Expert Contributors :

How to accelerate digital transformation in payments

2019 The Future of Payments

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The Future of Payments Report 2019

Contents

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Introduction

Chapter 1: Implications of digital transformation

Expert view:Vocalink, a Mastercard company

Chapter 2: Regulation vs technology

Expert view: Infosys

Chapter 3: P27, the new era

Chapter 4: Big Tech attack

Expert view: Seeburger

Chapter 5: Cashless society

Expert view:Tieto

Conclusion

Bibliography

About Finextra

The Future of Payments 2019: How to accelerate digital transformation in payments

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The last decade has seen an acceleration in the rate at which banks are being encouraged, or required, to innovate and transform their business. With PSD2 and GDPR now in action, questions are being raised about whether complying with these regulations will result in success for the payments market and whether legacy infrastructures need to be shaken up to remain efficient in this age of real-time payments and open banking in Europe.

Data points referred to throughout this report were gathered by the Finextra Research team during EBAday 2019 in Stockholm, Sweden

Introduction

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The intersection of regulation and technology is also making an impact on intraday liquidity and how players in the financial services are responding, is being examined. However, this is no small feat. Banks are now also having to contend with the likes of Google, Apple, Facebook, Amazon and Alibaba and attempt to deliver API-based, contextual financial services in an open ecosystem, especially when the suite of tools that artificial intelligence offers is being leveraged by these Big Tech giants.

Finextra’s The Future of Payments 2019 report explores how financial institutions are transforming the cash management process to provide newer and more innovative solutions for liquidity, payments and electronic banking. This report also examines how banks are revising core operations following the implementation of regulations across the European Union and discusses open banking initiatives that have blossomed in other parts of the world after learning from the mistakes in the UK.

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01 | Implications of digital transformation

2019 has been the year of digital transformation for legacy-era brick-and-mortar banking giants. Financial institutions have been forced to step up their game in order to keep up with consumer demand and push out several different products and services, leveraging emerging technologies, to provide customers with choice. Today, retail customers can deposit cheques, transfer funds and apply for loans from their mobile devices, signifying that we are in the age of the application.

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Paper, time and cost will increasingly be eliminated, and financial services players will continue to have an increased focus on innovation. In conversation with Gary Lawrence, senior manager of digital transformation at TSB Bank, highlights that it is the combination of digital technology, modern development and delivery practices that has resulted in the advancement of innovation by challengers in the financial sector, who are able to develop new customer experiences at an increasingly rapid pace.

“The bar is now much higher, with customer expectations ever increasing. Traditional banks with legacy systems and, in some cases, an older way of thinking, have found it challenging to match this pace. However, with the advantage of a large existing customer base, market presence and strong capital, combined with the ability to also partner up with fintechs, incumbent banks are starting to rise to the challenge,” Lawrence says.

The end of the comfort zone

Alessandro Greco, leading the digital banking and open banking transformation at Cater Allen Private Bank, part of Santander UK, has a similar attitude and reveals that the “advancement in technology has a clear impact for the financial sector: the end of the comfort zone. It has been a big shake up for a sector with a small appetite for innovation.”

He went on to say that incumbent banks have already conducted work in the digital transformation space after the introduction of internet banking back in the 1990s, but the improvements that were made affected user experience and since then, little has been done to reinvent business models. “For challengers, it is much easier to create a new digital bank from scratch rather than digitising a mature one. The real challenge will be how banks position themselves towards open banking as it requires a fundamental reinvention. An obligation can become an opportunity,” Greco says.

However, if leveraged correctly, technology can be a driver for efficient customer service. Alexander Zwart, head of digital channels and CX at Rabobank states that technology “enables us to deliver better services for our customers; they gain more insight in their financial situation for example via their app on their smartphone.” He goes on to examine that today, organisations that work together are the real winners and will be able to provide easy to integrate solutions for merchants that help them to create a smooth onboarding process for their clients. But how are banks leveraging these technologies? According to Accenture’s 2019 ‘Key Banking Trends to Watch’ report, 1 there are 10 significant market forces that will propel the industry forward and “banks’ responses will net either greater disruption or refreshing bliss-flavored, of course, by market-specific traits.”

1 Accenture, ‘Banking in 2019: 10 key trends to watch’ (2019).

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The crux of McIntyre’s argument is to not underestimate progression in digital transformation, but there is still a lot more to be done in order to serve the consumer and provide a good customer experience. 2019 is merely a drop in the ocean in the evolution of an industry.

1. Unbundling and fragmentation due to open banking

2. Divergence of profit and value to avoid burst bubbles

3. Frequency of AI assistants and a digital advice evolution

4. Growth in the offerings of US community banks

5. Chinese payment providers shaping European markets

6. Attracting a clear share of business

7. Migrating new core banking system alternatives

8. Migrating to the cloud to give customers more value

9. PSD2 fueling payments options and pushing for app-based options

10. Considering becoming a platform and enabling business models without ambiguity

Here’s a breakdown of Accenture’s senior managing director – banking Alan McIntyre’s predictions:

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Welcoming the app for everything

Dr Louise Beaumont explores in conversation with Finextra that digital transformation is a loaded term and one that “encompasses everything from transformation which transcends sector to the far more pedestrian ‘tarmacking of the goat track’. And it’s this latter reality that we see most often.

“Banks simply take a poor process and digitise it – the retail banking product is a perfect example. What we, the consumer, need are live-data-enabled services, not a digitised ‘fire-and-forget’ product which is in all ways pertinent a stolidly 18th century experience.

“And many fintechs, when boiled down to their essence, are simply point-solutions for today’s problems. Companies with ambition and scale, sweep, away not just problems, but points solutions and digitised products too. Just look at Tencent’s WeChat, for example, often described as ‘the app for everything’.

