Payments evolution: striking the balance between regulation and innovation
Published January, 2017 |The future of financial services Print
Regulation, technology and product innovation, new players and increasing customer expectations are changing the face of the payment industry in the UK and beyond. They are challenging participants to rethink what they need to do to be successful. Payments are key to an effective economy and are a core function for banks in terms of their product range and service. The world of payments is constantly evolving as individuals and businesses are using more and more convenient, accessible, electronic payment products.
An ever-increasing rate of change is now being experienced. This can be attributed to:
• An evolving regulatory vision driving new payments regulations and legislation
• High customer expectations
• Emergent competitor landscape
• Increasing cross-border activity and globalization of the payments market
• Innovative use of technology
This changing landscape poses both challenges and opportunities. In some cases, it even blurs the lines between regulation and innovation. This is notable through the introduction of Open Banking; a requirement which demands financial institutions to open up their infrastructure with the objective of enhancing data-sharing and enabling third party payment initiation and competition.
In this article, we discuss how banks must balance the investment and innovation needed to meet customers’ expectations with the demands of the regulatory environment.
An evolving regulatory vision
Transparency, fairness to customers, competition and innovation are the declared thrust of much of the regulatory change hitting the payments world, along with the ever-present underlying requirements for controls and reporting.
There is a plethora of regulatory developments impacting the UK and Europe both directly (e.g. Open Banking) and indirectly (e.g. Structural Reform). Furthermore, ongoing scrutiny of AML and Sanctions measures won’t subside. Firms need to prepare themselves for changes in the regulatory regime and need to assess not only the risks but also the opportunities that these new regulations present, examples of which are set out below in Fig 2.
Customers of the payments industry represent a broad spectrum from the individual consumer interacting in branch, online, by phone, at Point of Sale or via their mobile to global treasurers of large multinational corporate clients. Customers not only want value for money, they also want to play an active role in tailoring their own products and services. Their demands are characterized more and more by:
• Ease of use, flexibility and personalization: customers used to intuitive, convenient, easy-to-use mobile and internet products are unforgiving of “clunky” experiences. This is particularly challenging when addressing security considerations, e.g. card readers for online banking authentication.
• Immediacy: there is an expectation for real-time capability from peer-to-peer payments and real-time notifications and balances provision to the treasurers of corporate banking customers.
• Mobility: the provision of services across channels is now a hygiene factor with an ever higher emphasis placed on the mobile channel. Delivering the right front-end experience and information back to customers is dependent upon effective, adaptable, efficiently running payments IT and operations.
• Reliability: failures in payment systems can have dramatic consequences. At market level, it can generate issues throughout the economy. At customer level, it can be both inconvenient and costly in terms of missed payments or being unable to access funds.
• Security: from channel through to backend processing, the need to pre-empt and respond to the latest threats won’t ease. Banks have traditionally been seen as trustworthy and reliable in this area when compared with new entrants, so as innovation is embraced, the robustness of this reputation needs to be protected.
The balancing act
Multiple layers of regulation and industry innovation converging to impact on payments systems and operations. Payment providers need to form a view about how these dimensions of demand will impact their payments, IT and operations. They also need to establish a holistic portfolio-management approach, set up to deliver change driven by what is known today but and to effectively phase in future regulatory demands and business needs (see Fig 3). Taking this approach, investments will help a firm respond not only to new regulatory requirements but also to business needs and enable the creation of innovative and forward-looking payments systems.
What should you do next?
1. Understand the regulatory and technological landscape and how it will drive change
Regulatory efforts to enhance competition and customer experience are catalysts for the innovation in the payment industry. Regulation can no longer be perceived as an independent requirement; it has become intrinsically linked with customer experience and innovation. To understand how these moving parts will impact your business, it is essential that you:
- Understand the scope of regulatory changes and technological advances and anticipate how they may evolve over time
- Identify the impact that regulatory requirements will have on your: business model, customers, market trends, current and potential future competitors
- Analyse the opportunities and risks presented by the changing landscape
2. Determine your payments strategy
There are many permutations of how each bank can exist in the future. As we begin to see a fundamental shift in the way that customers and banking providers interact, the key questions to consider are:
- Where do you want to sit on the regulatory and technological spectrum: from minimal compliance to targeting strategic growth?
- What will your customers' expectations be in the future? How do you want to engage with them?
- What sort of relationship do you want to develop with emerging FinTechs?
- What are the barriers that will prevent customers from adopting new products or forming new relationships? How will you overcome these?
3. Understand your readiness position and develop a road map
The next step is to consider your current readiness position and the steps you need to take to achieve your strategic goal.
- Decide how to leverage your market position or expertise to thrive in the changing environment
- Understand the gaps that exist between your current position and your strategic goal; what are the operational and financial impacts on closing these gaps? What is a realistic timeframe to close gaps and does that fit in with your strategic ambition?
- Consider how you will track regulatory requirements and progress towards meeting them
- Determine your road map and test levels of senior stakeholder ‘buy-in’
4. Establish a holistic portfolio management approach
It is important to meet regulatory requirements whilst also serving business needs. Key questions to consider include:
- How will you determine which projects should be pursued and how will you measure the benefits?
- How will you manage the value chain of innovation?
- How will you ensure that you continuously review your position in the market and adapt to new factors?
Nobody can predict exactly how the payments landscape will evolve over the coming years, but we can be certain that it will undergo fundamental change. This is an exciting and challenging time for banks. The winners will be those who strike the balance between managing regulatory change and innovative thinking.