The payments landscape has evolved significantly over recent years.
Not so long ago, a bank would deploy some payments software, carry out some systems integration work, and be equipped to make and receive payments, largely satisfying customer needs.
Today, banks need to navigate a much more complex payments ecosystem, one that has evolved to meet new customer expectations in today’s digital landscape.
And it doesn’t stop there. Banks also need to ensure their customers are well placed to better serve their own customers – integrating their payment services with a plethora of new technology and fintech apps that deliver the experience customers have come to expect. All players in this new payments ecosystem need to collaborate and work together.
Exploring key trends for the year ahead, instant payments, CBDCs and digital identity are set to be the main drivers of change in the payments industry.
Instant payments have great potential to disrupt the existing payments ecosystem. It looks increasingly likely that as part of the EU’s Retail Payments Strategy, the next Payment Services Directive (PSD3) will include a requirement for pan-European immediate payments.
We’ve already seen over the past two years how customer appetite for real-time, contactless and e-wallet transactions has soared.
While many business-to-business payments will continue to use existing payment rails, particularly for high-value payments, the greatest potential for disruption and growth in real-time payments over the next three to four years can be expected in consumer-to-business and peer-to-peer. It’s likely we’ll see new offerings, both for domestic and cross-border payments in these areas.
For banks, real-time payments will provide an opportunity to gather smarter insights on customers and their requirements, and potentially extend their services into business lending.
A key challenge banks face will be the need to ensure 24/7 real-time monitoring of these platforms to combat fraud and prevent money laundering. Whereas in the past banks had the time to process payment transactions and carry out AML checks in-house, increasingly they will rely on third-party specialists to execute these checks in real time.
The consequences of the shift to real-time payments will be many, and we’re only scratching the surface today.
Central Bank Digital Currencies (CBDCs)
The shift from analogue to digital with instant payments is nothing compared to the radical change CBDCs could bring to the table.
As it stands, there is an ongoing debate in different countries about the potential value CBDCs can bring – for example, offering the potential to manage cash resources more cost-effectively and implement government fiscal policies.
In many instances, the conversation surrounding CBDCs is driven more by politics than economics. Nations don’t want to lose political power and influence around the world, or for their currencies to be overwhelmed by CBDCs from overseas.
Another issue arises with regards to the different rules and regulations that apply to digital currencies versus traditional forms of payment, and what the rise of CBDCs may mean for banks and other payment intermediaries.
CBDCs could undermine the business models of conventional banks, making it harder for central banks to maintain financial stability. Furthermore, the current payments ecosystem may be disrupted by the introduction of CBDCs around the world. For CBDCs to become mainstream, it’s important to put in place a viable infrastructure and settlement system that is robust and efficient to run.
A big subject impacting global payments and partner ecosystems is the use of digital identities. The ability to digitally identify the payment sender and receiver is a key step in combatting payments fraud.
The implementation of an electronic identification (eID) scheme in India has helped to drive growth and innovation.
Similarly, in Europe, the European Commission is reviewing the current regulatory system concerning eIDs, alongside the use of strong customer authentication (SCA).
To help combat financial crime, banks need to put real-time fraud detection technology in place, use behavioural analysis and biometrics to authenticate customers, and also educate customers about how to spot potential fraudsters and best protect themselves.
Summing up, we conclude that real-time payments and Open Banking present strong opportunities for those banks that have the right technology architecture in place. In a landscape where the boundaries are blurring between banks, fintechs and big tech, banks need to gear up and work collaboratively with ecosystem partners to innovate and address customer needs.
Crucially, speed is of the essence. If banks don’t act in an agile way, others will.
Written by Axel Zingsem, senior sales executive payments at Finastra