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Pan-European Instant Payments – Which Scheme Should Banks Choose?

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Pan-European Instant Payments – Which Scheme Should Banks Choose?

Dean Wallace, Practice Lead, Real-Time and Digital Payments, ACI Worldwide

Domestic instant payments schemes are either live or in progress across the world. In Europe this poses some challenges for the next stage of real-time evolution: cross-border. Even though there is a single pan-EU rulebook “SEPA Inst”, Europe has 34 markets that are either implementing or have successfully implemented domestic schemes, which in turn makes true instant payments both within the Eurozone and beyond the single-currency borders a little complex. As well as domestic needs to transact with local banks, banks across Europe are acutely aware of the need to deliver cross-border real-time payments to their customers. Connecting to a pan-European scheme therefore is a strategic priority for any bank who needs to transact outside of their home market. But with both EBA Clearing RT1 and The European Central Bank’s TARGET INSTANT PAYMENTS (TIPS) schemes competing for members, how can banks decide where to prioritize their resources and decide which to connect to?

Reachability is Key

For banks to be competitive with their real-time services across Europe, they need to join the scheme with the highest reachability

At first it might seem like RT1 wins this round, but the equation is more complicated than it appears.

RT1 has more members so far, 28 to be precise, but it’s a closed scheme controlled by the investing banks, with membership fees charged and strict windows for testing. In contrast TIPS charges no membership fees and has the potential to be accessible to all. The key difference is the indirect model available for TIPS which requires that a TARGET2 settlement account be used at the European Central Bank (ECB), but does not dictate that the account must belong to the Payment Service Provider (PSP) or a Payment Initiation Service Provider (PISP). Particularly under the PSD2 regulations, smaller banks or new Fintechs can look to partner with a sponsor bank that does have an account in TARGET2 (T2), in accordance with the T2 indirect model participation. This could expand the reachability of TIPS to be far broader than RT1, especially when we consider the role of these new payments players in servicing the un- or under-banked.

TIPS will also be multi-currency and expand its service to non-eurozone countries such as those in Eastern Europe, again expanding the reachability of the scheme in comparison to RT1. However, comparing that reachability against your actual business is critical – if a bank’s cross-border payments are primarily between banks in countries that have strong RT1 penetration, then the business case for prioritising RT1 becomes much stronger.

The EBA consortium banks have made a significant investment in RT1 to ensure an efficient scheme. There’s a strong motivation for banks to join RT1 where they can exert more control over non-banks’ ability to connect. Banks have the majority both in terms of customer numbers and transaction volumes, so most instant cross-border payments will be bank-to-bank reachability, not necessarily a network beyond banks, at least in the short term. Therefore, the scheme with the highest number of banking participants carries significant weight. These factors may influence banks’ decisions over which real-time scheme to prioritise, tipping the balance in favour of RT1. But with a relatively closed network comes risk; you cannot offer real-time services to customers if there is a high risk that you cannot send all their payments in real-time, low reachability could kill the service forever if customers feel ‘burned’ by their initial experience.

Overall, the question of, ‘how do I ensure maximum reachability?’ seems most easily answered with ‘connect to both RT1 and TIPS’.

Not ‘Which’, but ‘When’

Based on the reachability potential of both RT1 and TIPS, the logical solution would seem to be for banks to enable both schemes, but the reality for banks is a complicated legacy environment that makes any new integration a serious consideration, and they have to prioritize their budgets across competing demands. Their fintech competitors are unencumbered by legacy technologies, and there essentially is only one scheme available to them: TIPS, because they aren’t members of the European Banking Association (EBA) and can’t access RT1. For fintechs, connecting their payment systems to TIPS is a less complex project, in part because it isn’t directly governed by the EBA. In this way they can work around the EBA clearing certification period, which can add months to project timelines for otherwise nimble Fintechs. Added to this, TIPS goes live November 2018 which means Fintechs are likely to be live with competing instant payment services relatively soon.

Banks must be cognizant of the timelines too; TIPS is scheduled to go live this year, whereas RT1 has yet to move all 28 original banks off the batch scheme and onto true real-time, despite a head start. TIPS appears to be winning the race for banks’ prioritization of budget when it comes to connecting to a pan-European instant payments scheme.

