Customer expectations are evolving fast. Convenience and digital first solutions are paramount, as is ensuring that the most vulnerable in society are protected and have access to the right products and services. Payments plays a central role in enabling this ecosystem to operate effectively, safely and securely.
Innovations effecting the payments landscape though haven’t always translated into progress. Some fail to take off, others prove too expensive, introduce risk or exacerbate cyber vulnerabilities. In some instances, these may even reduce financial inclusion. So how can providers, customers and regulators come together to create a genuinely inclusive, innovative and secure payments ecosystem?
Having worked in and around the industry through several of these evolutions, working with the regulator and regulated, as well as innovators operating in the ‘grey area in-between’, what strikes me is often a huge amount of time and energy is spent on adjusting standards, governance and organisations, but not enough on culture, mindset and expertise.
Recently I’ve attended several payments forums where the customer is still mentioned as an after-thought. Too often the language of payments becomes a barrier to effective discourse and collaboration rather than an enabler. For the ecosystem to be effective, and truly enable the industry, this needs to change.
Payments at the heart of a new economy
We’ve seen a myriad of innovations in the payments space - some regulatory driven, some competition enabled. On the whole, these have marked a trend towards real time payments and inter-operability. The game-changing potential of open banking (while more advanced in some markets than others) is opening up competition, as well as the possibility to innovate on a set of consistent rails and infrastructure. ISO 20022 can create new opportunities too, given the rich data it supports. Now we’ve got beyond purpose codes, we can shift to thinking through what this can allow, now, but also 5 years hence.
As boards begin to understand and embrace the implications of ESG, from Carbon Removal and Awareness activities in Payment Transactions - using payments data to identify carbon usage - through to the impacts of digital innovation on financial inclusion, Payments will become ever more central to how financial services operate.
With payments becoming embedded into digital services, online retail is now part of the customer proposition. Payments are no longer just a distinct element of the customer interaction, but a central and potentially differentiating or deterring part of their experience.
As businesses go in search of data and closer engagement, some are taking the possibilities further by developing advanced customer loyalty programmes where capturing data at the payments level has been a critical component of understanding customer needs and the success of the proposition. Now, the onset of generative AI is fundamentally changing the game on what is possible.
But for every ground-breaking innovation, there have been numerous false dawns in an ecosystem that’s heavily regulated, a continual target for fraud and data theft, and has to meet the needs of a diverse range of consumers and business customers. Covid-19 is a good example; while accelerating innovation, lockdowns exposed the vulnerabilities in today’s extended payments systems and those without cards or access to the internet also found it hard to buy essential goods and services.
Tough choices ahead
If progress is at risk of stalling or its benefits are unevenly spread, the case for a rethink of payments is becoming more pressing.
Australia, where I recently spoke on this topic at the Australian Banking Association’s annual conference, has become the latest country to conclude that its payments system is in need of modernisation. The country has launched a five-point plan which includes amongst other initiatives, the phasing out of cheques altogether by 2030.
But progress in Australia as elsewhere demands trade-offs as the industry and its regulators seek to balance innovation and protection. While payments are becoming an embedded and invisible element of the customer journey, they remain systemically critical - and the cue for backlash if anything goes wrong. Although cheque usage, for example, has diminished globally, we still all know individuals, communities and businesses that rely on them.
The influence that regulators have over the direction of change is highlighted by the varied fortunes of open banking across the world. As the UK demonstrates, regulators can be accelerators. Obligatory standards for the largest CMA9 banks and clear stipulations on API interoperability have provided a springboard for industry and customer take-up - more than seven million consumers and SMEs now use open banking services in the UK. In the EU, however, regulation has held up progress. In particular, the lack of clarity over both the Berlin Group interoperability standards and SEPA ISO 20022 data exchange standards have led to wide variations in how the standards are interpreted and applied locally. As a result, we’ve seen ‘digital islands’ being created, which prove costly to run, lack customer focus and deter take-up – less than 12 million customers use open banking services in the EU, a fraction of the proportion in the UK. However, and to bring some balance here, even the most ardent supporter would admit that Open Banking in the UK hasn’t been as successful as the industry would have liked. The ‘clunkiness’ of OB payments is still a barrier to widescale adoption.
The challenge of getting the balance between innovation and protection right is complicated by the increasing complexity of today’s payments networks. Many no longer even touch a regulated bank. We could see more mandated change, but at this critical time for the industry, this could impede the innovations needed to keep pace with customer and business demands. So, there’s a strong argument for moving away from mandating to instead providing a clearer set of guard rails that promote innovation within clear and agreed parameters.
The picture is complicated by the need to sustain financial inclusion. In Australia for instance, one of the nuances is that many First Nation communities find it hard to access even the most basic banking services, including payments. While employment opportunities for First Nation workers are improving, legal uncertainties over property rights hinder both verification and the ability to put down collateral against a loan.
There are no easy answers to these conundrums and regulators won’t be able to come up with them on their own. They need input and support from customers and payment providers. However, there is a clear opportunity for regulators to more activity work with the industry to pro-actively help prevent many of the harms before they occur.
So where do we go from here? This is the question at the heart of Baringa’s new Future Proofing Payments campaign.
A good starting point is thinking about what a modern payment system needs to achieve, recognising that it’s not just a transaction in itself, but part of a wider customer journey and societal need. For me, this comes down to four priorities:
1. Safe and secure
Be this through an established bank, fintech app or collaborative ecosystem, it’s imperative that customers are protected throughout the payments journey. Trust remains a critical factor and the key actions the industry can take here include:
- Ensuring open banking developments take account of shifting cyber threats, data protection regulations and frontiers of innovation in areas like central bank digital currencies
- Collaborating in areas that enable the wider payments ecosystem and learn from the successes and failures of other markets
- Ensuring regulators don’t simply mandate and regulate but listen to industry needs and can respond dynamically to changing circumstances. Customer and industry groups play a critical role providing first-hand insight into what customers need and which protections they deserve.
I’ve seen first-hand that progress is being made against these points which gives me real hope that we can create a thriving and innovative payments ecosystem that meets all kinds of customer needs, while providing effective protection where needed.
2. Fit for purpose and inclusive for all
Understanding and responding to the full spectrum of customer needs, from digital natives to SMEs still relying on access to physical cash deposits, right through to potentially vulnerable and excluded members of the community, Commercial and Corporate clients continue to need effective cross border payments capabilities and their options for this extend far beyond the traditional rails.
The industry has to move from a service-led to proposition-led approach to keep pace with changing customer demands and to embed payments in customer/business interactions, ensuring that all customer segments are accounted for.
Systems need to be able to talk to each other and the data that underpins this needs to be accessible and drive insight. Interoperability is not only a catalyst for impactful innovation and healthy competition in itself, but also in making sure that the benefits can be applied universally and effectively.
In my work with both fintechs and established banks, I see welcome progress in pursuit of these goals. Many are recognising the commercial potential from payments through appointing a dedicated chief payments officer, that typically thinks customer first, and takes ownership of the payments journey end to end. Clients are reviewing organisational structures, delivery platforms and risk management to make sure that payments can work within collaborative and embedded ecosystems.
We must work hand-in-hand with regulators to define a clear set of objectives and a roadmap for the future of the payments industry. The focus here should be on standards and guard rails that can facilitate operability, rather than a restrictive approach that stifles innovation, as well as on bringing together a broad and inclusive range of participants, not just traditional players/incumbents.
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