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Who Are The Real Challengers?

Posted: Thursday 16 September 2021

Jamie Dimon, the CEO of JP Morgan Chase, said earlier this year that his bank should be scared about fintech competitors and identified PayPal, Square, Stripe and Ant Financial as well as techfins Amazon, Apple and Google as companies that the bank would need to compete with in the future. Interestingly, none of these organisations keeping him awake at night began as “challenger” banks or bank spin-offs.

This is not surprising. Challenger banks are just banks. They do not present a disruptive business model and neither the challenger nor the incumbent banks, despite spending heavily on their own technology, have transformed the financial services sector.

But perhaps real challengers will. Who are they though? Where are the banks vulnerable? Mr. Dimon singled out payments. This is because the business models of the future depend on data, and payments are the overwhelming majority of interactions between a bank and its customers. And, I suspect, because Mr. Dimon had the case study of ChasePay in front of him.

ChasePay Case Study

Five years ago JP Morgan announced a deal to incorporate Chase Pay into the Starbucks mobile app for payments at more than 7,500 Starbucks locations. Integrating a new payment mechanism into physical stores is a hassle. Point-of-sale (POS) systems need upgrading, staff need training, deals need making. But adding a new payment mechanism into a retailer’s app is, by comparison, trivial. This is why new payment mechanisms (eg, direct from account instant payments, deferred payments and so on) have an advantage in that world and retailers can use that opportunity to expand the range of payment options in a less expensive and more controllable way.

The combination of pandemic and phones accelerated the movement to payment by apps and now both “super apps” and retailer apps are looking to exploit new opportunities in the post-pandemic payments world. But these are not only about the wallets and the payments: they are about the consumer’s identity. The “Connect with PayPal” service, for example, talks about providing a “commerce identity”, which I think is a good way to think about the key element of competition in a space in which the apps must find ways to make their partners successful. Taking away the aggravation and errors of identification and authentication is certainly one way to do that and, as I frequently observe, almost everything in my physical wallet is about identity not payments.

Europe lacks a super app along the lines of China’s Alipay, so the main focus for retailers who want to integrate payments outside of the existing card networks is a combination of open banking and instant payments. Open banking-enabled services, such as Request-to-Pay (R2P) and Variable Recurring Payments (VRP) will give retailers a tool kit to develop cost-effective and efficient payment models.

I’m not smart enough to know whether the super app strategy (ie, the third-party wallet using a variety of banking-as-a-service players) will win out over the open banking orchestration strategy (ie, the retailers using a variety of banking-as-a-service players) but I can see that unless the banks do something radical with their wallets, they can’t compete. Indeed I think we can see that this is the case, because after some $100m of investment, Mr. Dimon has thrown in the towel and killed off Chase Pay. JP Morgan advised their customers to use “their preferred merchant apps or PayPal” instead.

Open for Business

The UK looks pretty good when it comes to exploring the business models around open banking and payments data. With a competitive fintech sector and open banking already in place, access to the transaction data has become energy for innovation. There are some terrific new businesses already taking advantage of this combination of new regulation and new technology. A few good examples are Fluidly, Swoop and now Liberis and Fintern.

Perhaps it is time for Jersey to begin experimenting with the new opportunities that open banking offers, because these opportunities play to the island’s strengths. Open banking is already creating new data businesses that use the transaction data accumulated by the banks in new and interesting ways and there’s no reason that Jersey cannot build in this direction.

Are these new open banking businesses keeping Mr. Dimon from his rest? I’m not so sure. If they get big enough, he can buy them. Or the techfins can, which is why they are on his list of nightmares, of course!

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