AS much as 13% of banks’ payments revenue in China, or US$61 billion, is likely to be displaced by the growth of digital payments and competition from non-banks, as payments become more instant, invisible and free, according to a report from Accenture: Banking Pulse Survey: Two Ways To Win, released November 4.

The report delved into how consumers pay and projected changes in merchant behaviour, technology and regulation, and is complemented by a survey of 240 payments executives at banks across 22 countries to determine how they plan to mitigate and capitalize on the disruption in payments to grow customer loyalty, revenues and profitability.

Payments revenue in the Chinese mainland will likely grow at an annual rate of 9.1%, from about US$292 billion in 2019 to US$494 billion by 2025, while in the Hong Kong Special Administrative Region (SAR) that is set to rise at a 2.1% rate from US$9.5 billion to US$10.7 billion, according to the report.

However, only banks that change their business models to adopt the latest technologies and focus on providing value-added services to customers will capture a share of the more than US$200 billion in incremental revenue growth.

The report also showed that global payments revenue in all markets surveyed will likely grow to more than US$2 trillion by 2025, creating a US$500 billion opportunity for banks in those countries.

“The payments industry has been under a lot of pressure from new competition and margins will likely get squeezed even further because the world of instant, invisible and free payments is here to stay,” says Albert Chan, Financial Services practice lead for Accenture in Greater China.

“At the same time, the payments market is booming and there’s a multi-billion-dollar opportunity for those willing to invest in new technologies and business models based on the new digital landscape ahead. Cross-border payments in particular could be the next gold mine,” he adds.

The report notes that over the next six years, banks will face further pressure on income from card transactions and fees, with free payments putting 5.2% of payments revenue at risk in the Chinese mainland and 23.9% in Hong Kong.

In addition, competition from non-banks in invisible payments - where payments are completed in a ‘virtual wallet’ on a mobile app or device - will put 4% of bank revenues at risk in the mainland and 2.6% of revenues in Hong Kong. Card displacement by instant payments, where funds are settled and transferred in real-time and banks make little to no interest, is projected to put an additional 3.6% and 2% of payment revenues at risk respectively in the Chinese mainland and Hong Kong.

This builds on current declines in income from card transactions and fees, with regulation triggering fee compression and technology displacing the role of banks in payments. Already between 2015 and 2018, revenue from business customer credit card transactions dropped 33% globally, revenue from consumer debit card transactions dropped nearly 15%, and revenue from credit cards dropped almost 12%.

The report notes that the industry is aware of the challenges posed by new technologies in payments. More than two-thirds (71%) of the banking executives surveyed globally agree that payments are becoming free; nearly three-quarters (73%) believe that most payments are already invisible or will become so over the next 12 months; and even more (78%) said that payments are either already instant or will become instant over the next 12 months.

“The digital transformation underway in payments will have a deep impact on all industry players and banks will have to fundamentally change how they think about their revenue in this area,” Chan says. “The billions of dollars banks previously earned from some of these channels will dry up, so they’ll need to develop new digital business models to compete in this new era. Banks lagging behind risk being relegated to the plumbing of payments.”

In response to these key market challenges, 18% of respondents said the main priority for the bank is to build security into retail payments transactions. Nearly one-quarter (22%) cited artificial intelligence, robotics, machine learning and innovative payments hubs as the key platform technology capabilities they need to adapt their core systems to high-speed and continuous payment flows.