We may currently be in a period of uncertainty, but in many parts of the economy, it’s an exhilarating one, too. Our increasingly connected, there-in-an-instant world means people expect instant service - whether it’s a music download, a film hosted by Netflix or even goods from providers like Amazon. In the world of payments, the demand for an instant service is no less pervasive: customers want to pay right now and the supplier wants to receive payments instantly, including across borders. We have never witnessed such a rapid pace and scale of change - and certainly not with so many developments shaping the payments world in consort: greater regulatory demands, new technologies, and evolving customer demands deserve mention. The payments industry – as it has developed in the last couple of years – proved that technology and collaboration, a boom in FinTech startups, and regulation changes have created a living, breathing organism that only knew an upward turn. And topping the metaphor, it is now all grown up, having gained an identity of its own and currently learning how to keep its momentum.
According to McKinsey’s Global payments 2018 analysis, the 11% growth generated by payments — which reached USD 1.9 trillion in global revenue — is the largest annual increase the statistics entity has measured in the past five years. The milestone of a USD 2 trillion global industry is set to be surpassed two years sooner than expected, and a USD 3 trillion threshold looms just beyond McKinsey’s five-year projection horizon. Compared to these figures, Mastercard estimates, just in the US, for reference, based on an analysis of payment flows, that the business-to-business (B2B) payments market is in the range of USD 25 trillion annually, with checks accounting for more than 50% of the overall transaction value. Within the complexity of this environment, B2B payments gain substantial leeway in terms of technological advancements, and banks are trying to develop reliable means of enabling corporate transactions, even though there still is room for improvement. B2B payments have to be:
It’s a dynamic time, but not without challenges for banks, which must balance protecting the customer and leveraging the demands of regulators with offering new solutions and services. In the cross-border landscape, there’s a comparable analog: the shift from the traditional, slower system of correspondent banks to a more interconnected high-speed world. One challenge is that different countries and banks are at different stages of their evolution and readiness, so there’s quite a range of propositions and systems, but the direction of travel is towards greater harmonization. In the UK, for example, a new real-time payment system is growing at pace - its increase in payments in the year to July 2019 was about 28%, and the vast bulk of that percentage were one-off instant payments made on mobile or online. In the UK, real-time instant payment isn’t “the new normal”; it’s an old normal that will be subsumed by a truly instant world.
During the launching phase of any business, B2B payments aren’t always topping the company’s list of priorities. Payments can be slow and expensive, especially across borders. In addition, many banks are pulling back from correspondent banking because of risk and compliance concerns, and, post-recession, traditional banks have become reluctant to lend to smaller businesses. New companies are finding themselves unable to compete effectively, thus limiting their potential. In this ever-changing environment, a generational shift is underway in payments industry infrastructure and technology that promises to deliver 21st-century speed, transparency, and efficiency to payments. Positive signs show the growth and increasing interoperability across SEPA, and stressing the impact, in the European B2B payments scene:
- Systems such as instant SEPA credit transfers in Euros (SCT Inst)
- EBA Clearing’s RT1 – an infrastructure for processing payments at the pan-European level
- Eurosystem’s TARGET Instant Payments Service (TIPS)
Interoperability is a key factor in the fluent evolution of B2B payments. In this sense, globally-agreed market practice will be critical to ensuring true interoperability across infrastructures. Guidelines for the common rollout and implementation of ISO 20022 for cross-border payments will lay the cornerstone for successful migration of cross-border payments traffic to ISO 20022 beginning in November 2021.
Many people envisage a future where the faster payments systems within each country or jurisdiction will collectively mature and link up, but only when we have standards in place. This sounds straight forward but poses several regulatory challenges, such as instant fraud checking and transaction monitoring. In turn, this demands the right technology. Artificial Intelligence (AI), for instance, is one way to solve the challenge of being quick enough to monitor real-time transactions and keep customers safe. Paired with other useful innovations such as data analytics, there is quite an onus on how banks - and FinTechs - can and should make important investments around the technologies employed. In cross-border payments, SWIFT’s global payment innovation (GPI) is becoming the standard for speeding up processes and promoting transparency and efficiency. In addition, other technologies, like the cloud and AI, are being adopted in different ways by different banks. While banks could be perceived as less nimble than FinTechs, they already have customer trust and robust systems and processes in place - and understand customer needs, regulation, and compliance. The aim is to combine those strengths with the right technologies. Deploying the right tech in the right way doesn’t entail a world of “banks versus FinTechs”. Rather, we’re seeing a more collaborative and connected ecosystem where we’re all looking to improve our products and services, against a recognition that you shouldn’t always do that on your own. The smarter solution for a bank is to find a partner that can develop technologies better and quicker, leaving the bank to focus on customer solutions i.e successful AI-enabled transaction monitoring in a subset of payments processing, helping to identify and prevent fraud. Technology allows connecting in different ways. Application programming interface (API) technology, which supports open banking, is transforming the landscape and offers huge potential.
The evolving market, driven by the desire to improve the customer’s underlying experience, ultimately changes business models by increasing competition. It has a wide remit, which includes promoting innovation and competition, so it’s challenging the industry to come up with better solutions and better customer experiences. That’s great because it puts the customer first. Everybody in the payments industry has an idea of what the ingredients for a successful future look like. Industry strives to get the mix right for a more connected and instant world; a world that brings new business models supported by technology, regulation, and competition. Against this backdrop, the incumbents are galvanizing, ensuring that disruption happens from within. By providing a common language, ISO 20022 will give the payments industry and its users a strong yet flexible backbone for 21st-century efficiency and innovation. Technologies such as cloud, artificial intelligence and APIs will also play important roles in making payments faster, more automated and cheaper. Fraud prevention and privacy tools will also need to be taken into account. The future will bring ubiquitous connectivity between systems, counterparties and across value chains, facilitated by regulatory initiatives such as Open Banking (PSD2), but also by standardized open messaging and APIs.