Customer expectations are changing tremendously, and the financial sector is obliged to react to this change. In the past few years, a lot of trends have been observed in the market, especially coming from the big card players who are deploying the multi-rail strategy, which is enhancing the services with instant payments and the usage of data to build new products and services. The European Payments Initiative (EPI) is whereby the European banks wish to end US dominance in payments by setting the directions for how they would like to utilize instant payments and real-time payment processing in order to offer something useful to the customer.
In this new digital era, where everything is faster online, banks must pay special attention to real-time compliance and fraud detection, resulting in an increase in 24/7 service, payment resilience, and scalability. In the past years, customers accepted a delay of 3 to 4 days for transactions to be processed, but it is no longer the same. Customers nowadays demand instant and quick payment irrespective of the day and time, showing a move towards a cashless economy. The most important thing is to have a customer-centric approach, and emerging topics like robotization, lean, and digital skills are required to keep up with the banking trend.
Nevertheless, it is challenging to meet customer expectations while employing the latest technology in order to be the best in the market and to provide the best services for customers, but the banking industry is also facing some regulatory challenges. The finance sector is well aware that in front of them is the big SWIFT ISO20022 migration along with the newly built EU Retail Investment Strategy, which pushes the market towards instant, standardization, and cross-border interoperability. On the other hand, the debate about the fear of data and digitalization is the main driver for cost optimization as well as customer experience improvement.
The COVID-19 pandemic situation added to the challenges which are unavoidable and the finance sector must face. In the past, SEPA introduced the ISO20022 standard, which had quite a massive impact on the bank's infrastructure, IT systems, and processing. However, this was the first step toward standardization. Then came instant payment by SEPA payments based on the same standards as ISO20022. Instant payments are based on the new standard across Europe and Euro currency, implying that Europeans are already covered by the SEPA payment on that standard. Because Euro is included in instant payments, ISO20022 is recommended.
As described by Silvia Mazánová in her presentation, "standardization can also help to improve straight-through processing and increase efficiency, and it is something that the financial sector has not seen in maybe 50 years". The entire payment processing was very fragmented, and it was very difficult to get the best out of it. Simplifying the payment process requires improved internal processes but leads to a decrease in manual work, especially for SWIFT payments.
So, standardization brings us different formats, including rich data formats that can be read by some machines, emerging technologies, and so forth. Hence, to maintain a high level of customer satisfaction, it is mandatory for the financial sector to adopt the latest technologies and acquire the latest skills to be able to deliver on time to the customers.
Standardization should also include data as a component of payment processing, which can then be used to improve efficiency or open up new revenue streams. Last but not least, the industry must maintain constant awareness of customer demand in order to provide the required service to its clients.
Blending Real-Time Payments into Legacy Systems
As noted by Edgars Bremze, "there is the importance of blending real-time payment systems along with legacy systems". The payment system is evolving annually with a percentage of 30%, and this implies more revenues. In the previous year, the payments were accelerated by e-Commerce transactions and peer-to-peer payments. Instant payments, such as mobile payments, have become more frequent due to the rise in e-commerce transactions and international travel. The increase in travel around the world forces the financial sector to adopt the instant payment method used by travelers. Project 27, for instance, has kind of preceded the journey with a strong acquisition with the European Union.
Components of instant payments:
The External Payments Interface allowed physical cards to be digitalized and dematerialized cards to push instant payment in the daily routine. With time, different payment systems are launched on the market and banks adopt them. However, the question of how to maintain these systems has always been very open.
Ubiquity is another form of payment that allows users to pay everywhere and anytime with the same instrument. Cash is the most relevant instrument for Ubiquity. Even if users are utilizing the mobile app, they do carry cash for small bills such as transport.
A payment guarantee is another form that ensures that our payments will be executed safely and guaranteed. The transactions are processed only when the goods are delivered to the consumers. In situations when the goods are not delivered, a claim or dispute can be raised to solve this issue. This form of payment is costly since this account payment is basically just an account transfer without any kind of possibility to have this payment guaranteed.
Last but not least, are the Value-added services. Customers expect more and more of these Value-Added Services and it is assumed that mobile payment definitely has the ability to deliver them because with the cash you have almost no possibility to deliver any Value-Added Services. With cards, one has limited possibilities to add additional value as cards lack this interactivity, but with mobile apps, one has a wide range of value-added services to customers.
Where are we heading?
According to Anders Olofsson, "the banking industry is changing so much that if bankers do not team up as a vendor, they may face a tremendous risk of not existing 10 years from now". The core drivers of the payment storm are the introduction of open banking and the consolidation of silos and legacy costs. Also, customers move to real-time, which requires a change in payments. Hence, this is a real challenge for banks and an opportunity for FinTechs. As bankers phrase it, whether FinTechs are friends or foes to the banking industry, it is widely believed that many players in the market do not have firm hypotheses about the future narrative.
Today, banks are under intense pressure to make money from card transactions, not only locally but also internationally. Regulators are simply forcing banks to operate like manufacturing companies.
The financial sector wishes to really be in the relevance of running a new care plan being scrutinized by the public and everyone else for whatever they do. That’s where a business model needs to be digested in change, and that's where one needs to change. Then the operating model will itself support that, and obviously, the technology model will support your operating business.
The entire article is written based on presentations by:
Silvia Mazánová (former Head of payments, cards and financial markets at Česká spořitelna) at the virtual Payments CEE Summit on 17-18 June 2021 called 'The unprecedented appetite for Instant Payments from Corporates & End Users'
Edgars Bremze (Lead Strategic Product Manager at TietoEvry) at the virtual Payments CEE Summit on 17-18 June 2021 called 'Blending real-time payment systems into legacy systems'
Anders Olofsson (Head of Payments at Finastra) at the virtual Payments CEE Summit on 17-18 June 2021 called 'The Mega Trends shaping today's Payment Market'