It has been said that prediction is very difficult,
especially if it’s about the future. The unprecedented events of 2020
demonstrated quite how difficult it can be. The monumental uplifts in digital
volumes, shifts in customer requirements and broader economic impact would have
been (and frankly still are) barely conceivable.
As such, financial institutions find themselves facing a
very different, uncertain world. Yet from this period of unique instability, digital
change has been substantially accelerated and foundations have been laid that
will shape the direction of banking and payments for years to come.
Getting serious about data-driven payments
A 2019 survey by Aite Group found that only 18% of banks were
moving from a transaction-based revenue model to a data-based approach.
Although this figure is unlikely to have changed significantly since,
data-driven payments are increasingly on the agenda for banks and we can expect
more movement towards this.
This is partly due to the accelerated cost-pressure on
payments as a result of events in 2020. More importantly, though, banks are
steadily identifying concrete use-cases and seeing their benefits. Helping
corporates manage cash and liquidity through automated data-based actions can
start to ease serious headaches for treasurers, for example. Equally, payments
data can be used to provide valuable economic insights to corporate customers.
At the same time, retail banks are getting better at making informed offers and
suggestions to customers based on payment flows.
With the rise of embedded finance, the ability of banks to
support personalised and contextualised payments will increasingly be expected
by their customers. But organising data efficiently to undertake such actions
is no mean feat. Perhaps in 2021, we will see more ways for actionable and
insightful data analytics to help monetise payments.
ISO 20022 migration moves up the agenda
ISO 20022 will play a critical role in supporting the shift
to a data-based revenue model. With constantly shifting timelines and strained
resources, it has been easy for banks to put ISO 20022 migration on the back
burner. But as deadlines near, it is important for banks to focus on the
long-term opportunities rather than the short-term pain.
ISO 20022 allows banks to improve and extend the
payments-related services they provide to business customers, enabling the move
from pure transaction-based services to value-added insights and advisory
services. As banks look to reassess their long-term strategy, expect ISO 20022
to provide a catalyst for banks to embrace payments innovation.
Realising instant payment benefits
Following years where the focus has been on technical
implementation, we are now seeing industry initiatives focused on maximising
the value of instant payments.
From a retail payments perspective, we can expect to a hear
a lot more about the European Payments Initiative (EPI) in 2021. Unlike the
several aborted attempts that preceded it, EPI has big bank buy-in and a strong
regulatory mandate from the European Central Bank. This may well mean that the
long-held ambition to create a third payment scheme in Europe will actually
come to fruition and bring the benefits of instant payments to the
point-of-sale both in-store and online.
On the corporate side, Request to Pay schemes could prove to
be the ‘killer app’ for B2B instant payments. If uptake builds and businesses
get on board, the significant benefits could start to be realised.
The time is now for cryptocurrencies and CBDCs
Beyond instant payments, momentum is also building for
cryptocurrencies as an alternative payment method. Although lauded by their
advocates for their efficiency and low cost, crypto has for many years been
something of a fringe curiosity with a hardcore fanbase. As the underlying technology matures,
however, cryptocurrencies are increasingly crossing over into the mainstream
with support from global banking and payments giants.
It is central bank digital currencies (CBDCs), however, that
stand to present the most wide-ranging strategic implications for commercial
banks. Central banks that find themselves compelled to mitigate the decline of
cash, modernise payment systems, support economic recovery and promote
financial inclusion are looking to expand their fiscal armoury, and this has
renewed focus on the potential of digital currencies.
And with private initiatives such as Diem – rebranded from
Libra in an attempt to remove the radioactive Facebook connection – posed to
launch in 2021, we can expect increased urgency from central banks to explore
and leverage CBDCs.
Government backed, digital identity usage goes mainstream
With digital transactions and interactions rising, there is
a corresponding and increasingly urgent need for a trusted, convenient and
scalable digital identity system to promote financial inclusion, reduce fraud
and improve the customer experience.
Yet, it is fair to say a widely used solution to the digital
identity challenge in the private sector has so far proved elusive, and the
industry has not yet reached critical mass. Revisions to regulatory directives
such as eIDAS, the coming age of CBDCs and emerging concepts such as
Self-Sovereign Identity (SSI) – plus a whole raft of other national, bloc and
international policies on “Digital” – are pointing towards a fully digital
world built on a cornerstone of trust. Banks’ trusted position and regulatory
know-how gives them a head start, and we saw growing momentum for bank-led
digital identity activity in 2020. Expect this theme to continue in 2021,
creating opportunities for new disruptors to emerge and the old guard to build
on their transformation journeys.
Building the business case for payments transformation
Given the scale and pace of change, transforming expensive,
inflexible and unreliable technology estates is no longer optional and must now
be a key priority for many banks. Reducing total cost of ownership (TCO) is a
critical consideration for any transformation project, but the required
investment is about more than cost savings from IT simplification. Dramatically
lowering cost requires re-architecting to offerthe fastest route to staying
competitive in a rapidly changing landscape.
This reflects a big challenge for banks, in that many are
not sure how to identify the long-term revenue opportunities and quickly build
the capabilities needed to realise them. Indeed, McKinsey reports that less
than 10% technology spend at an average bank increases value-added business
functionality.
It is crucial, therefore, that transformation projects are
underpinned by a clear business case that reflects the importance and role of
payments data as an enabler across the organisation. Perhaps the key underlying
trend we can expect to see in 2021, therefore, is banks increasingly considering
the strategic role that payments can play,but most need to cut costs by
factors, not percentages.
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