By : Andy Brown
June 18, 2018 12:00 PM
This year the NCR financial services team headed to EBAday, a two-day payments industry conference held by the European Banking Association in Munich on June 12-13. This gave us the opportunity to spend two days discussing payments trends and directions in Europe and around the world, while this year NCR’s exhibit-floor booth was focused on the theme of how to transform the payments business via transaction processing and real-time fraud detection.
Naturally the focus of the event was on two major industry changes happening in Europe: PSD2 and the drive to Open Banking, along with the launch of SEPA Instant Credit Transfer (SCT Inst) – part of the general move to real-time payments. It was interesting to hear the discussions on how these changes are impacting – and will impact – the banking and payments business.
The keynote speaker, Cedric Durras, Global Head of Cash Management at Unicredit, introduced a couple of challenging and salient points, including a quote from Rupert Murdoch: ‘The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.’
This theme of being a ‘fast mover’ came up again and again in the sessions over the two days as speakers challenged attendees to think about their innovation strategies. But how exactly does an organization become a fast mover?
Thomas Nielsen, who recently joined Deutsche Bank from outside the financial services industry, talked about the need to be nimble across all aspects of business, and not just in IT development. Nielsen focused on procurement as an area often overlooked in process improvements, but also that there is a need for a change in corporate culture; too often leaders in the banking sector agree that change is a good idea but have the view that another group can go first. It’s said to be human nature to not like change, so altering the culture is difficult. Is it possible that this is also a generational difference? Perhaps those entering the workforce today are more ready for change than those who are further along in their careers?
We typically think of the fintechs and challenger banks as the ‘fast movers,’ with traditional banks being slower to adopt change, therefore making the challenger banks the organisations poised to gain market share and remove significant business from the established banking sector. While they may take some market share, one panel discussion noted that to date, that market share is still quite small. For example, all the challenger banks in the UK have less than a 1% share of the current account market. The view of the panel was that customer acquisition methods revolving around digital strategies will only enable them to grow so far; to secure real market share they will need to use more traditional acquisition techniques, which means much higher costs.
The real-time payments debate
So what of this new world of real-time payments? One panel session with representatives from EBA Clearing, Unicredit, Erste Group, NatWest and ABN Amro reflected on the speed at which the SCT Inst service had been rolled out and the number of banks that are now involved across the EU. But a key cause of problems is that there are still significant gaps in uptake, which creates a challenge for senders – they cannot be certain that the recipient account is enabled for the instant payments service.
I’m not sure I agree with the panel’s view that banks will realise how important real-time payments are and voluntarily implement support for SCT Inst, but maybe the next developments will cause the laggards to wake up. More than half (58% percent) of the audience polled believed that the biggest impact of the PSD2/SCT Inst combination was the chance to replace card transactions. And when the audience was asked about what is next in real-time payments, 39 percent thought request to pay was the most significant development, while a quarter thought the convergence of high value (Real-time gross settlement systems) and real-time payments was most significant. ‘Request to pay’ also came up in other discussions as a valued service for businesses and something that should be added to SCT Inst quickly, and it was noted the UK already has plans to put this in place.
Open banking and the impact of AI
When it comes to Open Banking and PSD2, a panellist from Nordea put forward an interesting view of the stages that the industry will go through before getting to a truly valuable environment for his corporate clients. The first stage is compliance with creating basic access to information and payments; the second is incorporating a network of partners into the services available through the bank (being the TPP); the next stage is enabling cooperation between those vendors; and the last stage is where there is a true platform with a range of services not necessarily related to banking or payments.
That ultimate goal recognises the fact banking products are used as a means to an end. For instance, a person or business does not take out a loan or mortgage because they want to; they take it out because they are buying a house or product and need the loan to finance the purchase. This is something we’ve discussed before on our blog – there are only a few account comparison services that are needed, and the true value of Open Banking is the ability to embed banking services in a regular business process, rather than having to exit the process and use another system for banking. While some consumer services have reached stage two of the cycle in the corporate servicing side, most platforms are still at the compliance stage but moving quickly to stage two.
While Europe has regulations driving Open Banking, in other places it is happening without regulation. The Clearing House in the US is working on an API framework, while India has a significant number of payment APIs in its Universal Payment Interface (UPI). However, the view from many EBAday sessions was that the challenge in Europe is going to be the lack of standardisation for the APIs; each region or country has its own versions, making it very difficult for all players (pan-European banks, fintechs and corporates). There is an API Evaluation Working Group reporting to the European authorities so maybe some sharing will happen, but there is nothing in the regulations to force this at the moment.
At the conference conclusion, various banks were asked about the hottest innovation topic. Artificial intelligence (AI) came up frequently in this discussion, with the key benefit of AI being the ability to provide a consistent response across the entire bank, rather than relying on human beings to remember the right answer. Obviously this is critical in tightly regulated products.
Open Banking was the second hot topic that is creating major change and opportunity across the banking and payments space. The pace of development in both of these areas is going to make the next 12 months very interesting.