, Loan and Credit in the automotive industry that combine driver credit history, car information and next generation platforms. transmitters.
Innovation in digital payments can provide a better customer experience by making in-car payments for tolls, parking and fuel or charging electric cars. Payment platforms like LogPay in Europe are driving this innovation. For this to be possible, payment processors will need to partner with gas stations and issue fuel cards that allow cardholders to refuel or recharge at the nearest station. They will also have to be integrated with parking and toll operators directly or with aggregators of parking operators.
Figure 1. The software will build a new auto industry. Cars can turn into digital wallets!
Source: Sirish Kumar
For banks, this transition to digitalization is difficult but not impossible. Banks will have to adopt an innovative mindset and integrate new skills to:
- Collaborate with technology platforms and create a cloud-based ecosystem made up of multiple players, including automakers, insurers, payment technologies, utility providers, and retailers.
- Build an infrastructure to support:
- microphone and real-time payments
- the evolution of digital currencies over the next three to five years – I think the first use cases for central bank digital currency adoption nationally and across borders will emerge from this wholesale payments line.
- Create tools that aggregate cash flows in real time and enable cash flow forecasting.
- Invest in a new digital bank if building new capacity on existing systems takes longer and costs more.
Sirish Kumar, former chief financial officer for India and Asean at PayPal, is leveraging technology to scale up financial inclusion in Asia.