Gearing up for the future of payments
The world of global payments is being transformed. Indeed, by 2020, the payments landscape is likely to be unrecognisable, having been shaped by a number of factors, foremost among which are technological innovation and evolving customer demand. It is essential for banks to ensure they have the right strategies and technology in place now, if they are to retain their position as market-leading payment providers in the future, writes Saket Sharma,chief information officer, treasury services, BNY Mellon.
Every aspect of the way in which consumers and institutional and corporate clients pay and receive payments is currently undergoing fundamental change. Technological innovation is accelerating, particularly in regard to consumer payments, and non-bank competitors are emerging, some of which have already acquired a respectable slice of the market. For instance, PayPal, the online payments provider, is growing at a rate of 20% year on year, achieving revenues of $1.95 billion in Q2 2014.
Global trade flows are shifting in line with the growing middle-class demand emanating from developing economies, with resultant higher intra-regional payment flows, and a growing number of small and medium-sized enterprises (SMEs) across the globe are ready to shift away from traditional payment mechanisms to emerging solutions and providers; in this regard following the consumer lead.
The banking industry as a whole isn’t famed for adjusting rapidly to change, so these new challenges and competitors, and the related investment required into innovative technology, may seem daunting. Yet the opportunities offered are substantial; forecasts show that the value of global non-cash transactions is expected to rise from approximately $377 trillion in 2012 to $712 trillion by 2022 and the entry of large technology companies and non-bank providers into the payments space needn’t necessarily pose a threat.
Certainly, the emergence of new non-bank elements should be recognised as the important market-changing shift it is. But, in the huge and ever-growing payments space, the mere introduction of new technology is not enough to truly disrupt the market; what matters is achieving widespread take-up and adoption. To illustrate, Apple’s iPhone became a real success when applications came on board – vital game-changing elements that weren’t supplied by Apple. And it is this dynamic that is currently being reflected in the payments space. New market entrants may bring exciting new propositions, but it is banks that have the long-term experience and regulatory oversight. So, rather than too great a fear over competition, collaboration should be the emphasis going forward. Certainly, there are relationships to be had here, and banking providers, while carefully considering their cost-models, should be open – and indeed proactive – to the opportunities presented by strategic partnerships.
For all providers, bank and non-bank alike, one significant challenge is evolving and heightened client expectation. Corporates today not only want but have come to expect the use of a robust payment infrastructure that offers reliable, efficient and increasingly real-time payment processing across multiple currencies and geographies. Payment platforms must also be fully transparent and offer added value in terms of clear information management systems that can help bring down costs and improve operational efficiency.
For banks, the other major challenge is regulatory oversight. Financial institutions need to have a real-time view of risk exposures, and this requires intraday reporting and real-time tracking of payment flows. Risk-mitigation can be further strengthened through increased automation; by removing manual processes and relationships, banks and corporates can reduce the opportunity for error, particularly around cross-border payments which are inherently more complex thanks to the involvement of multiple entities and jurisdictions.
These challenges translate into two must have features for payment platforms in 2020 and beyond: first, access to and use of real-time data availability to make decisions faster and meaningful; and second, real-time processing of payments and settlements. As it stands, not every payment clearing channel is real-time yet, giving the industry as a whole a clear next step in creating a bridge to the future of payments.
Technology is key
In order to deliver on these requirements, banks must ensure their technology investments are not only geared to meet the growing needs of today, but are fit to adapt and adapt again as future needs require. Indeed, in order to not just successfully navigate but thrive in today’s era of fast-changing market developments, flexibility is of utmost importance. Certainly, this is the thinking behind our own investment into a new global payments infrastructure, built with the future of payments in mind, and designed to process all payments via a single platform, regardless of currency, settlement mechanism or the geographic location of underlying parties.
Of course, breaking down current payment barriers – from overcoming disparate legacy systems and processes in different countries, to injecting far greater transparency and flexibility – is easier said than done. Use of new modern technologies is helping create more flexible configurable payment processing engines, adaptable to different operating models, and helping create a service-oriented ecosystem. With the emergence of crypto currencies and peer-to-peer processing, open source infrastructures are going to play an important role, and existing providers need to think how they carve out their role in the changing landscape. Furthermore, cloud technology has evolved leaps and bounds over the past four to five years – something we are utilising by locating our global payments infrastructure in our own private cloud.
Alongside flexibility and accessibility, banks of all sizes must look to enhance levels of standardisation and harmonisation throughout their payment structures. With corporate clients increasingly demanding real-time seamless transactions, being able to offer standard and consistent processes and procedures and identical products and services across all geographies is essential.
One driver behind the transformation in the payments space is the prevalence of ‘smart’ and intuitive technology in consumers’ everyday domestic lives. Accustomed to user-friendly experiences and ‘one-click’ payment technology, such expectations have filtered through to the retail space (mobile banking and contactless payment cards, for example) and in turn are now entering the institutional and corporate sphere.
While corporate banking services will continue to follow in the footsteps of the retail banking sector in this respect, one aspect that can immediately be cherry-picked and applied to the corporate sphere, to offer considerable added value, is data analytics. Easy to use and richly rewarding, technology-supported analytics will become increasingly recognised as a key means for banks to add value to payments. Valuable information around client preferences and behaviour, uncovered by mining client data, can be leveraged to not only offer far better client service, in accordance with different client segments, but help improve the efficiency and effectiveness of banks’ own operations. For example, shedding light over common errors as well as opportunities for improving straight-through processing rates, and faster adaptation to changing client payment trends. Banks can in turn offer such data-rich insight to their corporate clients, who may desire electronic access via an integrated service delivery portal to intraday statements, or information on the status of payments in real time.
With so many competitive pressures on banks’ payments business, added value – whether via analytics or other means – is the key to success. No payment occurs in a vacuum, and ‘payment-proximate’ activities must be explored and leveraged. By 2020, payment providers will undoubtedly offer their customers far greater strategic value around payments, rather than considering a payment to be a mere commoditised product with no surrounding opportunity.
Alongside transformation, the evolution of the payments market through and beyond 2020 will also show convergence, on many levels. There will be convergence of expectations and capabilities, between the consumer and business space, and in terms of the quality and scope of solutions available, as well as the interoperability of infrastructures across markets and geographic regions. There may also be greater convergence between regulatory structures and a more balanced geopolitical environment in terms of the exercise of political and commercial influence.
Technology itself will undergo convergence, as current geographical discrepancies in technological development – with emerging markets, such as Kenya, often leapfrogging their more developed counterparts when it comes to innovative solutions such as mobile banking – set to steadily decline and disappear. Certainly, developed markets, currently hindered by legacy infrastructure, will catch up, and wider convergence is expected through further technology adoption and the increasing engagement of non-bank providers.
In all of these changes, one thing is clear: those banks wishing to thrive in the payments landscape of the future will have to offer compelling value-added payment and payment-proximate offerings, and do so by ensuring they have the relevant (and adaptable) technological capabilities in place. Whether this is achieved through proprietary investment, through strategic cross-sector or cross-industry alliances with non-bank competitors, or through leveraging the support of a specialist non-compete provider, the time to start devising and implementing such strategies is now.