This sponsored piece appearing in The Banker is a fairly comprehensive discussion of how two convergent factors (regulation and technology) are drivers of expected rapid ongoing change in the payments industry. In this case the author, a payments exec at FIS, focuses more specifically on the European market. As many readers already know, the recent enactment of open banking legislation in the EU and UK (PSD2 and CMA) is causing banks to review institutional strategy and technology infrastructure to not only comply with regs but also to effectively compete in financial services going forward. The competition includes existing competitors, de novo challenger banks and non-bank service providers, essentially the original prescription envisioned by the various pieces of EC and PSR legislation for lighting an innovation fire under the European banking industry.
Among many changes, banks will be required to provide access to account information and payment initiation to regulated third parties, but only if the customer consents. Although the regulation does not prescribe technology, there is universal agreement that the application programming interface (API) will be a major catalyst of open banking. This challenges the traditional bank/customer relationship by forcing banks to manage not only the end-to-end value chain, but also become manufacturers of products that regulated third parties will distribute. Managing this new three-way relationship with customers will be critical to a banks success in a PSD2 regulated environment.
Another major factor in this payments transformation is the rise of real-time payments schemes (the author uses ‘instant payments’), available now for ten years in the UK (with a planned upgrade) and more recently across the EU with SCT Inst. In addition to the open banking challenges (with use of APIs at the epicenter), the expansion of faster payments capabilities creates higher client expectations (consumer and business) for better and better experiences. Incorporating these convergent factors into institutional planning gives rise to a need for deep fundamental review of business models and long-term tech support systems.
Banks can solidify their position in the PSD2 era is by electing to become an account information service provider (AISP), which creates new opportunities for them. Some major banks already have open-banking applications that allow their customers to view all their accounts, including those held with other banks. Such initiatives position the bank firmly in the fintech landscape, deepen the customer relationship and facilitate targeted marketing. PSD2 also provides for an organisation (including a bank) to become a payment initiation service provider (PISP). For example, if a large supermarket becomes a PISP, payment for goods may be made instantly from the retailer’s app, as an alternative to a debit or credit card.
In a recently published research titled Payments Hub Renaissance in 2018, we essentially make similar points. Financial institutions are in a critical stage as ‘digital everything’ begins to accelerate, and it is causing a re-thinking of payments infrastructure, especially in conjunction with other institutional enterprise initiatives as FSIs adjust to the already present Industry 4.0 era (the 4th industrial revolution). FIS happens to be one of the firms who deliver hub capabilities through their Enterprise Payments solutions (remember the Clear2Pay acquisition). So the article is worth a read as an interesting landscape summation as well as appeal to the industry.
While a ‘wait and see’ attitude is understandable, doing nothing is not a viable option. In the not too distant future, a payment will be a payment will be a payment. Banks that address PSD2 as simply a matter of compliance run the risk of becoming bookshops in the Amazon age.
Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group