Payments have been an indispensable part of people’s lives for many centuries. Throughout history, we have seen significant advances from the use of leather money in ancient China, through the development of gold coins and paper notes, all the way to today’s contactless payments, which can now be initiated via smartphones and wearable devices.
Whilst the fundamental principles of payments haven’t changed—at their most basic, payments instruments are still a means of exchanging goods or services—the way in which we complete transactions has changed.
Now the next wave of transformation is emerging, as banks navigate an increasingly complex landscape.
In my role as the head of the UK and Ireland Banking practice at Accenture, I often get asked what I consider to be the biggest challenges in the payments space. As I see it, there are three key things to be mindful of…
1. The introduction of new regulations
Over the past few years, payments have been a major focus for European regulators. The recent introduction of PSD2 increased security and forced banks to start implementing Open Banking solutions, and SEPA is driving competition in the instant international payments space within Europe.
Whilst mostly beneficial to customers, these new regulations also create huge cost challenges for banks, both in terms of initial implementation and ongoing maintenance. What’s more, they have landed at a time when revenues are already under pressure from increasing competition and disintermediation. As a result, not only do traditional banks need to work hard to comply with frequently changing regulations, they must also fight harder against new—and very different—competition.
2. The new market entrants—challenger banks and fintechs
In the UK and Ireland we’ve experienced particularly strong growth in challenger banks and fintechs. The resulting market disruption has helped to drive accelerated digitisation of payments services and the creation of new payment methods as a direct response to changing customer needs.
The next wave of payments transformation is now starting to build, powered by customers’ changing behaviour. To navigate it successfully, banks will need to address three sets of challenges.
Take fees as an example. A few years ago, nobody would have objected to paying relatively high FX fees. Now, with players like Revolut or Monzo established in the market, everyone expects them to be minimal. In addition to low costs, customers are also demanding sophisticated mobile banking app experiences. In many ways, these innovative new solutions are much easier to implement for the challenger banks, who often benefit from newer, more agile infrastructure than their traditional high-street competitors. Payments projects at established banks often impact legacy mainframe systems, leading to lengthier transformation timescales due to the amount of regression testing required and complex routes to live.
Going forward, innovative solutions like New Payments Architecture, microservices and open data will need to be explored to allow banks to be more flexible in their offerings and respond faster to changing customer needs and expectations.
3. Changing customer expectations
So how exactly are expectations changing? Well, in today’s world, everything happens quickly. We don’t wait to buy a book; we just order it online and have it within seconds (if it’s an eBook) or the next day (if it’s a physical copy). We don’t go to a shop to buy a film; we purchase it online and watch it there and then. Everyday experiences like these have made customers more impatient than ever and they now expect payments to work in the same way—instantly.
We’ve made good progress towards this in the UK and Ireland with the introduction of Faster Payments, but we still have a long way to go to integrate instant payments seamlessly into the customer journey. This is especially true for international payments. Customers also expect payments to be free—another big challenge for international transfers. Open Banking solutions and new technologies, such as blockchain, will help banks address this, but the focus now needs to be on integrating payments into customers’ day-to-day journeys and making them ‘invisible’ as a result.
The way forward: Listen to customers
Overall, what’s clear across the payments space is that we’re living in exciting times—bringing both constant challenges and exciting opportunities for banks to stand out. The right response is vital. In my view, the best thing banks can do is listen to customers and invest in creating a flexible infrastructure that can support their evolving needs.
My thanks to Sulabh Agarwal, Dan Graham and Ewa Wojcik for sharing their expertise on this topic.
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