Banks and retailers are being urged to forge strategic partnerships or risk falling behind, as new KPMG research shows businesses scrambling to keep pace with spiralling costs and disruptive tech in the payments landscape.

KPMG International’s latest report, Partnering for Payment Modernization, found 54% of retailers agree payment innovation is crucial to their business, delivering efficiency and operational gains, but nearly half (47%) don’t think their banks understand their payment goals. 

Surveying 500 banks and 500 retailers, KPMG found that while just 45% of businesses currently report their banks offer payment solutions tailored to their needs, that figure is predicted to rise as 60% of banks indicate an increase in payments spending this year.

Retailers, meanwhile, plan to boost their payment modernisation budgets by an average of 2.5%, evidence that there is room for greater coordination between banks, retailers, tech providers and regulators before new systems are introduced.    

The study identified common goals across both sectors, including the replacement of legacy infrastructure and improved fraud prevention. However, steep costs and budget constraints are consistent barriers for those planning to modernise (66% in banking and 69% in retail), with outdated infrastructure and technical debt adding to frustrations.

Arguing that a better ecosystem of partnerships could improve operations as well as the payments experience for customers, KPMG said that the next phase of payments will be shaped by a joint effort between banks, retailers, tech firms, regulators, and consumers.

“Banks and retailers cannot afford to work in isolation or indulge in traditional vendor-customer relationships,” said Isabelle Allen, global head of consumer, retail and leisure at KPMG International. 

“Success should be measured by the way companies access new technologies, reduce costs, share expertise, fill skill gaps, accelerate time to market, and mitigate risks.”

That sentiment is reflected in the capital pouring into payment technologies. KPMG found that banks spent an average of $96.9 million on payment modernisation over the past year, with full-service and corporate banks leading on investment, at $151.1 million and $146.7 million, respectively.

On the retail side, hypermarkets and warehouse clubs report the highest levels of investment due to their high-volume, low-margin models, which rely on fast, efficient checkout processes, though online retailers have also committed major funding to support their digital business models. 

According to KPMG, some of the biggest investments over the next year will be made by those looking to catch up, for instance, department and discount stores are predicted to ramp up payment spending by over 3%, while supermarkets are targeting increases of nearly 4%.

AI-Biometrics and Digital Cash

The report also highlights the disruption that emerging tech like AI and digital currencies are having on traditional payment systems and processes. KMPG argues that in three years, the lion’s share of banks will be using AI-enabled biometrics for secure transactions, with 85% of banks saying they will turn to it for instant risk resolution.

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Likewise, 78% of retail respondents noted the use of behavioural and contextual data to create personalised services, while 71% said that extracting insights from payment data for pricing and liquidity decisions will be the top AI use case over the next three years.

Away from AI, 60% of banks are already upgrading core systems to support programmable money and digital ledgers, with 76% looking to do this over the next three years. KPMG also said it expects the banks to focus more attention on using Central Bank Digital Currencies for atomic settlement for SMEs, alongside efforts to establish their own stablecoin and token platforms.

“With the rise of digital currencies, it is increasingly clear that the future of payments lies in dynamic and value-driven ecosystems and partnerships…where banks play a key orchestration role in providing a variety of services on top of advanced technology and modern payment infrastructure,” said Geoff Rush, global head of banking and capital markets at KPMG.

“Such alliances amongst these sectors should be encouraged by shared goals around operational efficiency, fraud prevention and regulatory compliance. The big question is, who will be the first to tie up some of these strategic partnerships and really differentiate themselves?”