By Gareth Vaughan
Trade Me's strong position in the local online, and burgeoning mobile commerce, markets could help protect local banks from the invasion of the likes of Facebook and Google into traditional bank financial intermediary space, Ernst & Young says.
Speaking to interest.co.nz about an E&Y international report entitled Smart Commerce, Banks battle for customers at the frontline of digital retail, Chris de Wit, the local leader of E&Y financial services advisory, said New Zealand has some singular features.
The report describes the evolving digital retail landscape as "Smart Commerce." It says banks regard the main risk posed to them by Smart Commerce as customer intermediation, and the decline in bank relevance to consumer commerce should this occur.
However de Wit said in terms of global behemoths like Facebook and Google, the big New Zealand issue is 'the block in our market" in the form of Trade Me as the primary digital transacting source.
"We know it (Trade Me) as a second hand goods trading area, but it's also a cheap alternative to small organisations when establishing a digital distribution portal," said de Wit.
This was something New Zealand's numerous small and medium sized companies could use.
"Trade Me is not part of that global network. EBay is popular all over the world bar here. That (Trade Me) is a bit of a handbrake on that stuff," said de Wit (pictured).
And for e-commerce specialist PayPal, de Wit said the best way to make head way in New Zealand would be to leverage off a consumer based online loyalty scheme. Within New Zealand de Wit suggested there were technology developers and payments innovators with the potential to present a real threat to banks if they moved "far enough down the value chain." He declined to name specific companies.
Three main challenges
"At Ernst & Young we recognise both that the intermediation fears exhibited in this study are well founded but also that Smart Commerce presents an unusual opportunity for financial services institutions to generate revenue from a profit pool to which they have had little access to date: retail sales promotion."
De Wit said for banks the fact they 'govern" access to customers' transactional accounts means they can control what accesses them. That said, consumer laws, consumer rights and customers' own preferences will ultimately determine what they do.
Keep an eye on RealMe
RealMe, the recently launched government (Department of Internal Affairs and NZ Post) secure online identity verification service, was also a key factor to watch, de Wit said. RealMe provides a single login to multiple government websites with a verified RealMe account working as someone's online identification. As RealMe's website puts it: "With a verified account you’ll be able to officially prove who you are during important online transactions, so you won’t need to front up in person."
"I think there's an issue coming up between the historical view of privacy and the convenience and access to digital information. I just don't know that we're going to be able to logically manage privacy issues in the way that the law says we should today. I don't think that's going to stop people moving into the digital area at all. Those are two things that are going to butt up against each other."
Then with the hosting of digital services being outsourced overseas, the issue of whose laws need to be complied with comes into play.
Speed versus utilisation
Key factors for banks moving into the Smart Commerce era were speed to market and utilisation, de Wit suggested.
"The first one suggests banks acting alone are likely to be more effective. The second one points to more of a utility approach to some of these things. The utility approach will in fact be a situation where more people will use the service and that's likely to be a big barrier for anyone entering this market," he said.
Meanwhile, the E&Y report suggests the real value in Smart Commerce will come from new services that genuinely improve consumers' lives and help merchants meet consumers' needs more efficiently and conveniently.
"Many of these new services are also likely to be disruptive to existing offerings. Our respondents said these disruptive services are likely to bring together location tools, social networking, scanning, mobile and payment technologies in new ways, potentially evolving in a manner that has not yet even been considered," E&Y said.
"Putting aside different views on future Smart Commerce services, all respondents recognised that the creative and insightful use of data will be at the heart of these offerings. Our interviewees also recognised that the creation and ownership of the right data is likely to be a critical differentiator for firms looking to play a part in a Smart Commerce future."
'Banks face serious threats & the risk of being diminished to utility status'
The report also pointed out banks and card processors have at least some concern about the direct revenue impact of their customers' adoption of digital wallets for purchasing.
"The poor relative economics of accepting cards as a funding source makes it likely that wallet providers will strongly encourage direct funding from bank accounts through an Automated Clearing House instead. This is likely to reduce card usage and revenue for bank card issuers," E&Y said.
"The other direct impact cited by a third of interviewees was that some consumers would start to maintain a balance in their digital wallets, which previously would have been held in a current account, thus reducing a vital source of low-cost funding previously considered reliable and stable."
E&Y says to maintain relevance to customers banks and payment providers need to find ways to accommodate the rapid development time scales demanded by Smart Commerce within big organisations conditioned to a slow pace of change. Furthermore they need to think in new ways about how their Smart Commerce services can add value in the broader context of peoples' lives and merchants' businesses, plus address fraud and data security risks.
"For many this will involve relearning the merchant business with which many banks have lost connection. Indeed, merchants are the new value pool for Smart Commerce and are innovating on their own account with services including payment. Larger merchants are already offering proprietary payment services, which intermediate banks and threaten to go further."
"Banks face some serious threats and the risk of gradually being diminished to utility status. However, if they make the right choices, banks could find themselves enjoying a continued and expanding role at the forefront of the Smart Commerce revolution," said E&Y.
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