Francesco Burelli is a partner at Arkwright Consulting and Andrew Shipilov is professor of strategy at Insead
The recent wave of technology-driven disruption has left no industry untouched. Even the payments industry, which has been undergoing fundamental restructuring since the dot-com era of the 1990s, has been shaken by the arrival of new channels, such as mobile; interface technologies, such as contactless; regulation, in the form of open banking mandates; and technologies, such as the ongoing use of application programming interfaces.
The payments value chain has been continuously reconfigured, and we are witnessing a blurring of the borders between payments and the other complementary industries. Organisations operating in different stages of the industry’s value chain have been subject to disruptive attacks. How can we identify the disruption and what can be done to counter such attacks?
From cards to mobile
There are some interesting regional dynamics. Card payments in Latin America are currently being overtaken by mobile wallets with account-to-account payments infrastructure. These address customer segments that were underserved by banks and priced out from accessing traditional card payments solutions. A similar competitive dynamic has happened in Africa and Asia.
In China, for example, Alipay grew out of the opportunity to help consumers make online purchases, addressing a gap in the market that was not served by UnionPay cards. Similarly in Kenya, M-Pesa was part of the first of a wave of mobile money solutions that have become serious challengers to retail banks.
These competitive dynamics have not been limited to retail payment services. It has also happened within the business-to-business segment, starting with small and medium-sized enterprises.
GHL Systems, formerly a terminal management technical provider in Malaysia, is an example of a competitive reconfiguration in the merchant-acquiring sector. For nearly 20 years, GHL Systems just served banks, but then started reselling acquiring services to the population that was not served by the banks. In parallel, GHL Systems expanded from being a third-party acquirer to become a merchant aggregator, then orchestrator, and in 2020 a direct acquirer, with the ability to compete with its former bank customers.
Blue oceans
What should an incumbent bank do when faced with the likes of a GHL? A “more of the same” strategy would most likely expose the bank to further attacks from within and outside the industry value chain. Instead, it should apply a “blue ocean” strategy.
Developed by Insead professors Chan Kim and Renée Mauborgne, BOS is a strategy and analytical framework that offers tools to create and capture so-called “blue oceans” — unexplored new market areas and identify untapped demand.
The financial industry seems to lend itself to BOS improvements. The key principles involve the need to challenge conventional wisdom, expand the target market to attract non-customers, and achieve differentiation at a low cost.
The challenge to conventional wisdom involves building new business models that don’t seem rational at first glance. These have to expand the market by attracting customers who are not of interest to the incumbent players. They should also eliminate some value drivers that historically have been present in the market, thereby lowering the costs, while creating new value drivers.
For example, early on Mastercard pre-empted many of the new entrants’ moves by focusing on the competing forces between cards and cash (which new entrants also targeted), not on its main competitor Visa.
Cash-users are non-customers from the payment cards industry standpoint. Mastercard was able to build innovative solutions in different payment segments, including the South African Social Security Agency’s card that managed to introduce electronic storage of monetary value and payments to millions of unbanked citizens at launch in 2012.
Other cash-targeting solutions aimed at non-customers include transport ticketing solutions. More recently, Mastercard partnered with Ubirider in Portugal to build a mobility solution that connects both transportation providers and passengers. Instead of being just a payment provider, Mastercard has turned into an enabler of financial inclusion, providing mobility-as-a-service and other solutions.
Faced with competition and the threat of disruption, banks should consider BOS principles to foster market innovation. Challenge conventional wisdom, expand the market by targeting non-customers, eliminate some value drivers to lower the costs of operation and reinvest saved resources into new value drivers that customers haven’t experienced before.
This is not about one shark eating another shark, but about one shark avoiding competition and swimming by itself into the deep blue ocean. BOS is a valid approach across the financial services industry, particularly in payments.