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Expert view:

Mastercard

Executive vice president, strategy & operations excellence

Liz Oakes

Liz Oakes, Executive vice president, strategy & operations excellence at Mastercard, on ‘Implications of digital transformation: How has the advancement in technology affected the traditional financial sector?

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Back in the 1990s, who could have predicted the impact of technology on the financial sector – a sector that had largely remained unchanged for decades?

From the introduction of ATMs, the arrival of the internet mobile banking and now immense data management capabilities, the traditional financial sector is running just to keep up. The result has been a revolution that has seen huge changes in how we bank with a widespread shift towards online banking, the use of new apps, a movement to fintechs and digital players – all above and beyond the traditional physical bank branches.

Now new regulation and legislation are driving even more change in a sector that was previously closed but is now becoming more open - thanks to PSD2 and open banking across Europe and the resulting ripples created as it captures the imagination of nations globally. But perhaps the biggest driver has been the rapid transformation of consumer behaviours.

Individuals and businesses, used to frictionless services delivered through smartphones and in other sectors, are expecting their banking and financial services to echo these experiences. Instant payments are no longer a ‘nice to have’ and are now a staple of modern-day banking. Globally however, certain markets are still suffering from a reliance on traditional batch payment methods and payment solutions such as paper or giro cheques that do not support the modern-day need for speedy, efficient and often online or mobile payments demanded by both consumers and business.

This also inhibits the development of new, innovative add-on products and services. For example, the US has now embarked on its own faster payments journey that is expected to herald a wave of innovation and opportunities for fintechs and digital disrupters thanks to the introduction of The Clearing House’s Real-Time Payment (RTP) rail with several major banks now live. This compares to the UK where faster payments have been a mainstay of the

payment landscape for over ten years and has allowed recent open banking legislation to thrive with 23 regulated fintech innovators already delivering market-ready products and solutions for consumers and businesses.

Challenges exist for larger financial institutions who have struggled to digitise their business end to end. However, identifying where the sweet spots and opportunities lie for the financial sector means taking risks – these are new unchartered waters. For well-capitalised institutions, this may not be a problem, but it takes them out of their comfort area.

New agile fintechs, challenger banks and neobanks have worked hard to identify opportunities that exist – mainly because they are better positioned to be nimble and test products and solutions, learn quickly and have the investment and backing to focus on customer experience as a driver of new customer acquisition.

Brands such as award-winning Starling Bank and Monzo have revolutionised modern banking through fresh, innovative approaches to customer experience. Starling Bank is expecting to hit one million customers this year through their app-only approach which hosts smart money management tools designed to improve customers’ lives. Starling says their offer is built around detailed consumer behaviour insights that will always drive how they create meaningful products in the future. With the advancement of the Internet of Things, artificial intelligence and the introduction of more regulation, financial institutions will soon be forced to further adapt their offerings and business models. Developing new and managing existing channels for a wider demographic are going to be vital. From wearable devices to personal assistants such as Alexa and Siri, the future is exciting and complex for any financial institution needing to get ahead of the game and remain competitive. Some of the major opportunities include:

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Changing ways of working: The world is seeing a change in how people work, and subsequently how they want to get paid. Freelancers, contractors and new types of employees are driving business, governments and society to rethink how the traditional ways of payment must change - such as weekly or monthly pay checks.

The rise of this gig economy is facilitated by technology platforms and the introduction of new, innovative payment solutions designed specifically to meet gig workers’ needs. However, only those financial institutions at the forefront that are adopting these pioneering payment products will be able to support gig workers in their desire to quickly and simply access their funds. And it’s no short-term trend.

Global disbursement volumes in the gig economy are predicted to grow at an average rate of 17% year-on-year to $298 billion by 2023 according to Kaiser Associates and Mastercard in their report The Global Gig Economy (May 2019).

Innovative solutions already in play include real-time payment rails that can speed up payroll for freelancers by 1-2 days. Taking this one step further are card-based dispersal solutions currently being used by Uber (Instant Pay) and Lyft (Express Pay) for over half their gig freelancers in the US. Providing electronic methods to shift these payments from cash, also enable gig workers access to credit scoring and reduce cost of lending.

Channels and devices: Ever more sophisticated tech-driven devices are being created to improve our day-to-day lives such as personal assistants and watches that incorporate personal planners. This digital transformation will also impact financial institutions who need to factor in channels and devices to product planning.

For example, as Alexa or Siri evolve to investigate financial products, then tailored and bespoke products must have built-in flexibility to suit a range of different circumstances. These could be loans that incorporate flexible payback periods, to products underpinned by open banking that become the #1 choice of personal assistants and wearable devices. It’s no longer a case of creating mass market

products that appeal to thousands but products that can be tailored to suit individuals.

In the UK, open banking is changing the way consumers and small businesses manage their money. Already there are 118 regulated providers made up of 78 third party providers and 40 account providers, with 23 regulated entities that have at least one proposition live with customers

From brands helping small businesses such as Coconut and Funding Options to consumer facing brands such as Digital MoneyBox and EcoSpend, these innovative fintechs are positioning themselves to become the new consumer or business interface while banks and financial institutions potentially disappear into the background. As momentum gains and consumers and businesses appreciate the value of open banking driven products, this could herald the biggest revolution in the financial sector for decades.

Mobile pay/digital wallets: While using smartphones and contactless in stores is now commonplace, instore mobile shopping is less common, as are ways to pay without interacting with servers or shop assistants. However, that’s changing as new innovations are enabling creative ways to pay - for example, in some places diners can now place orders from their phone or tablet and pay their bill from their seat without waiting for a server. This is a sector destined for rapid innovation and transformational growth driven by those financial institutions who can imagine and shape behaviours of the future.

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Security: Paramount to the success of the digital revolution in the banking sector is security. With the widespread sharing of data comes the responsibility to protect and safeguard consumers and businesses. There’s no doubt that payments-related fraud has gained ground over the past few years and open banking introduces even more risks from consumer education standpoint.

