The Evolution of Wholesale Payments

The Evolution of Wholesale Payments

The future of wholesale payments belongs to banks willing to navigate the shifting landscape, secure valuable touchpoints with clients, and remain competitive amidst growing competition. We have reached an inflection point – decisions made today will shape banks’ positions in the wholesale payments market of tomorrow.

 

The landscape of wholesale payments is undergoing a profound transformation, posing challenges and opportunities for traditional banks. In recent years, the once-stable market has seen a surge of competition from fintechs, neobanks, and software vendors. This influx of new players threatens to erode banks’ dominant position, particularly in lucrative segments such as small and mid-size businesses (SMBs) and cross-border payments.

The Current State of Wholesale Payments

As of 2022, traditional banks enjoy a staggering 95% share of the $490 billion global wholesale payments market. However, this stronghold shows signs of vulnerability, especially in segments like SMBs and cross-border transactions. Bain & Company projects a steady growth in global wholesale payments revenues, reaching $645 billion by 2027. Yet, much of this growth is expected to shift away from banks, with emerging providers capturing a significant portion of SMB transaction banking revenues and profits.

Several factors contribute to this seismic shift in the wholesale payments landscape. Firstly, the rise of digital payments is gaining momentum, particularly in markets where checks have been a traditional staple, such as the US. Modern, real-time payments infrastructure and the integration of artificial intelligence are driving efficiency and automation in transactions. Companies are increasingly turning to third-party digital platforms for their payments workflows, finding them more convenient and efficient.

Secondly, fintechs and software providers are aggressively targeting high-margin client segments, offering tailored solutions that meet clients’ evolving expectations. For instance, Shopify now supports business-to-business e-commerce, while SAP’s acquisition of Taulia provides working capital solutions for businesses. Nonbank entities like Wise and Revolut are leveraging direct access to payments infrastructure, challenging banks’ historical advantage.

Risks and Challenges

Beyond the direct threat to revenues, banks face the risk of losing valuable touchpoints with clients. Understanding a client’s payment flows provides banks with insights into their financial health, growth plans, and needs. Ceding this ground weakens the overall client relationship, hindering cross-selling opportunities for lending and other services.

In response to these challenges, banks must reassess their wholesale payments strategy and business models. Four promising postures from Bain & Co. include:

  • Wholesale Utility: Some banks may opt for a reliable, client-centric approach, focusing on reliability and existing relationships. This model may involve limited product innovation and a “fast-follower” strategy for technical advancements.
  • Innovator: Global banks and large regionals can lead with innovative solutions, such as new real-time payments infrastructure and cross-border transactions. These banks differentiate themselves with mature partnership strategies and cutting-edge offerings.
  • Universal Provider: Larger banks can compete across all client segments, investing selectively in high-value use cases. For example, HSBC excels in cross-border banking flows aligned with key trade corridors.
  • Embedded Finance Specialist: Neobanks and certain traditional banks may adopt a “payments-as-a-service” model, offering modular solutions via APIs to nonbank financial service providers and platforms.

The path to adopting these postures involves trade-offs across key areas:

  • Technology: Banks burdened by legacy systems must prioritise modernisation efforts. Focus on areas with the highest impact, such as orchestration engines for unified payments.
  • Operating Model: Banks must strike a balance between decentralised decision-making and centralised control. Options include business line ownership, payments councils, or centralised payments business units.
  • Go-to-Market Strategy: Refinement of product bundles, customer segmentation, and distribution channels is crucial. Banks must tailor products by industry and evolve distribution to include APIs and external partnerships.
  • Partnerships: Successful collaborations extend beyond commercial agreements to shared resources and goals. Banks can partner for capabilities, distribution, or enhanced data insights.

While banks currently dominate the wholesale payments market, complacency is a luxury they can ill afford. The rise of fintechs, software vendors, and evolving client expectations necessitates a proactive approach to strategy and business model evolution.

Banks that embrace modernisation, innovation, and strategic partnerships stand to retain and attract valuable business customers in this dynamic landscape.

 

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