2020 will likely be about big bets in payments, with processors either doubling down on all-in-one apps or opening up to more partners
Consulting firm Deloitte expects "big bets" from payments companies in 2020, and says they'll have to choose between "open" or "closed" strategies. Open strategies are all about zeroing in on a specific product, and then partnering with other companies. In a closed approach, a company is looking to build out a collection of its own products. "Ultimately, it's two strategic choices on how to serve the customer," Zachary Aron, US payments leader at Deloitte Consulting told Business Insider. Click here for more BI Prime stories.
Next year will likely be marked by payments companies either going all in on all-in-one apps, or branching out as much as possible by opening their products up to partners, according to consulting firm Deloitte. Payments companies will have to choose between "open" and "closed" strategies to scale their businesses and grow their customer bases, a report from the firm said, which likely amounts to a big wager in 2020 on what people actually prefer to use and where their brand allegiances lie. "Ultimately, it's two strategic choices on how to serve the customer," Zachary Aron, US payments leader at Deloitte Consulting told Business Insider. Cross-border payments startup TransferWise has been working the open strategy. The UK-based fintech has a number of partnerships with other startups, like digital banks Monzo and Novo. Instead of going directly to TransferWise's website to make an international transfer, Monzo or Novo customers can use the TransferWise services within the banks' systems. On the other hand, Stripe and Square, which started as payments companies, are examples of the closed approach. They have launched several new products under their own umbrellas, including lending, fraud prevention, and payroll services. Open strategies are all about zeroing in on a product or piece of the payments space, and growing through integrations with other companies that want to offer that product to their customers. In a closed strategy, a company is looking to build a front-to-back collection of products. Aron said that the challenger banks are one group that is leaning toward the open model. "They're providing their own products and services, but there's a lot of integration and partnership going on," he said. Larger players like credit card networks also tend to be more open, given a core part of their business is to offer a platform to process transactions. The partnership-focused open strategy is a way for payments companies to grow their customer base without having to build new products. Instead, the companies use open APIs to integrate into another company's existing platform. These companies may be more adaptable to changing consumer needs. Mobile wallets, for example, require payments processing technology. From Starbucks to Apple, consumers have several options to pay with their phones. A payments processor with an open strategy could integrate with any digital wallet, regardless of provider. "If your customer oscillates on preferences, say they moved from wallet A to wallet B, you'll be able to plug and play that wallet into your platform," said Aron. By being wallet agnostic, an open strategy can mitigate the risk of losing business due to customers' behavior or preference. Read more: Cross-border payments startup TransferWise just inked its first US bank partnerships, including one with digital bank Novo. We chatted with its CEO about the launch, and why an IPO is still far off. But, Aron said, there are some drawbacks. Sitting within another company's app means the payments company gives up some of its control. "If you don't have the ability to influence or support all aspects of the customer experience, you aren't necessarily gaining the full economic value of that experience," Aron said. If a company wants to expand its suite of services without putting them on a partner's platform, it would choose the closed strategy. "You're able to design every element of that customer experience because you're controlling every aspect of that experience," said Aron. But it may be more challenging for closed-strategy companies to adapt to changing customer tastes, given the scale of their own products and platforms. Read more: The president of $20 billion Stripe explains the 3-pronged master plan as it opens a new service for small business loans Deciding factors Deloitte highlighted several ongoing trends that will help drive companies to decide between open and closed models. The economics of payments are changing. New fintechs are driving fees lower, which puts pressures on incumbents. There are also public-sector players that will influence the payments space. The Federal Reserve has announced its ambition to release a 24/7 real-time payments service called FedNow as soon as 2023. If the public sector is processing payments in real time, private providers will need to keep up. And companies will compete on more than just their simple payment processing capabilities — aside from price, there are differentiators that can win or lose customers. "It's not just the function of processing a payment," said Aron. "It's in different aspects, like trust and security, or the ability to do things that are customized." Whether closed or open, payments companies will likely need to deploy creative products to make money, according to Deloitte. "They may need to make strategic positioning choices on where to compete, what products/services to offer, and how to design their growth models to meet customers' ever-increasing appetite for innovative payments solutions," the report said.Join the conversation about this story » NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.
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