The good news is that state-of-the-art solutions are proving their worth by identifying and preventing attempted fraud, and in providing greater security and access to redress for users of open banking products. Adopting the highest standards in security systems is a prerequisite for financial institutions if they are to protect their customers and their brands. Failure to do so could result in a brand going out of business virtually overnight due to loss of consumer trust.

Existing players have the benefit of customer engagement, where often the only driver to change is a terrible experience. To get someone to move requires an incentive, and it’s those incentives that will define the shift. Challenger banks and neobanks are well placed to capitalise on the opportunities because of their agile, technology-first approaches with a strong focus on consumer insight and behaviour.

However, new fintechs backed by investors with big pockets are equally well placed to compete in the highly evolving financial sector and well capitalised incumbents with foresight and an appetite for risk are also joining the fight – either alone or in partnership with fintechs. The next few years will certainly be interesting as the competition continues to heat up in a market where the only consistent and guaranteed factor is on-going digital disruption.

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After years of speculation and months of preparation, PSD2 came into effect in 2019 across the European continent. While the impact was not immediate, the effects have been drip-fed into the banking industry, bringing about increased competition, greater transparency and security across the payments landscape.

02 | Regulation vs technology

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As well as including non-EEA currencies for intra-EEA payments, the regulation set minimum standards for Strong Customer Authentication (SCA) and allowing third party providers to enter the market, paving the way for open banking. The former initiative ensures that adequate security protocols are implemented in order to authenticate clients when using online products and services, which will go live in September 2019.

However, open banking continues to be discussed far and wide and this new model will allow new entrants to enter the market to provide value added services to corporate banks, as long as they provide open access to accounts for newer entrants. While real-time payments and APIs capture the attention of consumers who use apps like Uber, Deliveroo or Airbnb, the experience for corporate businesses will be different.

An enabler for innovation

Despite PSD2 being less disruptive than anticipated, corporate banks should realise the potential of responding to the standard and use it as an enabler for innovation. In conversation with Finextra, Sungmahn Seo, head of EMEA Payments and Solutions for JP Morgan unequivocally points out that “PSD2 is spurring innovation and removing barrier to entry in the payments sector. The first phase was very much focused on PSD2 compliance, but now we’re in a place where technologically astute payment providers – including banks – can innovate around the user experience and disrupt traditional models.”

While the UK has been a leader in open banking, similar schemes are popping up all over the world, mimicking what has been done well in the past and learning from previous mistakes. Seo adds that “banks are leveraging this new connectivity to offer safer digital payment options (e.g. pay by bank) and multibank solutions; but also, in the US where a more organic open banking movement is taking place, and banks are using open banking as a tool and enhancers to solve some of their client’s longstanding pain points such as users having to log in to multiple bank and card websites to get a consolidated view of their spend.”

However, Lawrence claims that “PSD2 has the potential to increase friction within the customer experience through SCA – with the need to authenticate customers at various stages that have not historically been required. Many companies are thinking creatively about the technology and are finding ways to even improve the experience. This includes the use of behavioural biometrics acting as a security factor in the background or authenticated calling to smoothly and securely transition from digital to telephony channels. This has the added advantage of increasing bank security, and customer perception to build trust.”

SCA, the underminer

As Lawrence points out, SCA could undermine the progress that banks have made to ensure that their customers are more financially aware and the counterproductive measures that banks release could threaten the consumer experience and topple the benefits of open banking. Customers are now accustomed to using fintech applications, because they allow for increased visibility over their finances, but SCA will disrupt these applications and customers will lose the control over their money that open banking promised them, resulting in friction.

“SCA will make or break internet businesses. The urgency to get ready for it cannot be overstated”

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2 EY, ‘The revised Payment Services Directive (PSD2): What you need to know’ (2018).

Lawrence continues: “I believe open banking is yet to be proven in the market, and still some clarity is required around the regulation itself. However, there are so many use cases with this, from account aggregation to strategic partnerships with third parties, that the potential could be huge for the industry.”

A new study conducted by Stripe and 451 Research forecasting revealed that Europe stands to lose €57 billion in economic activity in the first 12 months after SCA takes effect, according to 500 qualified payments professionals at online businesses and 1000 consumers in the UK, France, Germany, the Netherlands and Spain.

Preparedness also remains low, with only 40% of businesses aware of SCA saying that they feel ready to address its requirements. Most businesses are now racing against the clock to become compliant, with 44% expecting to be ready on the exact day SCA takes effect, which is September 14th.

Guillaume Princen, head of continental Europe at Stripe, said at the time that “SCA will make or break internet businesses. The urgency to get ready for it cannot be overstated. We’re building infrastructure to insulate internet businesses from this kind of regulatory complexity. Our ambition is to accelerate online commerce and empower innovators to easily experiment with new internet business models.”

Source: EY 2

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3 McKinsey, ‘PSD2: Taking advantage of open-banking disruption’ (2018).

Source: McKinsey 3

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Expert view:

Infosys Finacle

Chief business officer and global head

Sanat Rao

Sanat Rao, chief business officer and global head – Infosys Finacle, Infosys on ‘Regulation vs. technology: What impact do market forces have on intraday liquidity and how are banks responding?’

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The move towards real-time payments has significantly mitigated the systemic inadequacies first exposed during the financial crisis of 2008. At the time, a large part of payment transaction processing was batched, which allowed banks to delay their payment and settlement obligations and limit counterparty risk. Periodic reconciliation permitted banks to use prudential assets for intraday liquidity as well as for broader liquidity such as protection depositors.

Enter real-time payments, and banks no longer have the leeway. The market drive for real-time payments means that banks cannot delay outgoing payments to manage intra-day liquidity imbalances. Furthermore, the extension of settlement service windows compounds the growing pressure on banks. Bank of England’s RTGS renewal program has proposed settlement support and capability for 22 operating hours a day. The expansion of intraday settlement window amounts to a corresponding increase in pressure on banks to manage their intraday liquidity efficiently. Intraday liquidity has become a distinct risk and prudential assets can no longer do “double duty”.

