Meshing new with old
As new technologies offer greater choice and convenience, the payment mechanisms of the past must also be accommodated
While the domestic payments industry is gradually being reshaped by new technologies, from application programming interfaces (APIs) to distributed ledger technology, the poll reminded panellists and delegates of the need to accommodate legacy payment mechanisms when implementing fresh innovations.
“As new technologies are introduced, the old ones don’t go away. The challenge for everybody is: how do you build technology for diversification of payments or systems; and how can you handle legacy along with new products? We have to start from what the customers want, because they are demanding payment systems that are efficient, seamless and instant,” said Ulku Rowe, technical director of financial services at Google Cloud.
In a debate that challenged payments professionals to think and work more disruptively, while respecting and maintaining the payment mechanisms on which customers still rely, panellists acknowledged that the pace of change has not always been rapid.
As the digital revolution took shape, quickly spreading from IT and consumer electronics to many other retail-facing sectors, most banks were dealing with the aftermath of the financial crisis, which put them on the back foot in embracing new technologies.
“It took banks slightly longer to put a strategic focus on innovation, but we are catching up and technology offers huge opportunities,” said Michael Spiegel, global head of cash management at Deutsche Bank. “We don’t know where payments will land because the space is so innovative and disruptive. Settlement of payments probably won’t change much, but the communication and the way you get there will change a lot.”
Ripe for change
Other payments specialists agreed that the proliferation of new technologies and innovative challenger organisations have combined to create a payments landscape that is now ripe for change.
“There is tremendous opportunity for both incumbent banks and non-traditional players to take a role in the distribution and manufacturing of products,” said Leila Fourie, chief executive of the Australian Payments Network. “The objective of non-traditional players is to keep people on their platform. Moving money is not always central – payments happen in the periphery – so the pricing and value that is attributed to payments might be fundamentally different to the traditional banking model.”
Asked in a second audience poll to rate the most important feature of any changes to a payment system, 46% of respondents cited ease of use, while security and regulation came in second with 30%, followed by stability and speed.
Australia has become something of a poster child for payments innovation, following the launch of the New Payments Platform (NPP) in February 2018. Informed by a core mission to provide domestic consumers, businesses and government departments with a means of making payments faster and more efficiently, the NPP has become a reference point in the industry, demonstrating the transformative power of bringing new technologies to conventional processes.
“The most important thing in meshing different technologies is making sure you take a regulatory enabling environment, robust and scalable technology and focus on the customer,” said Fourie. “With NPP, there was an enormous amount of collaboration between regulators and participants, and between the FinTech and banking industries.”
Acknowledging their impact on client expectations, payments professionals have sought to learn lessons from consumer technology giants such as Apple and Amazon, which have thrived by developing platforms that give third-party providers access to a global customer base, while also giving customers easy, standardised and cost-effective access to a wide range of services.
The NPP was built on a similar premise with a basic infrastructure, a fast settlement service provided by the Reserve Bank of Australia that allows every payment to be settled in real time, and an overlay that enables products and services to leverage the NPP to provide tailored payment experiences.
With eight banks connected directly and another 70 indirectly, the NPP has embraced the concept of open access, working with SWIFT to develop an infrastructure that ensures availability to non-bank organisations. But keeping the barriers to entry as low as possible is not always easy, said Adrian Lovney, chief executive of the NPP.
“One of the challenges for us is to think about how we extend the ecosystem in a way that allows as many different people to connect to that infrastructure as possible. Market participants were looking for consistency, standardisation and interoperability in terms of the access methods. In response, we developed an API framework that provides this consistency and harmonisation,” Lovney explained, speaking during a SWIFT Institute panel discussion.
For banks seeking to remain relevant in this fast-changing payments environment, one of the core challenges is to extract value from data in a similar way to their more nimble non-bank competitors. Just as banks may have been slow off the mark in embracing technological innovation in payments, they are also playing catch-up with FinTechs in leveraging and optimising customer data to refine and tailor their services.
“Banks have such a big amount of data but we have never exploited it, so it’s an asset for the future, with respect to data privacy legislation as a trusted third party,” said Fabrice Denele, senior vice president for partnerships and interbank relationships and head of customer solutions at Natixis Payments. “Banks have millions of customers and this creates some constraints; we cannot act as a FinTech and test and run a new product for a small customer base. When we decide to launch a product or service, it has to be reliable, dedicated to everyone, and it has to work every single day.”
But other speakers took issue with the concept that banks cannot compete with the same agility as FinTechs, suggesting that a large incumbent customer base should not be a barrier to innovation. Thomas Nielsen, chief digital officer for Deutsche Bank’s global transaction business, argued that the industry is moving away from a model of ‘walled gardens’ – where banks owned and operated the entire stack of payments technology and services – towards an open access model.
Nielsen illustrated his point with reference to the way that Nokia’s dominant position in the mobile phone sector was quickly overturned by the new partner-based business model introduced by Apple’s iPhone and App Store, warning of similar consequences for banks. But he insisted that banks have the assets and capabilities to respond positively to the challenges ahead.
“What banks and financial institutions can bring to the table is the knowledge of a global network, customer experience and understanding how to do business in multiple regions in a trustworthy and compliant way,” said Nielsen.
The evolution of central bank digital currencies (CBDCs) is a positive example of the public sector embracing new technologies and disruption in the payments landscape, but industry participants also have a role to play in demonstrating use cases and tackling associated challenges.
During a panel discussion on the prospects for this emerging asset class, Reserve Bank of Australia assistant governor Michele Bullock explained that while digital currencies are not expected to replace standard bank notes in Australia, they might still have a significant role in the payment systems of the future.
“We have more of an open mind on whether or not a CBDC could play a role in assisting with supply chains and cross-border payments, for example,” said Bullock. “It remains for the industry to demonstrate to us why what we have got available in terms of payment systems and what is still coming onboard can’t actually deliver that already. How would a CBDC make things more efficient and competitive?”
Financial inclusion and the extension of banking to the world’s poor is one area where session participants felt digital currencies might ultimately play a valuable role, by offering a more accessible and secure form of tender. A digital currency could have a more challenging impact in a future systemic crisis scenario, however, as large numbers of people might look to hold value in CBDCs rather than withdrawing cash, which could put new strains on the financial system.
While some countries such as Sweden and Singapore are already in the advanced stages of exploring CBDCs, there is clearly still some way to go before they become widely accepted. Despite conceptual and practical challenges, discussions at Sibos reflected a high level of interest in potential benefits.
“From a commercial banking point of view, we see the potential opportunity to address a few challenges we have seen in the traditional settlement networks. The ability to address availability, ubiquitous access to markets, no time-zone, and the settlement mechanism can all be achieved. However, to succeed technology must also be accompanied by other changes, such as a consistent approach by regulators,” said Lewis Sun, regional head of product management for global liquidity and cash management in Asia-Pacific at HSBC.