Unfortunately, too many banks are employing the industry’s ‘wait and see’ attitude to decide which scheme to connect to, but it’s not really a question of ‘which’, more of ‘when’. It is highly likely that banks will have to connect to both schemes in the medium to long-term if they want to ensure the highest possible reachability – connecting to both schemes will give banks the competitive edge over those to whom RT1 is not open. The imminent go-live of TIPS presents a strong business case for many banks to prioritise getting up and running with TIPS at a minimum for current budget planning.

Road to Real-Time

Ultimately, connecting to TIPS and offering pan-European instant payments services is just another step on the road to becoming a truly real-time bank. In the first instance TIPS implementations may be small-scale due to low current volumes, but that doesn’t mean they will be low quality services. The initial development of pan-European instant payment services with TIPS will be to meet the needs of your largest and most important corporate customers. But corporate customers need more than just the real-time payment; the ability to provide real-time remittance information, liquidity management, and additional data should be in banks’ plans when considering a strategic instant payments solution. This could be in the form of added intelligence and business processing within the solution, as well as the ability to integrate other schemes and messaging types into the solution along the way. A ‘good enough’ TIPS implementation now includes the capability to scale functionally and to growing volumes as new business cases crystalize.

The pan-European scheme question is not just about a new payment type, but about a new business environment. That environment is increasingly global for both the bank and its customers. When considering any real-time payments decision banks must be confident that every step along that journey is with long-term strategy in mind; any pan-European implementation now must easily scale to expanding volumes and integrate with global cross-border payments schemes to provide the quality and reach of service that customers expect.

Banking

The Next Evolution in Banking

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The Next Evolution in Banking 1

By Young Pham, Chief Strategy Officer at CI&T

Everything we know about banking is about to change. A new industry around the sharing of financial data is primed to give birth to a host of new consumer services, all thanks to Application Programming Interface (API) technology. Already known for being the safest place for money, there are opportunities for banks to expand that relationship to other aspects of the customer relationship. Banks will no longer simply be just a place to deposit and withdraw your cash, but a one-stop-shop for a range of data-sensitive services.

The passing of GDPR and the Payment Services Directive (PSD2) were the first steps in this process of banks modernising how they handled their customer data. However, incumbent institutions have so far not engaged enthusiastically. Rather, it was only after growing pressure from fintech challengers and government regulation that they were forced to open up and share their data. This should not be treated as a regulatory challenge, but rather a way to grasp the unique opportunities that banks have to reposition themselves as the most trusted resource for their customers.

Expanding offerings

It is hard to overestimate the breadth of possibilities arising from open banking, should banks choose to take advantage of this evolution. While the public rarely holds bankers in high regard, it still puts a high level of trust in banking institutions. People are more willing to hand over their sensitive data than they would be to almost any other private entity. Furthermore, banks have a unique perspective into their customers’ behaviours, needs and desires. Spending habits, income streams and risk appetites are just a few examples of the data that no other institution can tap in to.

There is certainly appetite to expand offerings. In our recent study of business banking customers, over 68% of respondents indicated that they were open to their financial institution providing digital non-banking services.  This includes services such as tax support, managing payroll, or invoicing to help them with their day-to-day businesses.

More banks should consider how open banking can maximise their digital capabilities and create a greater range of services for customers to enjoy. Such offerings could be tailored according to each bank and their particular customer audience. For instance, banks could offer everyday services for most users, such as insurance for individuals or business management tools for business accounts. Alternatively, banks could offer more exclusive and specialised services for high net worth individuals to meet their specific needs, such as art appraisal and investment management.

The idea that a firm can expand its offering into new verticals is hardly new. Many of the world’s largest tech companies, such as Apple and Amazon, already offer diverse products including hardware, software, entertainment and cloud services. They are able to do this thanks to the vast quantities of data they have gathered, which provide invaluable insights into consumer behaviour and demand. Banks are in prime position to follow the example of these top tier tech companies thanks to their monopoly on key financial data.