Open Banking and dwindling predictability

Traditionally, expected payment volumes and default payments have helped banks predict their intraday liquidity requirements and calculate their maximum net debit accordingly. New open banking realities that allow authorized third parties to initiate transactions are now causing a huge shift as significant volumes of transactions move away from banks to payment initiation service providers (PISPs). This reduces the ability of banks to predict their intraday liquidity requirements.

What’s more, the pressure on intraday liquidity not just stems from the inability of banks to predict and manage their own liquidity as efficiently as before. Large corporates are adopting real-time payments and digital solutions that allow them to monitor their liquidity positions. Traditionally, banks permitted uncollateralised credit lines to their corporate customers. With real-time

payments often initiated by third-party applications, the likelihood of a corporate shock affecting the intraday liquidity of a bank is also becoming harder to predict and manage.

So how do banks manage their intraday liquidity in a world of real-time payments and open banking? The simple answer would be to increase intraday liquidity limits. Following the recessionary crisis of 2008, several controls to ensure higher capital requirements have been put in place. However, is it the only solution to ensure sufficient liquidity? Perhaps not. In fact, significant opportunity costs make it a rather expensive option.

The rise of real-time payments demands that banks adopt equally swift and efficient ways of managing their intraday liquidity to support the market requirements. If rapid technological development has introduced new challenges, it has also equipped banks with the tools and techniques to address these challenges. For instance, the use of the application programming interface (API) can help banks source real-time information about transactions across multiple banking relationships of a customer. These APIs could be linked to a risk cockpit to allow liquidity oversight and prompt alerts when certain liquidity thresholds are reached. The roadmap of Bank of England’s RTGS program proposes the use of APIs to help manage intraday liquidity.

It is common knowledge that many of the most profitable open banking opportunities for banks are in the corporate space. Not surprisingly, several banks have

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already introduced digital corporate cash management solutions for their corporate clients. These solutions allow corporates to consolidate their cash positions held at multiple banks into a single screen using real-time APIs, irrespective of which accounts, securities or jurisdictions the cash is held in. By consolidating all these positions in one place, corporates can manage their liquidity through “pay on behalf of” processing. Modern liquidity management solutions allow corporates to consolidate their assets into a single liquidity position to support payments in multiple jurisdictions, instead of a fragmented view of the movement of money across banking relationships.

The benefits of real-time liquidity management solutions for corporate enterprises have been widely understood and recognised. For banks, these solutions help reduce their exposure to intraday liquidity risk. Firstly, real-time liquidity management at corporates reduces the risk transferred to the banks’ books on account of their corporate customers.

Secondly, digital solutions and new account management constructs allow banks to monitor the transactions and liquidity positions of their large corporate clients. This greater visibility can help banks reduce their intraday liquidity risks by allowing them to place payment limits if required. However, regulatory mandates such as PSD2 restrict the control and ability of banks to regulate third-party providers. Planning intraday liquidity for the potentially sizeable volume of payments initiated by PISPs will be a challenge for banks. The slow adoption of open banking then is an advantage for banks. Banks should develop their open banking risk models while the volumes are still low.

Real-time payments and open banking offer many opportunities to transform liquidity management. However, they also pose new challenges. One of them is the need for real-time management of intraday liquidity to keep pace with the market demand for real-time payments. These new challenges demand collaboration among market participants and regulators. It is not enough for banks to be aware of their own Intraday Liquidity but also of the Intraday

Liquidity Risk of the other participants in the payment settlement system. If one counterparty in an RTGS system fails, the risk is that contagion may lead to further failures. Banks must lose no time in understanding and modelling the risks associated with the new payments market, and begin investing in the right technology to manage those risks.

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03 | P27, the new era

At EBAday 2019, discussions were centred around what is expected from fully integrated, open-access infrastructures for domestic and cross-border payments and how regional initiatives fit into the pan-European context, while keeping new schemes like P27 in mind. James Barclays, executive director at JPMorgan, explored the importance of revisiting infrastructure to evaluate cost and deciphering where scale fits in the process by describing a trip to Universal Studios in Orlando, Florida.

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Barclays likened the journey from the car park into the resort to the payments industry: while his children run ahead in excitement, they cannot enter the theme park without their parents. He said this is like PSD2, as third parties have to register and needing a ticket to enter, is alike access solutions. “When the doors open, you discover you’re in Epcot. My mother in law wanted to go on the Ellen DeGeneres ride, which seemed like it was put up by the dinosaurs, equivalent to an ACH transaction which takes 2-3 days.

“Me and my wife liked the Frozen attraction because it had great customer experience. However, we soon realised that it was the same as the Vikings ride that had been in the same place 10 years ago. This is similar to RTGS solutions, as the industry is looking to renew the system, but process payments in the same way.

“The kids were smarter. They went straight to the race track, where the real user experience is and were able to design their own car and go from 0 to 100 in 2.4 seconds. But it was built on the same set of rails as the other rides and that’s why we let our kids go on that ride. We know it will be secure, robust and resilient. We want to know our payments are as safe as our kids when processed.”

Focusing on the benefits of national vs. regional variance, Barclays moved on to his experience on the Harry Potter-themed ride which got stuck halfway, but because contingency measures had been put in place to ensure security, the attraction was up and running in no time. “This is what customers want to see from infrastructure: cost, security and resilience against the excitement of customer experience.”

Back to serving the customer

Tino Kam, head of transaction banking solutions at Nordea, agreed and said that while payment infrastructure may not be the most interesting subject for corporates, in the end, serving the customer is most important. “The most important thing in the infrastructure discussion is ensuring it is cost-effective, but from a product perspective, we need to see where we can support our customers and do it as efficiently as possible.”

