The digital payments industry has been expanding at a swift pace for years, and there are no obvious speed bumps in front of it. Companies like PayPal and Square continue to disrupt the old model, and even the Federal Reserve now plans to develop its own new payment and settlement service that will shake up how money moves. For the banks, all of that could be bad news, and just how bad was detailed in a new report from consultancy Accenture (NYSE:ACN).
In this segment from MarketFoolery, host Chris Hill and senior analyst Jason Moser consider its findings and forecasts, talk about the payments space, discuss why the old guard is getting outmaneuvered, and more.
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This video was recorded on Sept. 16, 2019.
Chris Hill: Accenture has published a report that, on the surface, does not appear to be great news for the banking industry. The headline of the report is Banks Risk Losing $280 Billion in Payments Revenue by 2025. That's somewhere in the neighborhood of 15% of payments revenue. I'm sure the big banks would like to have that $280 billion, but right now, it looks like the beneficiaries are going to be businesses like PayPal and Square.
Jason Moser: Yeah. It's a very big market out there to grab, as far as the market of money moving around the world. We talk about it often. Big banks are big because they've been able to take advantage, for the longest time, of being the only game in town. For a really long time, they've been the ones pulling the strings. To put a little context around that, I remember back in 2001, when I was working at Bank of America as a loan officer -- we would help people with account management and whatnot. It struck me that anytime I ever saw someone coming in with business service needs -- like, they had a business and they needed to be able to accept credit cards -- that was immediately something that we'd refer over to our merchant services side of the business. And it always struck me that the merchant services side of the business was so clunky and cumbersome. And yet, it seemed like the bank made a killing on it because it really was the only game in town. You fast forward to today, and certainly, technology has changed everything for the better.
It's certainly understandable why the big banks are thinking, "Oh, my God, we've got to protect our interests here." It does sound like they are in a little bit of a bind there. You've got the Fed looking to create their own system to disrupt the Automatic Clearing House to make transfers even faster. The big banks are trying to fight the Fed on that. The small banks are in favor because it makes them more competitive. A lot of things that play here because there's a lot of money to be had.
By the same token, one of the things that you see in that report is -- you're talking about this payments industry, and essentially, payments are being whittled down to free. We've talked a lot about that. The payments industry, one of the competitive advantages for a company like Square or PayPal, they're going in there and charging next to nothing for these transfers. You ask yourself, "how can they do that and still be a good business?" Well, ideally, you build an ecosystem, so to speak. You build out more services so that you're not just a payments transaction business. You look at something like Square. That's the importance of a two-sided network, both the buyers and the sellers. They're providing software, hardware, services for their sellers to be able to open up shop. They have the Cash app that is helping buyers do more things with their money from a mobile perspective. They've got Square Capital, which is in the lending side of the equation there. You've got Square dabbling on the brokerage side now, making some early bets with Bitcoin. It's all to say that these smaller, more nimble tech companies like Square and PayPal have a lot of upside there because they're figuring out new ways to do things in a market where very few players held so much of the sway for so long.