Martin Coen, Chief Executive Officer
04 July 2017
There is no shortage of imminent deadlines and challenges to keep the payments professionals in Europe’s banks awake at night. Pan-European instant payments from November this year imposing an unprecedented performance requirement on systems… PSD2 mandating the opening up of account information and driving adoption of open APIs and strong customer authentication… ever-increasing demand from customers, retail and corporate, for better access, more information, value-added services… the list is certainly long.
However, difficult though this may be, the smart approach for banks right now is to take a step back from the immediate priorities, and think about the bigger picture of next generation banking. Yes, the demands of instant payments and PSD2 are many and far-reaching, and must be grappled with. But these two developments are also part of the much broader and more complex developing tapestry of the future of the financial services industry, and it is important for banks not to get so hung up on the detail that they can’t formulate a vision for their ongoing relevance in this fast-evolving environment.
For me, the critical question banks need to ask themselves is, how can they drive the digital agenda, and improve the consumer and corporate experience? Banks’ historical focus has been on holding money for their customers, and they have developed their strengths in core banking, and devoted energy to improving the way ledgers work.
Going forward, banks’ businesses are going to be much more about delivering great online, real-time, digital experiences to customers. The banking experience will be much more integrated into the rest of the world – into customers’ other interactions with different verticals such as retail and healthcare – and this must be done in a frictionless way. The future of banks will depend on their ability to leverage the trust they have and deliver a seamlessly integrated banking and payments experience geared to making their customers’ lives easier.
In this context, the payments function will become ever more critical. Payments – how and why money moves – are all about the customer experience. Core banking is needed to hold money, but payments are at the forefront of any bank as it interfaces with the outside world.
Of course, it’s very easy to say that banks must not get caught up in the detail of immediate concrete challenges – but avoiding a preoccupation with the short term is hard to do. There is so much going on in front of and behind them – new schemes, new regulations, new technologies – and all of these factors influence the way in which banks can drive the digital agenda forward.
A lack of clarity about what will happen is also a major challenge. We know that pan-European instant payments are coming, but there are question marks about how the pan-European schemes will work with domestic schemes and how the Eurosystem’s Target Instant Payments Settlement (TIPS) initiative will impact the landscape, given the likely appeal of leveraging central bank money.
There is an element of wait and see here – while banks know that they have to do real-time, that their clients will demand it, they also know that instant is not the only development they have to be ready for. The industry is buzzing with talk about what open APIs and open banking will mean for banks, and again, PSD2 compliance is a must-do, but it’s also new territory, and the impact it will have in practice is not fully understood.
One fact which does seem to be clear is that while banks are no longer losing as much sleep over the prospect of fintechs eating their lunch, their awareness of the competitive threat posed by other banks – those that make the right bets in these uncertain times – is getting far more acute. 2017 and 2018 are set to be challenging years, requiring banks to react rapidly to the directions the markets take. It’s unclear at this point what those directions will be, but when market changes gather momentum they can take off much more quickly now than in the past – banks won’t have long to react, and becoming more agile is a necessity.
When you enter into a market characterised by this level of uncertainty, you need modern tools at your disposal. In the absence of a crystal ball, banks need both strategic and operational agility, and at the heart of agility is a modern platform. For all the challenges, the changing environment also holds great opportunities for banks to provide tailored, more fine-grain payment and information services to customers of all kinds within the emerging ecosystem – but this is not possible if they are stuck with siloed legacy payments platforms.
As a consequence, we are seeing a shift in perception of payments modernization programmes, from being a step some banks have feared to take to being a step they are determined to take in order to avoid missing out on the opportunities modernization creates.
In short, payments modernization is a key pillar for success in banks’ digital transformation programmes. One of the few certainties in this shifting marketplace is that the confluence of change drivers shaping the payments industry right now will be the catalyst for a wholesale move to the modern platforms that make possible so many new and valuable revenue generating opportunities for next generation banks.