However, a problem persists where customers believe that they are a direct customer of the schemes they are dealing with. As Liz Oakes, Executive Vice President, Strategy & Operations Excellence at Mastercard explained, it is “all about choice, access and simplicity. It is all very well to turn up to Universal if you speak English, but if you can’t read the signs and don’t know what Diagon Alley is because you haven’t read the books, it’s confusing.”

She continued to say that there are hundreds of variants of what financial institutions are doing and can do, which is insignificant when considering the banking infrastructure that has been set up because every customer has a unique banking experience. “The sheer complexity of doing business is one thing, but what we’ve done and how we move money is absolutely amazing. However, we wouldn’t construct a global banking infrastructure like it is now if we were starting from scratch.

While the RTGS mad rush continues, and instant payments and PSD2 are enabling this renewal, the core issues here revolve around speed, access and data. “If we don’t harmonise, we’re missing the trick,” Oakes said.

Room for innovation

Anders Olofsson, Finastra’s head of payments echoed Oakes and believes that there is no urgency for a global unification of standards. “It is important to sign principles to drive innovation, but it doesn’t need to be unified. Open Banking is proving there is room for innovation.” Olofsson added that he sees regulation has a driver

“Customers want cool stuff but don’t understand that it might not be legal”

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for unification, but the elephant in the room is if the financial services industry doesn’t act, others will from outside of the sector.

Providing insight into P27, CEO Lard Sjogren suggested that despite failed attempts in the past, this time they’ll get it right because the Nordic region is largely export driven and clients have a different mindset today. “They used to accept what they were given and didn’t know what was happening outside of their country. We need to rethink how we do this as domestic is not the way to approach this.”

To consider all nine clearing platforms in the Nordics, Sjogren advised that it is time to stop using the standards that have taken over 40 years to develop and achieve scale with simplification. Oakes pointed out that there needs to be a balance between regulation and customer experience: “customers want cool stuff but don’t understand that it might not be legal,” she went on to explain how users start to behave how they do in their daily lives and start to use emojis when making payments, which could be problematic. Serving the customer means serving all segments of society and addressing the needs of the vulnerable, not just who financial institutions see as profitable customers.

Sjogren added that with P27, they are in a different starting point than others that are also building payment platforms. “We are not building a new rail next to existing ones, we are building a new platform. To look at transaction monitoring, for examples, five billion transactions are processed in one system, so it is easy to find mule accounts in one, than in nine different platforms. I don’t know if that’s innovation, but it solves a problem we have today.”

“We are not building a new rail next to existing ones, we are building a new platform. To look at transaction monitoring, for examples, five billion transactions are processed in one system, so it is easy to find mule accounts in one, than in nine different platforms. I don’t know if that’s innovation, but it solves a problem we have today.”

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04 | Big Tech attack

The Apple credit card launch in the US is a gamechanger. The first joint venture between Goldman Sachs, Mastercard and Apple will threaten traditional financial services as we know it today, as the latter organisation prides itself on its customer experience. Are instant payments and open banking a match made in heaven? The answer was a resounding yes at EBAday 2019 with Gene Neyer, member of the interim board for the US Faster Payments Council, leading the session stating that “open banking is just starting, which is different to the status of instant payments.

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“We are the sandbox stage and are trying it out, although some countries like India are quite far along in the process. Progression has been made in concentrated markets; we’ve proven it can be done in the UK, but to scale it to 10,000 banks or fintechs, is a different proposition.” Neyer questioned the panelists if instant payments supported by open banking could overtake cards, to which Hakan Eroglu, global open banking expert lead at Accenture, provided a comprehensive summary, detailing that it could be ambitious for financial institutions to cover entire asset classes in different service parameters.

Despite open banking initiatives having only been implemented recently in the UK, Australia is seemingly a step ahead and are moving forward with open data, exposing account and product information - but there continues to be a gap to be filled, Eroglu said and explained that although the European market is regulated, it is important to remember that “the most value is created by those who can make the most of data.”

Looking at Latin America and Asia, the focus in these regions is on infrastructure, but more needs to be done in relation to TPP licensing and registration processing, for example. Eroglu added that banks need a common identity structure so that they are not impacted by SCA, a collaborative approach so that traditional lenders can compete with Big Tech.

Fragmentation of banks

CEO of equensWorldline Michael Steinbach spoke more on the fragmentation of banks, which has occurred as a result of changing strategies and needs. “The core question must ask how diverse the roadmap is, which leads into big fragmentation again in Europe. Different API services, different

API standards and different instant payment solutions is not what Europe needs and will not return payments to the control of the banks.”

Steinbach went on to highlight how the European market is in a “squeeze” and could soon be dominated by the US and China. He posited that if a European scheme existed, banks would have 300 million people in their pocket, which would trigger acceptance of the scheme across the world. “This is the last chance to regain control. Don’t stop national schemes but stop being egoistic and ensure you’re turning to collaboration.”

One global standard

Returning to the topic of wider standards, Seo said that “one global scheme would be ideal, but we’re never going to get there. In any case, it isn’t a pre-requisite for open banking to succeed. Whether there’s one standard or a few, the European market is strategic, and we will continue to play a role in open banking.”

Harry Rymert, product manager domestic and real time payments, SEB added that the terminology surrounding open banking needs to be considered, because it is “not easy for customers to understand because it implies that the bank is open in any channel, which is what customers expect from us. Platform banking is what it’s really all about, but how do you ensure we as banks have our services in different places? The hurdle is standardisation. We are on our way there, but if banks don’t do it, someone else will do it.”

“JPMorganEats or UberPay, which is more likely? ”

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Neyer then asked the compelling question: “JPMorganEats or UberPay, which is more likely?” Seo took this question on and explored how there is a discussion around Big Tech companies entering the payments space “and they very well may do. Banks can only prepare for it.” He went on to say that there is a high degree of regulatory scrutiny that persists with being in the banking sector, which he sees as a burden that ecommerce organisations would not want to get into.

