Emmanuel Proust, Head of Digital Partnerships & Offering for Giesecke+Devrient (G+D), explores how US banks can stay competitive by leveraging advanced payment technologies, enhancing payment sovereignty, and adapting to market complexities.
Banks and financial institutions in the US continue to face significant challenges to remain competitive. Their ability to overcome these hurdles, while understanding where the expansion opportunities can be identified through advanced payment technologies, will be critical to realise growth in the coming years.
Furthermore, the diverse US payments market, with its mix of traditional and digital methods, underscores the importance of payment sovereignty, ensuring a variety of choices. Heavy reliance on major payment networks highlights the need for additional alternatives to support economic growth, independence, and security to reinforce a strong financial landscape.
The outlook for banking is becoming more complex due to several external pressures.
Deposit growth, which had been strong due to favourable fiscal and monetary policies, began to decline in the US and slow in other regions as governments tightened monetary policies. Despite some recent and potential future interest rate reductions by central banks, high interest rates are expected to persist. This scenario, characterised by positive real interest rates and quantitative tightening, suggests that deposit growth will remain sluggish for retail banks.
Additionally, banks are facing mounting margin pressure. Although margins peaked with rising interest rates over the past two years, regulatory constraints and anticipated interest rate cuts will compress them. Furthermore, increasing operating costs driven by wage growth, fraud counteraction, technology investments, and credit risk will compel banks to rethink their cost management strategies.
Moreover, retail banks also face some obstacles concerning big tech’s forays into payments, lending, and other financial products. Consumers often see (and trust) the tech-brand front end – a shift that can reduce a bank’s brand presence and direct relationships in the long run.
The challenging environment is also putting pressure on regional banks, where the top six reported 15% to 38% drops in their profits year over year from 2022 to 2023.
Payment technology may represent an intriguing opportunity for growth in the coming years. The US payments market is a fascinating blend of traditional and modern methods. The diverse needs and preferences of its users result in an appetite for new payment methods, but an unwillingness to phase out any of the old ones. This market is characterised by its vast size, rapid innovation, and the coexistence of various resilient payment methods, from cash and checks to digital wallets and contactless cards.
Digital payments in the US are experiencing significant growth, driven by the widespread adoption of various forms of digital wallets. A 2022 McKinsey survey revealed that nearly 90% of respondents used some form of digital payment, with a notable increase in those using multiple forms. This trend spans across demographics, with different generations favouring different digital payment methods.
For instance, while some prefer PayPal, others lean toward Venmo or Zelle. The key to this widespread adoption is the acceptance of these methods by both users and vendors, facilitated by the flexibility of digital wallets to work through QR codes, email IDs, phone numbers, or usernames.
Despite the rise of digital payments, traditional payment methods like cash and checks remain relevant. The US market is unique in its continued use of personal checks, which are still a part of the payment ecosystem, especially among those who value tangible proof of payment. Additionally, a growing portion of the population is unbanked or underbanked, relying on check-cashing services to convert their checks into cash. This highlights the market's need to cater to diverse financial situations and preferences.
Contactless payments have also seen rapid growth in the US, particularly since the pandemic. The increase in EMV card issuance and the prevalence of NFC-enabled terminals have made contactless payments a viable option. Interestingly, while mobile-based tap-and-go transactions are growing, card-based contactless payments remain the most common. This trend is more pronounced in metropolitan areas and among large retailers, reflecting the market's adaptability to new technologies.
Card payments continue to dominate the non-cash payment landscape in the US. In 2021, cards accounted for 77% of all non-cash payments, with debit cards leading the way. The average American holds multiple credit cards, indicating a strong connection to this payment method. The card market is highly competitive, with vendors striving to differentiate their products through innovative features and targeted offerings. This competition drives continuous improvement and adaptation to meet the evolving needs of consumers.
The US has higher merchant service charges on credit cards compared to Europe and parts of Asia, with no major regulatory push to lower them. Although US merchants entered a period of litigation with payment networks and banks in the mid-2000s over these fees, the settlement mainly provided compensation without capping fees. As credit card issuers rely on these fees to fund value-added offerings, such as reward programmes, the US premium credit card market remains competitive, with many options offering attractive rewards and perks.
In addition to consumers’ payment preferences, risks, like fraud, drive innovation in the industry. Ecommerce presents both opportunities and complications for the US payments market. The sector has grown rapidly, making up at least a fifth of US retail sales annually since 2020. This growth is fueled by events like Black Friday and Cyber Monday, along with the rising popularity of Buy Now, Pay Later (BNPL) options.
However, the shift to online shopping has also led to a rise in ecommerce fraud. In addition, the widespread use of AI-driven techniques has put certain types of frauds on steroids, by easily enabling more personalised, convincing, and large-scale attacks. Combating even faster and more diverse fraud is a complex and costly endeavour for financial institutions, requiring a balance between security and user experience. Solutions such as dynamic digital CVVs, tokenization, and biometric payment authentication are being explored to address these barriers.
Navigating the complexity of the US payments market requires a deep understanding of its local nuances, shaped by geography, age, and cultural factors. There is no one-size-fits-all solution, and financial institutions must tailor their services to meet the specific needs of different customer segments. This understanding is crucial for providing effective and relevant payment solutions in such a diverse market.
The US payments market is a dynamic and multifaceted landscape that offers valuable lessons for the rest of the world. Its blend of traditional and modern payment methods, rapid adoption of digital technologies, and the ongoing challenges of ecommerce fraud highlight the need for continuous innovation and adaptability. By understanding and addressing the unique characteristics of this market, banks and financial institutions can better realize the true opportunities for growth, serve their customers and drive the future of payments.
Emmanuel Proust is the Head of Digital Partnerships & Offering for Giesecke+Devrient (G+D) in the United States. With over a decade of experience in innovation, from ideation to go-to-market strategies, he is currently leading G+D's efforts to strengthen its global digital payment offering through strategic partnerships. For more information, please visit our website.
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