...while challengers are having fun in the sun.
Until recently, travel was a pastime only few could afford. Today, the whole world has caught the travel bug, with Britain leading the way: Brits average 6 trips over 2 years compared to the European average of 4. As more customers started going abroad, the problems and pain points only a few once faced, grew and multiplied. Amongst them, the biggest pain, was around payments.
To solve this problem, banks enabled debit and credit cards to work overseas. Cross border transactions became a high margin business and banks profited as overseas travel increased.
For customers, cards proved to be an easy and more secure payment option. However, the lack of transparency around fees made spending abroad confusing and expensive - you never knew how much you were really spending. Unfortunately, customers had little choice. They could either put up with the unknowns and the fees or seek alternatives like cash. It should come as no surprise that lots did - 3 in 5 people use cash abroad compared to 1 in 5 at home, even when visiting countries with similar payment infrastructure as the UK e.g. France, USA, Ireland etc. The impact - lots of money is left on the table.
Rather than try and make the payment experience abroad simpler, focus was on initiatives that reduce operating costs and risks. Overseas transactions have always been an area of high fraud which explains banks overly cautious approach of automatically declining transactions. In the past, that was the only option: approve or decline. Today, we have lots of new security measures and ways to authenticate transactions that mean we no longer have to sacrifice customer experience for security. Now that the trade off no longer exists, what are banks doing about it?
Until a few years ago, not much. But then, the fintechs landed. Their target - the high margin and underserved customers who go abroad. Their strategy - creating a customer experience that delivers greater transparency and simpler fees.
New player, new rules
Fintechs play by very different rules. They are neither hamstrung by legacy systems nor a large retail footprint, resulting in them having a very low cost structure compared to banks. This is why they’re able to offer such competitive prices. Yet, this low to no fee business model that has become synonymous with Monzo and Revolut is only half the picture.
Because it’s not all about fees. Technology and smart product thinking mean we can deliver a better experience for various customer groups and spending context, and help them achieve their outcomes better by making it:
- Convenient. From being able to open a bank account from the comfort of your sofa with your phone to setting a budget and tracking your spending in real-time in both local and foreign currency. Customers can even create a shared holiday money pot with their friends so no one is left out of pocket after the trip and having to awkwardly chase someone for money.
- Understand the real cost of my holiday. Fintechs have eliminated the confusion and fear of using a card abroad by being transparent about fees and giving customers more control and choice, and valuable spending advice e.g. how to not get charged multiple times due to dynamic currency conversion.
- Secure. Fintechs are using technology to solve security and fraud problems that in the past where difficult to solve. By using device and payment location to authenticate and authorise transactions, fintechs are able to significantly reduce fraud. In addition, the card is no longer just plastic that can be lost or stolen. It is a connected payment tool that customers can control through their mobile device e.g. customers can freeze and unfreeze their card with one tap.
- By focusing on outcomes and spending context there’s no part of the value chain left untouched. Banks are now fighting two battles simultaneously: the age-old battle against cash, and now, the battle against Fintechs.
What happens next?
For banks, competing on price appears to be the obvious solution. And we’ve seen banks turn to this low to no fee model already e.g. Natwest have waived their overseas debit card charges this summer. The trick will be figuring out how to make this a sustainable change - either by reducing costs overall, or finding new ways to make up their margin. As it stands, banks cost structure is high, and if they do all decide to switch to this low to no fee model, then they risk cannibalising up to 84% of their overseas revenue.
But this won’t necessarily be enough. Similar to the internet boom, fintech organisations are showing the art of the possible, and in doing so, have changed the commercial model and customer expectations irrevocably. Bank’s won’t only need to find new ways to replace the loss of revenue in this new world of low to no fees, they’ll also have to deliver an experience that offers greater transparency, convenience and security. As low to no fees become the norm, customer experience is where the competition will be won.