“As long as we continue to perform, we won’t see it happen soon, but it could happen in niches like P2P. But in terms of core payments, I don’t see it happening.

The pyramid of success in the open future

In conversation with Dr. Louise Beaumont, she explains that in her view, there are five characteristics which indicate whether a company will succeed in the open future, which goes far beyond Open Banking. “I visualise these characteristics as five layers in a pyramid, at the top of which I place Brand. The reason I start with Brand is to steer us away from the flawed thinking that says the open future is all about compliance and technology. It isn’t. Brand comes first.”

She goes on to use Amazon as an example of a brand that has succeeded in the open future: “It doesn’t seem to matter what you put the word Amazon in front of – Amazon Balance, Amazon Pay, Amazon Key, Amazon Prime, Amazon Fashion – it makes sense and there is an implicit positive association around that because when things go well you expect it, and when things go badly they fix it. Try that with Old School brands and you will see what I mean. Banks tend to be heritage brands, with proven resilience only within their chosen, limited product-centric heartland where brand functions as a strait jacket”.

The next layer of the pyramid is Engagement. Beaumont says: “It’s not just the very competent update messaging that wraps around anything you might buy from them. It’s also that they’ve invested heavily in the Echo technology, where you literally talk to it and it listens to you – and vice versa.” She adds that in the future, consumers will routinely use this technology like Amazon Echo and Alexa as an interface in their life: We are living in a voice-first world.

“One step down the pyramid from engagement, is Service and the key concepts here are: services you never knew you wanted; services you never asked for; services you now can’t live without. Services which are hyper-personalised, predictive and pre-emptive, fuelled by the live-data stream that you authorise - and dead without it.

“The fourth layer of the pyramid is Ecosystem. This is the world in which everyone must find their place and big players need to understand that they cannot own or control the ecosystem within which they operate. That’s a myth. The choices banks face in an ecosystem future are to be positive contributors to it – to collaborate effectively with other players to design the services that will replace today’s mass-market product-push, or to reject collaboration and try to dominate the ecosystem with the aim of preserving the status quo.

“Banks that try that will either be voluntarily disintermediated by putting a fintech front end on their process (adding cost for incremental improvement which leaves the underlying old economy business model intact), or forcibly disintermediated by a competitor with a better customer experience, ending up as a data donor forced to hand over the customer’s data to a competitor and get nothing in return.

“In reality, these things will happen simultaneously. The critical consideration in the open future is that the Tech Titans are much more experienced ecosystem players than banks – and more attractive partners, investors and exits for fintechs. The other alternative, of course, is ‘Infrastructure Redux’ where the banks hold the money and move the money, with competition being to have the best/fastest/cheapest rails. The top prize? To become Amazon’s white-labelled supplier…”

Beaumont concludes by saying that the final underpinning level of the pyramid is Data. Big Tech companies can find the data, augment the data, torture that data, balance data science with data artistry, are willing to listen to what these insights tell them and are prepared to act on what they hear. “These are the qualities that will be required to be a truly successful business in the open future. It is a future in which banks must find their place – before others find it for them.”

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Expert view:

SEEBURGER

SVP, global business development

Ulf Persson

Ulf Persson, SVP, global business development, SEEBURGER on ‘Creating an agile payment ecosystem today or tomorrow’

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In today’s on-demand world and digital economy, we expect to be able to spend, move and receive money instantly; real-time payments, also known as ‘faster payments’ or ‘instant payments’, are gaining momentum globally.

Many financial institutions have an infrastructure and a good customer base, but they are typically burdened by legacy systems. Many payments solutions are outdated, and interfaces are not intuitive. Upgrading the payment infrastructure are at the top of the list for many financial services organisations as a key digital relationship strategy with customers and business partners.

The future of payments will require an agile, interconnected, and open architecture focused solution to meet the continuous demands placed on banks through fintech innovation. One of the main challenges, or to be more exact, a key opportunity, is for financial institutions to be able to do ‘new’ and at the same time ‘manage the old, the more traditional.’

For example being able to achieve faster payments, and at the same time support traditional ways of managing payments. Typically, this requires innovative use of technology. More importantly, taking hold of this opportunity will require a change in mindset and oversight to ensure that right skills are used at the right place, at the right time. A combination of people, processes, technology, and governance, will help financial institutions to move forward faster towards a more efficient way of managing payments.

Some key areas to focus on for enhancing payment capabilities in 2019 onwards for financial services organisations are:

Leveraging real-time data capabilities and a cashless society: This continues to be a major focus for open banking and core banking renewal. However, it is not simply about updating the technology payment structures to enable real-time transfers. There is a new focus on the cashless society. At one time, six out of ten transactions were cash, now it’s three in ten. Various research shows in just another decade, it could be as low as one in ten. Technology advancement, efficiency, high levels of security, lower cost, customer experience - there are plenty of reasons why consumer and business uptake of digital payments is on the rise.

Regulations and compliance requirements: Open banking, such as PSD2, ISO20022 and other similar compliance and regulative banking initiatives, seeks to level the playing field among countries and among payment service providers, putting consumers in a better position, as they will benefit from increased competition. It also hopes to normalise new payment methods like online and mobile payments.

With the right vision and implementation strategy, the transformation forced by PSD2 can help traditional banks and other financial institutions become digital innovators and disruptors, ensuring they will not only remain relevant, but take the lead in the new digital payments value chain.

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With the right vision and implementation strategy, the transformation forced by PSD2 can help traditional banks and other financial institutions become digital innovators and disruptors, ensuring they will not only remain relevant, but take the lead in the new digital payments value chain.

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From effective role management for monitoring and end-to-end visibility to speeding up onboarding and implementing ISO2022, ensure your solution is well integrated. New protocols, new file formats, transformation requirements and backend integration, secure file management – all of these requirements must be addressed.

