By David Chance, Vice President, Strategy and Innovation, Fiserv
The changing payments landscape has provided financial institutions with new possibilities and opportunities for innovation. While some trends are accelerating due to COVID-19, most were evident and growing rapidly before the pandemic. Initiatives such as open finance, open banking and APIs are playing a significant role in furthering innovation and are transforming the payments ecosystem alongside mandated regulations, such as the EU PSD2.
Financial institutions must embrace the digital opportunity in payments and provide capabilities beyond basic payment initiation to support their customers’ entire financial lifestyle. This will allow financial institutions to pivot away from a product focus to a customer-centric one, enabling enhanced competitiveness against market disruptors.
The promise of open banking
Incorporating API-based services allows a financial institution to broaden offerings across ecosystems. APIs can be utilised across the wider financial services ecosystem, such as insurance, investment, pensions and lending, to support the complete financial lifecycle for customers through an integrated, one-stop approach. Digitalisation, open banking and the provision of service APIs can provide financial institutions capabilities beyond just payment initiation.
While fintechs such as Klarna, Banifi, Yolt and Money Dashboard are taking the lead when it comes to leveraging APIs to offer new services, financial institutions have every opportunity to do the same. In fact, pragmatic financial institutions are broadening their financial ecosystems by including these fintechs services in their own wider ecosystem.
By leveraging APIs, financial institutions can gain access to a holistic view of a customer’s different types of financial and payments data and utilise this information to provide value-added, innovative services and solutions to support the entire payments ecosystem and journey. New products can help drive transformations, providing end-to-end services for individuals or corporates, including banking-as-a-service and payments-as-a-service.
Combatting challenges ahead
Growing digitalisation has increased competition within financial services. Open finance will change the way players interact in payments, such as merchants and big fintech players, who are taking up a bigger piece of the payments space. These players are enabling consumers to initiate payments in real-time anytime and anywhere, allowing them to provide services such as mobile payments, or instant payment at checkouts in retail settings.
A continuous challenge that financial institutions face is security. The pandemic has created significant growth in e-commerce. While this has been great in accelerating digitisation and innovation in this space, it has also resulted in a higher volume of transactions and a growing number of payment users for criminals to target. We are increasingly seeing new types of threats and sophisticated ways of committing fraud. Regulations such as PSD2 help to bring a greater level of protection to those newer adopters. Near-term regulation is expected to create a framework for payment instruments with much better levels of security to reduce fraud, such as Strong Customer Authentication (SCA).
The role of regulation in fostering open innovation
There is a real need to balance regulatory and market developments. For example, the P27 scheme in the Nordics addresses the need for cross-currency instant payments across the sub-region. However, regulations often do not cover most recourse requirements or account for the finality of instant payments. Therefore, it is incumbent for financial institutions to provide overlay services that provide the best customer experience, as well as allow further innovation. The EU PSD regulation lends itself well to use cases that can rely on digital elements like bound devices and biometrics. This is increasing the divide between financial institutions that offer these capabilities and those that do not. Financial institutions that have more digitally focused customer bases are likely to get further ahead.
As demand for new payment methods and technologies grow, regulations can play a role in introducing innovation. There is growing interest amongst regulators, together with central banks, to embrace digital currencies to promote efficient, seamless payments. Digital currencies have the potential to change current payment models, both domestic and cross-border, as well as how traditional and non-traditional payments players interact in this space.
A customer-centric mentality
As financial institutions continue to move towards a customer-focused way of doing business, there will be a continual drive for consolidation of different payment types, further adoption of APIs as PSD2 comes to full implementation, and new opportunities for innovation and cooperation to build a complete ecosystem.
Placing customers at the centre of payment strategy allows financial institutions to continue to improve services and establish loyalty in the long term. For customers, their priority is to have easy and secure access to funds anytime and anywhere. As technologies and regulations evolve, financial institutions can continue to find new ways to innovate and embrace the digital opportunity in payments to provide seamless experiences for customers.