While there are still formidable barriers to overcome before entering the new world of open payments these are being relaxed through regulation such as Europe’s revised Payments Services Directive (PSD2). Generally, third parties are innovating much more rapidly than banks and the scope and pace of development are driving change, which is forcing banks to respond.
Third parties are acting as disruptors of the payments status quo, leading to a marked reduction in the level of control that banks can command. Consumers are moving into a position where they can take control for themselves, as their buying decisions impact the payments space while favouring creative, cost-effective offerings.
“The barriers to entry are definitely going down and third parties are challenging the traditional players,” says Salim Dhanani, director, business development EMEA, for Carta Worldwide.
The integration of legacy bank systems is a big drag on change, as such systems were not built for expediting on-line, real time payments. There are many new players in this space, looking to bridge the gaps between legacy systems and the new environment. Increasingly rapid and responsive services are now being demanded by more customers. Third parties can be sufficiently nimble to facilitate the necessary advances quickly and seamlessly. One clear effect of the new efficiency will be a radical reduction in payments’ costs.
Consumers are being presented with an expanding range of choice in payments solutions. In this context, they are not primarily interested in the payments transaction per se. They will simply choose the easiest, most cost-effective approach to buy the goods or services they need, and will drive the innovation of rapid, transparent solutions. So the direction of changes will be driven by consumer choice.
The general trend in supply chain management is for higher volumes of smaller orders to be placed, which increases the volume and decreases the value of individual payments executed.
The Options for Banks
Foreign currency payments present interesting opportunities for third parties. The current arrangement lacks transparency. A card payer may be presented with the choice of settling, for example, in sterling or euros – but the costs of this choice can be substantial and are not necessarily visible. Third party alternatives can offer improved cost visibility. “We all agree it’s about customer choice,” adds Dhanani.
Banks’ reactions to the challenges being posed by the advent of nimble and creative third party solution providers have been quite variable. Some have tended to ignore the situation and have then reacted aggressively to the new competition, for example by cutting lines. The current trend seems to be towards banks partnering with selected third parties, although some are presently less open. “Banks are slow to change because of the barriers of security,” says Terrie Smith, chief executive (CEO) of DigiSEq. “Third parties are far more flexible and it will take time and thought before banks act.”
It should be remembered that banks do offer generally high levels of customer security, and regulated risk management for their liabilities. Their institutional inertia means that they are slow to change – but the new environment means that those who are not nimble enough to adapt are increasingly liable to lose customer wallet share.
The banks seeking to adapt need to work with third parties to evolve settlement systems that will work with multiple front end to satisfy customer needs, flexibly, simply and competitively. Large banks must accommodate the diverse needs of, for example, high value payments, consumer payments, payroll and trade flows. The front end businesses need to be agnostic to the settlement method used, which requires substantial technical cleverness behind the scenes.
Looking forward, when it arrives PSD3 will – presumably – continue to encourage the opening of the payments market, at the same time plugging the control gaps that will inevitably emerge in a fast- evolving environment driven by increasing competition.
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