Banks can thrive by rethinking their solutions and models

As the B2B activities of banks evolve, driven by the payments revolution, it becomes evident that banks need to carefully consider and define what their role would be in the coming years within this landscape.

Having demonstrated strong resilience and characteristic ability to manoeuvre various challenges in previous times, there is no doubt that banks have the potential to successfully navigate this emerging payments ecosystem. Thus in this section, we propose certain strategic actions for banks’ consideration that would accelerate the pace of their next adaptation phase and consolidate their position in this emerging payments landscape.

Partnerships with fintech will lead to a win-win situation

Now more than ever, it has become imperative for banks to seriously explore opportunities for collaboration with other players within the payments ecosystem. Partnering with the vast number of fintech and emerging big tech players holds immense potential to enhance banks' agility and innovation initiatives at much lower costs, as well as improve their internal operational efficiency. Banks already appear to agree on this, with nearly 55% of banks in a survey by Banking Circle already collaborating or intending to collaborate with partners in the area of payments

Further collaboration could also encourage the development of joint digital payments offerings between banks and fintech and big tech firms, which could allow banks to better capitalise on innovation-driven regulatory changes. With such partnerships in place, banks would be compelled to revisit their product structure and packaging. This could lead them to explore new product offerings such as Buy-Now-Pay-Later (BNPL) or develop attractive BaaS propositions, while also allowing them to not only reach but also retain access to a diverse client pool. Banks like Goldman Sachs are already looking into these vast possibilities within the B2C segment, partnering with Apple Inc. to offer the Apple Credit card which operates as a smart consumer credit card. The bank handles all matters related to the platform such as underwriting, customer service, and regulatory compliance, and the card users benefit from doubled efforts to ensure consumer data security and privacy via Apple's advanced technologies such as Face ID and Touch ID.  

Banks could also partner with fintech firms to consolidate processing volumes using Payment-as-a-service (PaaS) platforms. Outsourcing or insourcing part of their payments value chain would allow them to develop dispensing systems that ensure continued transaction flow at a lower cost. This could be especially beneficial for small and mid-sized banks that are unable to commit the required investment to upgrade or adapt their infrastructure to new open API systems. 

In the B2B segment, we are also seeing the rise of promising partnerships aimed at driving payments innovation further. ING Bank, for instance, acquired a minority stake in TransferMate, a leading cross-border B2B payments service provider, in 2018. This partnership provides ING bank's SME and corporate customers access to TransferMate's full suite of payables and receivables solutions. The bank also benefits from TransferMate's cross-border API technology and payments licence which helps to reduce costs associated with international payments. As recently as 2021, JP Morgan has partnered with Alipay, the B2B platform of Alibaba Group, to provide digital card payments services for US-based SMBs. In Luxembourg, an increasing number of banks are offering open banking solutions to their customers through Payconiq's application. This includes B2B customers, who now have access to the PAX A920 electronic payments terminal, an accelerated mobile payments solution developed through a strategic collaboration between Payconiq and Servipay in 2020.

In deciding to expand partnerships with pure-play fintech firms, however, banks need to consider potential challenges. These range from differences between banks' more conservative approach to risk-taking and fintechs’ entrepreneurial approach and high-risk capacity, long project timelines which fintechs may not be used to but are required to ensure that banks can implement necessary compliance, legal and risk mitigation controls, and having to decide between upgrading legacy systems and integrating new technologies at scale. To tackle these challenges, it is imperative that both parties clearly define and align on the strategic objectives of the collaboration, securing the commitment of all related stakeholders. Banks would also have to be more flexible in adapting their often rigid internal structures and procedures to the more dynamic and agile systems associated with emerging technologies.

Drive the development of global payments solutions

As the payments ecosystem becomes increasingly connected and digital,  it is imperative that the systems and infrastructure underpinning this connectivity are strong enough to withstand the growing impacts of fragmentation and regulatory/systemic divergence. This would be particularly necessary if banks are to operate truly global and interoperable payments systems that seamlessly connect businesses, markets, and economies to the digital world and also facilitate digital integration.

At the moment, several structural and geopolitical risks threaten to force the further fragmentation of the payments system. Paramount among these is the absence of a strict EU-wide framework for the implementation of the PSD2. This has resulted in ambiguity when it comes to interpretation, with each country applying the regulation based on its own defined criteria - creating barriers to the flow of cross-border payments and technologies and having various cost and efficiency impacts on different economies. Recent geopolitical tensions have also intensified the risks of economic and technological fragmentation across the region, with impacts on payments.

Nevertheless, banks stand to assert their relevance and credibility within the payments sphere through their access to institutions and networks that could enable common agreements. They could do this by collaborating among themselves and with regulatory bodies like the ECB and IMF to actively promote the standardisation of international payments systems that are safer, inclusive, more efficient, and less prone to the risk of fragmentation.  The European Payments Initiative - launched by 16 European banks to create a unified payments solution for European consumers and businesses - is an example of how banks can drive progress towards a truly global and integrated payments market that facilitates processes across the region and drives economies of scale.

In addition to such initiatives, banks could harness their unique role as experts in cybersecurity risk management to develop innovative and industry-relevant services in this sphere, backed by regulatory initiatives such as DORA. This could be useful not only for identifying and mitigating cyber risks but also for enhancing e-KYC and overall risk management in the payments sphere markets.

Overall, banks in Luxembourg find themselves on the precipice of a monumental and transformational moment, with the skill sets, relationships, and infrastructure to advance significantly in tandem with the payments revolution. Considering the implementation of the above-mentioned points, while keeping in mind the integration of client centricity at the core of adaptation to changing business models, will separate the winners and laggards in this respect. The former stand to attract greater volume in terms of transactions or expand on value-added services, while the latter—should they be too slow in their pace of adaptation—may find themselves outpaced by their peers and restricted to intermediary roles.