Ongoing global open banking initiatives presents a heap of new opportunities to increase revenue, capture customer ownership and progress toward an extended environment focused on the everyday bank. The key is for banks and financial organisations to leverage APIs and their existing customer relationships to develop a customer value system created around their own banking portals. This is also where fintech plays an important role.

Take a page from Facebook and Instagram’s open banking strategy:APIs used by Facebook and Instagram are an example of open banking, and are typically delivered by banks and consumed by FinTech organisations, through secure and tightly controlled interactions. They

are used to build apps for end users for purposes such as account aggregation or personal financial management. Access to these APIs must be managed, including using open API standards when these are defined or mandated.

In general, management of internal and external API’s are very valuable to any payments platforms because they provide efficiency to the overall service development and to the end user, the consumer. First and foremost, APIs enables any service provider to significantly decrease costs and time, which is crucial given the “always on” world we live in.

KYC and AML are opportunities – The 4th AML Directive, FINCEN Financial Rule, GDPR and eIDAS is a challenge to enforce with legacy systems and can hinder the customer experience; however, non-compliance can lead to hefty fines. KYC and AML integration is necessary to efficiently meet compliance regulations, but these requirements also provide an opportunity for financial services organisations to digitally onboard new customers while reducing risk exposure to fines for non-compliance.

Strategic vendor partnerships for IT infrastructure – Strategic alliances for IT infrastructure are shaping the world’s leading banks facilitating a better customer experience, reducing costs involved in supporting duplicate technologies and inefficient legacy systems that hinder fast execution.

Payments journey using an agile, scalable and secure Business Integration Platform approach

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05 | Cashless society

The message was clear at EBAday 2019 in Stockholm: Sweden does not accept cash. While the ABBA Museum may prefer card or mobile payments, Frantz Teissedre, head of interbank relationships at Société Générale, believed that a purely cashless society across Europe may be ambitious. The introduction of Instant Payments, Request to Pay and mobile payments has led to a seismic increase in the use of debit cards in Europe, but two billion cheques are still in circulation and each year and there is a 10% increase in the number of banknotes being issued.

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“Cash is not only a means of payment, it is a reserve of value. A third of European bank notes are in circulation within the Eurozone, a third are in circulation in other regions, but the final third has disappeared,” Teissedre explained that some citizens continue to keep cash at home. Teissedre added that cash also promotes social inclusion and allows those without the means to access technology to manage their money. On the other hand, cash also permits citizens to “pay less” because there is no moral judgement involved in the use of physical currency.

“In an economy where there is high unemployment and high fiscal pressure, people use cash for tax evasion as they don’t want to pay VAT. When a major payment system fails, the only thing that remains is cash and coins. Cash is freedom in a society in which we are hesitating to give data and don’t want to be traced. A purely cashless society won’t work because people don’t change their habits overnight. We need all parts of the ecosystem to be convinced, like in Sweden and move together,” Teissedre said. Anna-Lena Wretman, CEO of Swish, put forward the Swedish perspective and explored the drivers that have encouraged the Nordic country to become a near-cashless society.

Driving modern payments

Wretman asserted that while new technology and regulation has driven usage of modern payment methods, to return to the subject of tax, Sweden has tackled this problem with a cash register law, where every shop has a black box from the tax authority. In addition to this, despite Swish being lauded as a changemaker in Sweden, she pointed out that the platform has only transformed peer-to-peer payments, and card remains the most efficient and preferred form of payment when making purchases.

Picking up on points made on inclusion, Henrik Bergman, director financial infrastructure at the Swedish Banking Association, believed that the significance in innovative forms of payment lies in educating all users how to use Swish, for example. Banks are pressured into implementing new legislation to ensure that

cash remains in circulation, but Bergman asked: “who is going to use it? Customers aren’t and merchants don’t want to handle it.” We need to do it together, banks alone cannot manage it.”

Charlotta Wark, vice president, head of banking Sweden at CGI continued this conversation and stated that there is a danger in not following “society or population driven change. If citizens of one country have decided that one way [of payment] is easier and [banks] don’t provide the means of doing it. Guess what? Facebook will do it for you. Then you’re in a situation where you’re no longer in control. The tech giants would like to provide these services free of charge because they see this as increasing the benefits of their platform in general. We don’t have a choice, we have to provide the digital infrastructure citizens are asking for.”

The future of cash

When discussing the future of cash, it is important to consider whether regulation is becoming a hindrance for the US and an enabler in the UK and how financial institutions interact with Big Tech companies should change. The future of cash has continued to be a hot topic of discussion in the UK with cash use declining rapidly in most of the developed world in favour of digital payments. It is a live topic in the US too, with the states of New Jersey and Philadelphia having introduced legislation to ban shops from not taking cash.

The fintech revolution has resulted in digital payments dominating, because of their convenience and lack of friction. This is causing a rapid decline in the use of cash, but the problem is that digital payments don’t yet work for everyone, raising the question of how we can include everybody as society uses less cash.

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Expert view:

Tieto

Head of business development and product management, payment solutions

Jarkko Turunen

Jarkko Turunen, head of business development and product management, payment solutions, Tieto on ‘The future of cash and fintech domination in Europe’

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Has the fintech revolution resulted in the domination of digital payments?

It’s more an evolution than a revolution: a steady move from cash to cashless payments, powered not only by fintech but also by banks, card organisations and public authorities. Today, time to market for services is faster than ever before. New customer journeys can be launched in weeks using Open APIs. Market drivers have shifted too. In the past, national infrastructure and big card schemes initiated change, whereas today consumers are the catalyst.

Over the past few years card payments have grown worldwide, as has e-commerce. With the rise of mobile acting as a key enabler for innovation in this payments landscape. If we take a look at Kenya, where MPesa offers mobile payment and financing services, the infrastructure triggered the move to mobile payments.

