The pace of payments transformation can be daunting. Payments are faster but are becoming commoditized due to contracting margins. Contactless payments are up; cash use is down. And businesses and consumers are demanding convenient, seamless ways to pay.
As market disruptions and new initiatives challenge a business-as-usual stance, financial institutions are reviewing business models to remain relevant and profitable.
We spoke with David Chance, vice president of product strategy and innovation, and Andrew Foulds, director of global clearings, Enterprise Payments Platform, both from Fiserv, to better understand what's driving the payments evolution and what strategies financial institutions should consider in light of those shifts.
How are consumer expectations for payments evolving?
Chance: Customers expect seamless and intuitive payment experiences, however they choose to pay. In Europe, we're seeing a shift from card networking to instant payments, open banking and overlay services that provides a contactless experience using push credit transfers. That offers end users the same experience but with greater convenience and speed – and reduced costs and risk. For merchants, the change is bringing down fees and improving cash flow.
The COVID-19 pandemic is accelerating the payments evolution. Especially in the U.K., there's been a significant drop in cash withdrawals from ATMs and a shift to contactless payments. And because there are no longer transaction limits, consumers can do a week's worth of shopping using contactless Apple Pay and Google Pay mobile options.
Services such as instant payments, request to pay and open banking can work together to provide a customer experience similar to traditional payments. For example, a credit or debit card could be used for authentication and authorization after receiving a request to pay. The merchant could then initiate a push credit transfer on behalf of the customer using open banking.
Customers expect seamless and intuitive payment experiences, however they choose to pay.
Foulds: The pandemic is also accelerating the move to a more cashless society – a shift that will likely be permanent for all generations. Look for continued rapid innovation in the ways merchants and consumers interact, pay and get paid.
In addition, regulators, police departments and governments are working to reduce cash use to improve tax receipts and help stop terrorist financing and criminal financing.
What is the effect of the move to instant payments?
Foulds: Traction for real-time payments is increasing within the corporate sector, which means financial institutions must be available 24/7 to businesses. Traditional practices, including asking businesses to provide their payment instructions early in the morning so they can be processed late in the day, are no longer relevant nor do they meet today's corporate demands. In the same way, credit should be provided at the time it is required rather than when bank staff would traditionally be available.
To gain efficiencies, the focus has shifted to cash and liquidity management and forecasting. Even small corporations are working to better understand how cash flow works. Instead of releasing all payments at one time, how can they manage and improve cash flow with just-in-time payments? For example, employees with zero-hour contracts, such as those in the hospitality service industry, demand immediate payment for service.
Chance: Using credit risk and forecasting services to manage cash flow is driving instant payments outside of the consumer world. Nonstop availability requires the same level of organizational support for liquidity, credit decisioning and treasury services.
That can be achieved with a radical rethinking of how the bank operates. For instance, using artificial intelligence and machine learning to analyze all available information is key for cross-border payments, which require inclusion of local language and character sets.
The pandemic is also accelerating the move to a more cashless society – a shift that will likely be permanent for all generations.
How and why is this shift to a more customer-centric approach happening?
Foulds: Consumers and businesses are not interested in the workings of the payments back office. They want to know how they can pay and that their payment has been received. The focus needs to be on the user experience. That is where fintech excels, including monetizing information by turning data into products and services.
Compliance with payment rules and clearing processes, as well as moving to the new messaging formats that will arrive with the adoption of ISO 20022, is complex and expensive. Financial institutions need to assess whether they have the skills and tools to meet the new standards. Working with the right fintech partner can help financial institutions meet compliance obligations and explore opportunities to add customer value with the data-rich information that is part of ISO 20022 messages.
Chance: All financial institutions should ask: Does our organization want to be in the payments business or are there alternatives that will offer clients what they need? The payments world is becoming a crowded marketplace with new entrants, including fintech and startups. To best serve their clients, financial institutions have started to look at managed services and payments as a service.
How do financial institutions decide whether to outsource or support payments processing in-house?
Chance: Is payments a strategic pillar or a supporting function for other parts of the business? Based on that answer and their strategic plans, financial institutions can work with a technology partner to deploy internally or on the cloud, or consider managed services.
Foulds: For example, a specialist bank or business-lending bank wouldn't necessarily need a full team to support payments. It could, however, choose a preferred partner to process payments, which would lessen scalability concerns when volumes increase.
There are many advantages to working with payments infrastructure processors, including greater agility, reduced risk, increased resiliency, and the ability to address sanctions and fraud given the scale and volume of transactions. Consolidation of payment types and processes on a centralized platform enables financial institutions to provide scalability, cross-organizational efficiencies and the ability to provide value-added services to customers with a single view of all payment types.
As the evolution in payments and the digital ecosystem accelerates, financial institutions can evaluate their operating models and the overall role of payments in their growth strategies and move forward accordingly.