Disruptors vs incumbents

The business model described above is already being adopted by numerous challenger banks. These firms have led the innovative charge thus far, thanks largely to their agility afforded by their smaller size. Indeed, some fintech banks already provide a range of non-banking services to their customers. Revolut, for instance, offers users several types of travel insurance as well as access to airport lounges as part of its premium service for a monthly subscription.

These offerings are not a sign that the challenger banks are about to topple the large incumbents. Rather, these disruptors have always flagged the gaps in the market that larger institutions have been too slow to fill. It is now up to the established banks to learn from their example.

While challenger banks may have a first-mover advantage for these services, the incumbents have two key advantages: capital and credibility. Firstly, the top banks have enough cash to fund this overhaul of their business models. While the challengers have been able to afford to do so in recent years, they lack the reserves to tide them over during economic downturns such as the current pandemic.

Secondly, even though challenger banks are perceived as more convenient and are less vilified than traditional banks, the public still trusts the latter. Many of these large banks can point to their extended histories and long-term investment success – accolades young challengers simply cannot match. In short, people don’t have to like their bank to trust them with their cash and their data. These two advantages strongly suggest that large banks are better positioned to take advantage of the open banking business model in the long term, despite being slower to adopt and adapt.

What’s next?

All this opportunity is within reach. We already have the technical capabilities for data sharing, and the regulatory framework is not insurmountable. Rather, the key for this evolution of the sector lies in banks’ appetite for risk and willingness to reinvent their business model.

Banks need to take a leap of faith and leave behind the business paradigm to which they’ve become accustomed. They should embrace transparency, run towards regulation and take advantage of opportunities to invest in these areas or collaborate with outside technology firms. Only then will banks be able to make the most of their data assets, creating value for the customer and further strengthening the relationship.

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Banking

Banks talk a good game, but are bankrupt when it comes to change and innovation

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Banks talk a good game, but are bankrupt when it comes to change and innovation 2

By Erich Gerber, SVP EMEA & APJ, TIBCO Software

You hear all the time about the incredible pace of change in technology and the way that it affects business, but sometimes we kid ourselves about the real speed of that change and the depth of its effects. Retail banking is a perfect example to illustrate the yawning chasm between the illusion and the less attractive reality. In this article, I want to provide a critique of the banking sector and its failure to change fundamentally and to modernise.

Banking is an old sector: the Banca Monte dei Paschi di Siena has its roots in the 15th century and the oldest UK banks go back to the 17th century. We often talk about legacy holding companies back, restricting their speed of operations and hampering their ability to adapt. Well, established banks have legacy in spades.

They also have cultural challenges. The old saying has it that something is “safe as the Bank of England” and that is a standard for security. But today we need banks to be more dynamic and represent something more than being a deposit box for our wealth. Consumers are accustomed to the superb customer experiences in entertainment (Spotify), devices (Apple), retail (Amazon), travel (Uber) and much else. Surveys show that they want their banks to be responsive, easy to use and available across multiple channels. They’d like banks to be secure but also to be advisors, enable flexible movement of assets between accounts, provide useful data analytics, be cloud- and mobile-friendly and offer deals that are specifically targeted at their interests.

S-l-o-w progress

At their core, banks now must become digital enterprises but, frankly, it has been slow going. As Deloitte observed: “While many banks are experimenting with digital, most have yet to make consistent, sustained and bold moves toward thorough, technology-enabled transformation.”

Erich Gerber

Erich Gerber

We all know that retail banking has changed significantly: you can see that in the proliferation of apps and the fact that, in pre-pandemic times, the morning and evening commute are peak times for transactions as people arrange their finances while sitting in trains, buses and subways. Banking has become a virtual, often mobile business, thanks to new tech-literate consumers pushing banks in that direction. But my fear is that the banks aren’t moving even nearly fast enough and that’s bad for us as consumers and bad for the banks themselves.

Banks are under pressure to change because challengers don’t have the legacy constraints of incumbents and because PSD2 and open banking regulations are having the intended effect of promoting banking as a service, delivering transparency and greater competition.

Attend any business technology conference and banks will talk about their digital transformations and customer experience breakthroughs, but it’s my contention that a lot of this work is more window-dressing than platform building. Or, to put it another way, banks are injecting Botox, rather than undergoing the open-heart surgery that they really need. It’s a case of ‘look: fluffy kittens and shiny baubles’ in the form of apps and websites, but the underlying platforms remain old and creaking and that means that the banking incumbents are hampered.

