The Payments of the Future: Shaping Tomorrow’s Payments Ecosystem
The last 20 years has seen a phenomenal shift in how payments are made. Customers were used to physical payments; this moved to digital payments and even further into virtual payments. Technology continues to surpass our expectations. Regulation isn’t just about reporting and risk, it’s about competition and wider access. And whereas payments used to be about back office operations, it’s now at the heart of fintech innovation and bank strategy.
This blog explores four of the key themes integral to shaping this new payments ecosystem: the customer, technology and data, regulation, and talent.
1. The Customer Proposition
What do customers want? Easy, instant, and secure payments that are cheap or free of charge. Whether a push or pull payment, domestic or international, they want a consistent experience. There remains a gap between domestic and international payments experiences which will narrow over the next decade. SME customers expect an integrated payments experience, with easy reconciliation, and all payments handled through a single flow. Corporate payment users also want speedy, reliable, and low-cost payments, though they have other needs too. Beyond the basics, customers look for innovation that complements their payments.
Providers like Monzo and Chip are creating smart automated rules to move money between accounts to maximise savings. The Emma app is providing insight on what you spend money on, and how that compares to other people. Flux is providing a better way to deal with paper records and receipts. These examples are likely to change the way the next generation interacts with payments, and services enabled by the increasing shift to open data will ensure a premium is placed on having a user experience that draws customers in. The bank’s own mobile application is unlikely to remain the default interface for payments. Instead, millions of app users will download and adopt the most integrated, contextualised payments apps on the app store.
If we are to delve deeper, what pre-requisites are required to make a payment? For cash there is little else needed to pay. Digital payments however are more complex. Generally, an account is required, meaning onboarding and passing Know Your Customer (KYC) checks. This involves physical proof of address and physical proof of ID. The payments industry has digitised the means to make payments, but we have not yet digitised the underlying pre-requisites for a purely digital payments ecosystem. To do that we need a natively digital identity, issued by government, that can be relied on for banking services. In the next few years the UK will need to overcome this. Other countries have done so – either by issuing digital ID or BankID. Some countries have gone further – like China or Kenya, where having a phone number is key to being able to transact. In future, payments should accommodate high-tech and low-tech options, existing both online and offline. We need to find new ways to make digital payments accessible, and customer needs should be the driver.
2. Technology and Data
We are clearly witnessing an explosion of payments data. The global adoption of the payments messaging standard called ISO20022 is expected to lead to significant improvements and richer payments data. In a nutshell, ISO20022 is a set of rules and standards for how a payment message should be structured, and different messages have different specified purposes. Whereas current messages were conceived in the 1960s and 70s, ISO20022 is a standard that is fit for today’s payments needs. While implementation could be challenging, benefits will include greater efficiency and reduced manual effort in areas such as transaction screening. This will be the messaging framework for the next payments ecosystem.
Today so much payment information goes in free text fields. Richer data will enhance automated compliance, allow easier reconciliation, and reduce manual input. ISO20022 is reaching critical mass globally with adoption in China and Switzerland, and plans under way in the EU, USA and the UK. A potential use case for this is greater resilience within an organisation and across providers. If an instant payment system faces difficulty, routing important transactions to CHAPS would not require as much transformation as today; and if a PSP’s platforms are down, agreements could be made with other payment providers to re-route traffic and prevent a gap in the payments market.
Across payments, technology is moving fast. API enablement, microservices and cloud-based architectures are gaining ground in payments. Traditional giant payments platforms will give way to skinny payments cores, surrounded by many layers of competitive and tailored services. Payments as a service (PAAS) has emerged as a viable alternative to traditional payment stacks. It still costs over £1million to connect to a payments scheme – far too much for a small FinTech, so PAAS services could accelerate their growth.
But what are the risks? We know that organised criminals and fraudsters are taking advantage of digital processes. There is already a perception that customer controls have not kept up with a user’s ability to lose large sums of money in seconds. Authorised Push Payment (APP) fraud, invoice fraud and phishing have dented user confidence in banking and payments. Bold steps are required to build comfort and control around digital payments. Initiatives like confirmation of payee and strong customer authentication should help. Our payment systems are very secure, but human users and human operators make mistakes. Having the right controls in place for your customer, and in the back end, will differentiate the best payment providers from the rest. It is a matter of when, not if.
Solutions for unhappy path scenarios – where a key microservice fails, or a server goes down, should be automated too, so that alternative routing is found, auto-repairs are made, and service provision is protected. Payments outages still occur far too frequently and can be hugely damaging. Technical resilience must remain among the highest priorities.
Ultimately, payments could be transformed from what they are today – an exchange of value – into a rich digital communication, robust enough to carry any type of value we choose to transmit. Data and technology are driving new ways for payment providers to deliver on customer needs, and huge scope for innovation.
3. Regulatory Drivers
Payments regulation can be multi-faceted and complex, covering banks and payments activity. With the expansion of the boundary for payments beyond traditional banks and Payment Service Providers (PSPs), a more competitive and nuanced regulatory landscape is emerging. The regulatory focus is shifting away from the type of institution involved, and towards the activity being carried out, and how systemic that activity is.
Payments regulation is focused on genuine customer benefit, protection and innovation. The opening up of payments schemes to non-banks is starting to bear fruit. One quarter of payments providers are now non-banks, and in addition to competing with traditional payment providers, these non-banks are partnering and complementing their services too. As more of these providers connect to central bank infrastructure, the makeup of the industry landscape is changing, and established providers are improving their services to keep up.
While regulation has important benefits, it is important to reflect on the opportunity cost faced by payments functions. Open banking, while wider than payments, has cost the CMA 9 approximately £1.5bn; current account switching cost c. £750m, and Image Clearing System (ICS) might have cost £800m. A more targeted approach to addressing weaknesses in the market, as witnessed with Confirmation of Payee, would be welcome.
In short, regulation is vital to the security, resilience and competitive success of the payments industry. Applying it in targeted ways and responding to a moving industry landscape will ensure it is focused on the next set of challenges.
4. Payments Talent
As the payments industry faces such dramatic changes, who will staff the payments functions of tomorrow? Will they be payment scheme managers, payment analysts, operations case handlers, and change BAs? Will payments business teams and technology teams remain separated? Increasingly, the roles needed are for payment experience owners, payment partnership directors and payment designers. Automation also has a critical role to play to reduce manual reporting and data management. At SIBOS 2019 Antonio Horta-Osario said: “You automate the ordinary to allow your people to do the extra-ordinary”. This should be taken as our mantra. And what’s more, a case could be made for Payments to be sponsored at the top of house by a Chief Payments Officer.
There are also wider questions to consider. Is payments facing a skills shortage? Is the best talent attracted to the industry? In fact, FinTechs, big techs and others want to play a part in payments because they see ways to improve customer experience, and tap into valuable customer data. Partnering with FinTechs and new payments providers is an effective way to complement an organisation’s core skillset and offering with other specialised or more niche areas. True payments expertise can be hard to find, and more emphasis should be placed on sourcing and nurturing the right people in future.
As we prepare for these challenges, there are some key questions to consider:
- Do payments functions have their own customer, data, partnership and talent strategies?
- Does your payments roadmap deliver what your customers want, when they want it?
- Are you comfortable with constant digital and cloud change?
- Is your team nimble and multi-threaded?
- Is Payments sponsored at the top of house by a Chief Payments Officer?
The evolving needs of customers should drive innovation. Technology must do the basics right every time. Regulatory compliance must be a given. And payments talent is critical to meeting evolving customer demands. There has never been a more exciting time to be in Payments.