A NEW ERA IN PAYMENTS
Innovation in Payments – At the Forefront of Retail Banking
WSBI and CaixaBank’s Innovation in Payments Conference was held in Barcelona on 13 and 14 April. The event focused on the new digital banking landscape, the effect of digitisation on the payments value chain, the transition to a cashless society, P2P payments, and big data analytics in banking. It brought together a diverse, global audience of retail and savings banks from 42 countries, indicating the importance of the "new era in payments" to retail and savings banks. Innovations in networking and transactions are central to emerging digital technology, and as payments is a transaction and network industry, it is obviously at the forefront of innovations in digital banking.
Digital is the new "normal"
To compete in an always connected world, banks need to respond to the mobility expectations of their customers, improve their service by basing their payments business on customer data, and continue to deliver very high levels of security. Over the next 20 years, technology transformation will have a greater effect on the banking industry than regulation, putting an end to the banking industry’s post-financial crises focus on regulation and protection through its own rules. Banks have always been part of a heavily regulated industry, making it easy for them to keep competitors from entering. This protection is being dismantled by technology and the overhaul of banking rules. Banks must adapt to this change in impetus, placing innovation at the forefront of their strategic plans and product management processes, and this undertaking must be led by top management – as the digital transformation will shape all areas of banking, including back-, middle-, and front-office operations. For this banks will need to retain and recruit talented, innovative, and digitally minded employees. Banks must also engage customers in the development process, adopting the customer-focused processes and product development that has become the norm.
The payment value chain is opening
Developments in technology and regulation are deconstructing the traditional banking payment value chain, in which banks operated and controlled the entire payments process. Each transaction stage within the chain is now open to the effects of innovation, and subsequently to competition. This has led to a very vibrant payments industry characterized by a large number of startups backed by impressive amounts of venture capital investment. This is challenging banks’ traditional "universal" model of payments, in which they offer services across the full array of payment processes. Banks should respond to these developments by moving toward a "specialist" model for payments, in which they exploit their core banking assets – security, trust, and data – to offer specific services that go above and beyond those offered by non-bank players, or by partnering with innovate payment service providers operating in specific areas of the payment value chain.
Digital payments a battle for customer data
It is essential that banks analyse and exploit the vast amount of customer data they hold to inform their actions, in real time, across all areas, including internal processes. Banks have less physical contact and fewer opportunities to build personal relationships with customers, and this contact will only diminish in the future. They must adapt to this reality, using the data they hold to inform insights on their customers, as this will be a critical factor in retaining and capturing market share. This creates a need for banks to perform as many of their customers’ transactions as possible, as data is gained through each transaction. The battle for payments is, in this regard, a battle for data.
Use data to innovate in mobile banking
Banks can also use the insights gained from analysing customer data to innovate in mobile banking, providing contextual lifestyle apps that can deliver one-to-one service offerings to customers, and ultimately providing market differentiation. The importance of contextual mobile banking will only increase as contextual lifestyle apps are gradually linked to the Internet of Things.
Preserve trust and security
While harnessing insights from customer data, banks must ensure that they do not jeopardise customer trust, and of course comply with data privacy obligations, which unfortunately differ across jurisdictions. They must also ensure security throughout the entire payment chain, protecting from all data breeches, whether they take place at the bank itself or affect third parties such as merchants. It is often banks that are left to deal with the consequences of customers’ financial information being released – through having to issue new cards, change payment details, deal with claims, and so on – so it is essential that banks are prepared to protect their customers at all stages in the payment chain.
Provide innovative payment support to SMEs
Physical and digital retail channels are converging, creating a new environment in which the customer gains the advantages of both physical retail and e-commerce – such as testing a product in store before purchasing it at the best price online. Banks can help merchants to turn transactions from a cost to a value-add in this context, by for example using digital technology and customer data to provide additional customised offers at the point of purchase. This support will help to thwart the threat that marketplaces present to SMEs, and the banks servicing them. Banks need to provide convenience for retailers and customers, but must uphold one of their key assets: security.
Digital banking and P2P relationships offer a new "proximity"
One of the strengths of savings and retail banks is the close, personal links they have with their clients, and this proximity – a core asset – has been essential in differentiating the services they provide. Digital technology offers banks a renewed opportunity to enhance the relationship they have with their clients. It brings the relationship to a peer-to-peer level: where the customer is no longer the passive recipient of the communication of the bank, but enters into an active dialogue with digital technology, allowing the customer to interact directly with their bank and to compare the client offer with those of other banks.
Banks should encourage a "cash-lite" society
In most countries, including many in the EU, the majority of transactions are still paid for in cash. The costs of supporting cash give banks a vested interest in promoting a migration to cashless payments, so as not to be outcompeted by parties serving more digitally savvy customers or offering digital-only payment options, and to avoid being saddled with the disproportionate costs of supporting residual cash transactions. In this context, peer-to-peer instant payments – a form of virtual cash or "cashless cash" – could become the new standard. The Netherlands and Sweden provide examples of how a multi-stakeholder approach can significantly reduce the use of cash by moving transactions to cards and online payments.
Continuing focus on innovation and digitisation in banking
The new digital era in banking is emerging at a time when banks face many other challenges, such as the enormous efforts required to comply with regulation, and competition from new players. The many banking leaders and experts in digital technology that spoke at the event agreed that these challenges must not steal the priority that digitization requires and deserves. WSBI members and others travelled to the conference in Barcelona from Africa, Asia, Latin America, and the US, as well as within Europe, to engage in the discussion on digitisation and share their experiences and expectations with regards to innovation. This shows the global nature of the challenges and opportunities presented by digitisation and innovation, and the need for WSBI-ESBG members to work together to share ideas and expertise in order to benefit from the technological, institutional, societal, and environmental changes affecting the banking industry. Chris De Noose, Managing Director WSBI-ESBG, praised the conference as a key step in WSBI-ESBG’s ongoing work into innovation and digitisation, and emphasised that there is still much work to be done in this area.
WSBI’s Innovation in Payments Conference is one in a series of WSBI-ESBG events on innovation and digitisation in banking. The next event, WSBI World Congress, will focus on "main street banking in a digitised world," and will be held in Washington on 24–25 September.