To be fair, I have lots of sympathy here. They simply can’t move as fast as the challenger banks that have had the luxury of starting their infrastructure from scratch and sooner or later that will come back and bite them. Look, for example, at cloud platforms where only 10 or 20 percent of infrastructure has been migrated despite promises of cloud-first strategies and the banking data centres where monolithic on-prem hardware still reigns.

You feel that slowness of action in your interactions with banks that communicate only via issued statements, letters notifying you of changes to Ts and Cs, and threats when you go into the red. Inertia is nothing new in banking either: we like to think that technology change happens in the blink of an eye but in banking contactless NFC took the best part of 20 years to go mainstream.

This is the dirty secret of banks. They see the need to change but remain shackled. Why are the banks so slow? Historically, because it was hard for competitors to gain banking licences and the capital to really challenge so there was no catalyst or mandate for change. Also, because change is tough and fear of downtime or a security compromise to critical systems is very real. More recently, because internal wars in organisations set roundheads against cavaliers, the risk-averse against the bold, resulting in impasse and frustration.

I said change is tough and that’s why banks need to power through on the basis of Winston Churchill’s wisdom that ‘if you’re going through hell, keep going.” How? By a combination of maniacal focus on expunging legacy systems, placing maximum emphasis on superb customer interaction experiences and digitally enabling anything that moves.

Right now, the banks are surviving, not thriving; they’re rabbits blinking into the headlights of approaching traffic, frozen in the moment. But they need to disrupt themselves before others do it to them: change is painful but not as painful as the alternative. They have to do much more or they will see a decline in their fortunes due to their bankrupt capacity for innovation and their inflexible infrastructures.

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Banking

Vietnamese National Citizen Bank Rises to Excellence with Three Global Financial Awards

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Hanoi, Vietnam – Global Banking & Finance Review is proud to announce the sweeping victory of National Citizen Bank in the 2020 Global Banking & Finance Awards®. The bank was recently presented with three prestigious global financial awards: Best Place to Work Vietnam 2020, Fastest Growing Retail Bank Vietnam 2020, and Best Investor Relations Bank Vietnam 2020. The Global Banking & Finance Awards® recognize the innovation, enterprise, method, progressive and influential transformations that transpire every year within the global finance community. National Citizen Bank would like to extend their thanks and appreciation to the community and their customers for their continuous loyalty and support throughout the last 25 years.

Vietnamese National Citizen Bank Rises to Excellence with Three Global Financial Awards 3

 

The National Citizen Bank was recognized for its all-inclusive professional working environment and ongoing staff development that enhances its internal communications and employee relations. Throughout the last 25 years, National Citizen Bank has focused on the core fundamentals of regulatory modifications with the underlying goal of dividing the volume of both business and administrative tasks. As a result of this, the bank has successfully strengthened its staff’s capacity to obtain, manage outstanding liabilities, and acquire assets to negotiate and retrieve capital efficiently and reliably.

When asked what allowed the bank to triumph against the fierce competition, Wanda Rich, Editor for Global Banking & Finance vocalized, “one of the key factors that stood out to the committee is that National Citizen Bank strives to maintain and maximize profit to shareholders through the implementation of stable, sustainable business operations and advanced production methods. The bank has also remained stable, positive, and had a high growth rate in all of its activities, which is not often seen; however, it clearly indicates how prestigious and overall accomplished they are. They should be exceptionally proud of all three awards.”

About National Citizen Bank

The National Citizen Bank was initially established as a rural bank in 1995 under the name Bank of Kien River. The bank optimized its competitive standing within the global financial industry, later transforming into an urban banking institution where they reinstated their name as the National Citizens Bank. With a team of highly professional financial experts and customer service representatives, the bank embraces each customer’s diverse needs to ensure customary, efficient, and trustworthy experiences from start to finish. Over the years, the bank has prided itself on its continued emphasis on risk management and global business relations with investors, customers, and partners. For more information, please visit the National Citizen Bank.

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