While in Sweden, one of the most downloaded apps is Swish, the country-level mobile payment system. These card and country-level processors have contributed greatly to the gradual move toward a cashless society, but digital payments’ popularity began before the fintech evolution. Now it’s exploding, gaining power and speed with the introduction of instant payments and open banking.

Why is the future of cash such a hot topic in Europe at the moment?

First of all, there is a cultural change happening. Countries with a large proportion of young people are seeing the biggest reduction in the use of cash. For example, Sweden with its Swish or China where Alipay is highly popular in large cities and among young adults. But not everywhere is changing at the same rate. Rural areas in China still use cash and in societies where cash has strong roots, like Germany, consumers prefer to use hundreds of cash bills to pay for goods.

By and large, the general public still mistrusts digital payments and digitalisation in general. With privacy issues being a big concern. However, there are examples

of market regulators pushing away from cash. In India in 2016, the government announced demonetisation of several banknotes, making them invalid. From that day, people rapidly moved over to mobile payments. Additionally, cash operations are costly with huge legacy infrastructures and many stakeholders for cash processing.

When more payments are made electronically these costs become difficult to justify, leading to discussions amongst stakeholders.

Is a fully cashless society and economy a realistic policy choice?

From a technological point of view it is a realistic choice, but in reality it’s not that simple. What is clear is that cash is no longer king. Despite this dwindling importance of cash, the likelihood that we will end up being fully cashless is minimal, at least in the near future.

The speed of change really depends on society, country, culture and history. Countries with a relatively young population will make the move earlier than others. In Sweden, where the government is pushing e-Cash it could happen within the next decade. Young people find making payments with mobile devices natural. They would rather go without something than carry cash. We see this trend in Asia and a large number of African countries too. High adoption of electronic payments brings its own challenges though. In some areas of Finland with low population density, it is costly to keep cash for the few transactions where people hand over actual money.

Another angle for policy makes to consider is grey economics. Most governments are in favour of moving away from cash as it enables better tax collection and protects society from crime.

What will this mean for financial inclusion and the number of people who are unbanked?

Many countries have solutions targeting people who don’t have bank accounts. It’s a key task for governments to enable central payment infrastructure, deliver banking services, monitor payments and increase

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security. In the Maldives, the Monetary Authority, which runs the country-level payments project has decided to issue a simple payment account to everyone in the country - both private people and companies. A mobile payment application is attached to the account, enabling incoming and outgoing digital payments.

These government issued accounts can connect to bank accounts, therefore integrating the new solution with the existing payment ecosystem. In Kenya M-Pesa, the popular mobile money transfer app, and other similar services were often based on closed networks, leading to a fragmented ecosystem, limited accessibility and inadequate regulatory control.

In turn, this restricted competition and the development of the financial services market in the country. The Kenya Bankers Association selected Tieto to provide the switching software for the real-time P2P payments to increase the competitive advantage of the banks, establish interoperability and promote financial inclusion. As a result, Kenya now has a modern, fast, scalable, and reliable real-time payments platform.

Is mobile commerce driving out credit cards?

Credit cards and mobile commerce are not a match made in heaven. Consumers have to type in long card numbers and other details, which can be difficult when you’re using a mobile. However, there are several solutions that keep card details stored for future purchases. But the challenge of fragmentation remains. Still cards remain popular thanks to insurance, credit facilities and loyalty programs. Consumers feel motivated by receiving benefit, e.g. earning points, receiving gifts or getting cashback.

It’s the underlying business case of cards that allows these kind of loyalty solutions. So, in the short-term, mobile probably won’t kill off credit cards. They will remain a viable option thanks to their strong ecosystem and clear consumer benefits. In fact, cards and mobile payments benefit from each other. Most mobile wallets and solutions still rely on card infrastructure to deliver their services.

The line between cards and other payment methods continue to blur, especially when the traditional benefits of cards, such as credit and loyalty schemes for consumers and enhanced data capture for merchants, become part of non-card payments.

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06 |

The future of payments will welcome digital transformation for legacy-era brick-and-mortar banking giants, and while banks continue to update and remodel their products, systems and services, it will be against the backdrop of an industry that is becoming increasingly hyped.

PSD2 will continue to make a gradual impact and bring about increased competition, greater transparency and security across the payments landscape. However, it remains to be seen what happens soon after the 14th September SCA deadline, and how traditional players fare ahead of the establishment of P27.

The Apple credit card launch in the US was a gamechanger this year, reiterating the need for banks to leverage the capabilities that open banking initiatives are offering. Alongside this, the only way that financial services players can remain a step ahead of Big Tech giants is by leveraging the actionable insights that data provides them.

Digital payments continue to dominate, which is contributing to the rapid decline in cash, but it is evident that a complete eradication of physical currency would not support financial inclusion.

Conclusion

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07 | Bibliography

Accenture, ‘Banking in 2019: 10 key trends to watch’ (2019). Available at: https://www.accenture.com/us-en/insights/banking/10-key-trends-banking-2019 [Accessed 15/04/2019].

EY, ‘The revised Payment Services Directive (PSD2): What you need to know’ (2018). Available at: https://www.ey.com/Publication/vwLUAssets/Regulatory_agenda_updates_PSDII_Luxembourg/$FILE/Regulatory%20agenda%20updates_PSDII_Lux.pdf [Accessed 15/04/2019].

McKinsey, ‘PSD2: Taking advantage of open-banking disruption’ (2018). Available at: https://www.mckinsey.com/industries/financial-services/our-insights/psd2-taking-advantage-of-open-banking-disruption [Accessed 15/04/2019].

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This report is published by Finextra Research. Finextra Research is the world’s leading specialist financial technology (fintech) news and information source.

Finextra offers over 115,000 items of specialist fintech news, features and TV content items to 420,000 unique monthly visitors to www.finextra.com.

Founded in 1999, Finextra Research covers all aspects of financial technology innovation and operation involving banks, institutions and vendor organisations within the wholesale and retail banking, payments and cards sectors worldwide.

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