Take a look across the UK & Ireland payments ecosystem and you will see pervasive change in multiple dimensions. With the pace of change only set to accelerate, banks need to ask some tough questions about their existing payments operations – and ensure they have the agility and insight needed to respond effectively and at speed.
To an extent, the current shifting landscape is merely the latest manifestation of a sweeping transformation over the past decade, encompassing payments infrastructure, technology and regulation. From chip & pin to Faster Payments, from SEPA to PayM, the changes have been remorseless and wide-ranging. At the same time, PSD1 started to bring attention to customer-centricity in payments.
As banks have undertaken the significant infrastructure investments to cope with these shifts, they’ve also had to face up to wide scale disruption. Mobile and digital payments have been talked about for many years, but in the past four or five they’ve exploded into the mainstream, with ventures like Pingit and Square fundamentally reshaping the way customer payments are enabled and delivered.
Again, this change will only accelerate, under the combined impact of new regulations and the industry-wide drive to provide better customer propositions. With PSD2 set to usher in the era of “open API banking”, fintechs will have more opportunities to integrate banks payments into other applications and further enhance customer engagement.
And the need for changes in core payments infrastructure are not going to stop any time soon, given the requirement for the UK’s biggest banks need to adapt to ring-fencing, and further regulatory initiatives ranging from the other provisions of PSD2 to instant SEPA transfers. There’ll also be continuing shifts between the core payments time, with the ongoing migration from BACS and CHAPS payments to Faster Payments being hastened by the rise in FPS limits.
So, what does all this really mean for banks? Several things. The recent period of high change costs will continue. But, equally, so will the increasing pressure on revenue potential from payments – which, as a non-interest income stream, is especially valuable in the current low interest-rate environment.
However, perhaps the biggest implication in the longer term is the rising threat of disintermediation from customers. In the era of “free” current accounts, banks have effectively bundled and given away payments to encourage customers to buy other offerings. But with growing numbers of fintech and payments start-ups seeking to force their way to provide payments functionality that approach may be running out of road.
In combination, all these developments leave banks facing a host of questions. What will the future payments landscape look like? What will be their role in it? Can payments remain profitable in its own right? Will cards remain a separate payments vehicle? What will be the impact of blockchain? How will the next wave of regulation change the environment?
In the next blog in this series, I’ll begin to answer some of these questions.