No Match Found
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.
Given that the advancement of payments innovation within the B2B sphere is still nascent, banks have an opportunity to capitalise on their status as all-round financial service providers to differentiate themselves in specific segments in the payments ecosystem (Exhibit 12).
Compared to other PSPs, banks’ unique position allows them to identify and assess emerging B2B needs of corporations in other areas outside of payments, and then look for ways to differentiate their current and future offerings. Treasury and cash management services are typical examples of areas in which banks can consider providing ancillary services. Within treasury management systems, for instance, treasurers can leverage greater deployment of automation fintech and emerging software tools to access information and optimise administrative processes through greater e-commerce integration and the use of alternative payments instruments. The implementation of the ISO 20022 could further support this, boosting the feasibility of instant payments if adopted globally. For cash management, innovation in payments could help to provide greater security through the integration of smart cash management software like the recently developed Zen Cash Management Software Suite, which offers heightened connectivity, remote management, and immense adaptability for banks’ cash management operations. The SafeStore Auto software from Gunnebo's SmartSafe solutions, which is currently used by Danish bank Danske for instance, is also another example of an automated and secure cash deposit locker that allows bank customers to manage their deposits virtually.
Cross-border payments represent another key area in which banks could differentiate themselves. Here, they could leverage existing networks and emerging technology systems to improve processing speed and seamlessness in order to catch up to the competition. The Immediate Cross-Border Payments (IXB) initiative launched by the EBA CLEARING, SWIFT and The Clearing House is a major step in this direction. Developed in collaboration with 24 banks and with seven banks involved in the proof of concept, this initiative will allow existing infrastructure and connections to be combined with new technology to bring about real-time and instant cross-border payments with a focus on speed, access, cost and transparency. It is expected to begin piloting at the end of this year with 24 participating banks already enlisted.
As the digitalisation of payments advances, concerns surrounding associated cybersecurity risks are also likely to intensify. This is not surprising, with 48% of business leaders in a PwC survey citing cybersecurity as their topmost concern. Given that banks already boast greater experience and expertise in managing cybersecurity risks, it becomes evident that they have an opportunity here to lead the way. Not only that, but banks' cybersecurity expertise could increasingly become a significant connecting point with other industry players, with these new players depending on collaboration with banks to not only strengthen their cybersecurity risk management frameworks but also enhance their credibility with clients.
Overall, re-inventing their roles in strategic areas does not only allow banks to favourably position themselves to secure and maintain leadership within the market. By differentiating themselves as experts in these ‘hybrid’ fields that merge specialised banking services and technology, banks could also transition from a transaction-based revenue model to a revenue scheme based on value-added services. This approach would drive them to provide maximum value on all their transactions, leading to an increase in loyal customers who are willing to pay a premium for these value-add services, as well as significant market share with positive impacts on profitability.
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.
There is sufficient evidence that embedded finance is opening up new frontiers within the payments landscape, with big tech and fintech firms currently leading the pack in fully probing the expansion opportunities this technology offers. Indeed, since the launch of Apple Pay in 2014, digital wallets have become an increasingly popular means of payments, accounting for nearly half (49%) of global e-commerce transactions as of end-2021 - with this figure forecasted to hit approximately 53% by 2025. Embedded lending - in the form of BNPL - is also fast rising within the consumer lending segment, thanks to the efforts of players like Klarna, Clearpay and Affirm. In this context, it becomes clear that banks would have to accelerate their efforts and actively leverage embedded finance technologies in order to retain market relevance and market share.
To this end, the 'uberisation' of payments - a knock-on effect of embedded finance - represents a typical example of how banks can potentially employ embedded finance to create scale within the payments sector. The influx of 'super apps' like WeChat in Asia proves this - being seen to significantly bolster e-wallet adoption and drive new business models through enhanced integration with PSPs, expanded service offerings and access to customer data. With B2B customers urging for a seamless and convenient means of effecting their payments, banks could already look into ways to develop similar offerings within their payments services.
Within the open banking sphere, banks should also consider using open banking APIs to integrate additional services features and services to improve the overall user experience. This could be implemented in areas like market investment management, liquidity management, invoice financing and/or management, as well as supply-chain financing options. Some banks have already jumped on this train, with HSBC launching its Connected Money App in 2018, which allows customers to view various bank accounts, loans, mortgages, and credit cards, on a single platform. In the same year, BBVA also launched its Open platform, a BaaS platform that uses API to connect customers to third parties offering financial products.
That being said, it is important to note that while the technology holds numerous cost and efficiency benefits and could likely be the next phase of the payments revolution, the exploration and replication of embedded finance-based innovations like super apps in Europe would not be without hurdles. Banks and other payments sector players would be required to navigate stringent data privacy concerns and GDPR restrictions. They would also have to demonstrate mastery over the data challenge, particularly in enhancing end-to-end transparency to secure data protection of customers.
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.
As already pointed out, the current regulatory landscape does not appear to provide homogeneity for all players within the payments landscape. Banks, being more heavily regulated, tend to encounter more stringent restrictions and greater compliance and implementation requirements. While this often translates into higher costs, this high level of regulation has also helped to enhance banks' trust and credibility with the consumers and businesses that they serve - a status that is further reinforced by banks' proven resilience to crises and their role in maintaining overall financial stability. In fact, research shows that 73% of consumers trust their banks to have their best interests in mind, while a BIS study showed that about 60% of consumers are more likely to trust traditional financial institutions, i.e. banks, than government agencies or fintech companies to protect their data.
For big tech firms, this is far less, with only 1.4% of respondents citing complete trust.This is probably not surprising, seeing that the low level of fintech and big tech firms’ regulation makes them more prone to assume risks that could have detrimental impacts on industry participants. The recent volatility of crypto-assets is an example of such impacts stemming from low regulation.
Regulators thus have a responsibility to level the playing field by ensuring all-round compliance with standards by all industry participants (Exhibit 13). This becomes all the more urgent when considering the data protection, liquidity, KYC, and AML risks that could materialise in the absence of stricter regulatory requirements across the board. At the same time, regulators also have an opportunity to dominate the world of payments by harmonising regulations and encouraging technological innovation.
In the same way, the imminent MiCA regulation, while still under consideration, also stands to foster fair competition. If adopted, this regulation would provide a framework to guide the issuance, custody, and administration of crypto-assets currently out of the scope of EU law. It would also help to enforce consumer data protection and address risks associated with the wide scale use of crypto and DLT-based financial services offerings, thus helping to prevent market abuse and other financial crimes.
Audit Partner, Banking, People Leader, PwC Luxembourg
Tel: +352 49 48 48 2451
Deputy Managing Partner, Technology & Transformation Leader, PwC Luxembourg
Tel: +352 49 48 48 4174
Advisory Partner, Banking, PwC Luxembourg
Tel: +352 49 48 48 4131
Assurance Partner, E-Money & Payments Institutions Leader, PwC Luxembourg
Tel: +352 49 49 48 2065