Payments are a key revenue stream for European banks, with retail payments expected to generate €128 billion in 2015. Moreover payments are of strategic importance as they provide an anchor for client relationships and act as a platform for selling a range of other products, such as loans, credit cards, savings accounts and mortgages.

But European banks face significant risks in the retail payments and their dominance of the market is increasingly under threat (for a variety of reasons):

Regulatory intervention

  • Payments are the subject of intense regulatory scrutiny with structural measures being introduced to promote competition and innovation
  • The impact of capping debit and credit card fees in the EU looks may be modest as associated costs only amounted to 2-3 per cent of the EU's GDP in 2015, but the impact of opening up the payments market, coupled with the effects of technological change, could be substantial.

Technology-enabled innovation

  • Tighter banking regulations have created more favourable conditions for non-bank participants in the payments market, including financial technology ('fintech') firms
  • New technologies could create risks for banks by allowing these agile challengers to enter the payments market and offer simpler user experience via apps and online tools that better meet customer needs.

Changing consumer preferences

  • Consumers not only want, but expect payments to be seamless and convenient using digital platforms and are very open to new players in the market
  • Digital payments are enabling much more data to be captured with each payment, such as where the individual was while making the payment. The value of this data is one of the key reasons payments is the biggest area of investment for fintech.

The impact of regulatory intervention, coupled with technology-enabled innovation and changing consumer preferences could be substantial.

So what do the banks think? We carried out extensive research with payments experts across Europe from retail banks, card and non-card payments schemes.

Banks have a range of questions to answer in response to the evolving payments landscape:

  • How much should they defend their position in payments?
  • Should they go it alone or collaborate with non-banks and new market entrants?
  • Where should they be active in the payments value-chain?

We believe the status quo, in which payment systems continue to be run by and for the major banks will not survive as EU regulations will not permit it. So what does the future of the payments landscape look like?

Over the following month we will continue to analyse at the impact of payments innovation on the banking sector – looking more closely at the emerging threat and possible future scenarios.

Interested our research and findings? Read the full report to find out more.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.