By Andrew Beatty, Head of Global Banking Strategy, FIS
2018 will go down as a landmark year for the UK banking and payments sector; marked as it was by regulatory changes that have opened the way for new modes of service provision. Here, I want to look at some of the main forces that have shaped the banking and payments landscape in 2018 and look ahead to what this might mean for the sector in the year ahead.
Open banking comes to the UK
In 2018, open banking became a reality in the UK market, paving the way for what may prove to be the biggest shift experienced by the sector in recent years. However, the pace at which the market is transforming under the influence of open banking varies greatly from bank to bank, financial institution to financial institution.
For some, open banking is little more than another compliance headache, while others are opting to ‘wait and see’ in the hope of managing risk. This tentative approach may eventually place such banks and financial institutions at a significant competitive disadvantage, however. This is because other players are taking a much more positive and proactive approach to open banking. Many banks and financial institutions have seen that open banking provides a new profitable way of doing business. For these firms, the real risk lies in doing nothing; or in only adopting open banking practices in a piecemeal way.
In 2019, I expect to see this two-speed approach to open banking embed itself further, with the pace of change being dictated by each financial institution’s innovation mindset/culture and their appetite for risk. What’s also clear is that the decisions made in the months ahead could be momentous. For those that embrace open banking, we can look forward to a new level of interconnectivity between brands and platforms; and the resulting partner ecosystems will create opportunities for a more holistic approach to banking and payments. To date, we have only seen some tactical examples of this, but in 2019 we can look forward to a market acceleration around strategy-led open banking plays.
In the year ahead, we can therefore look forward to a new generation of customer-first, digital services that are created in open collaboration with an ecosystem of platforms, partners and technologies that are led by incumbent banks and payments providers and underpinned by deep customer data.
These services are being launched at a critical time for incumbents, many of which are struggling to compete with new and compelling services being offered by new market entrants. As it stands, and according to the results of our annual Performance Against Customer Expectations (PACE) report, new digital-first banks are currently outperforming the world’s top 50 banks across key customer service metrics, including privacy, security, problem solving and real-time payments. This is a threat that will need to be addressed in the year ahead.
One way that incumbents will seek to increase their competitive edge will likely be through ‘co-opetition’. In the year ahead, we think there will be a marked increase in the number of incumbent financial institutions partnering with challenger banks. These partnerships will form the basis of platform banking propositions that will offer next-level customer experiences that leverage emerging technologies such as artificial intelligence. For example, banks might look to create and launch new ‘skills’ for smart speakers like Amazon Echo or Google Home that allow them to interact with the banks and consume payments services through voice-enabled apps.
In the debate around the implementation of open banking-based services, much of the focus has been on the technical side of things – such as how partners can effectively and securely connect their systems, for example. However, as new platform banking partnerships coalesce, the commercial frameworks on which they are built will prove every bit as important as APIs and data sharing frameworks. This is for the simple reason that in a world of interconnecting partnerships, banks and financial institutions will want to do all in their power to ensure their businesses and reputations are covered should something goes wrong.
The fact is that us consumers are by and large an unforgiving lot. We embrace digital innovation and convenience so long as everything works as it is supposed to and there are no data breaches. However, the moment something goes wrong, we tend to look for someone to blame – and that blame will most likely fall on the incumbent bank or payments provider that underpins the service. In 2019, we therefore expect to see firms focus on building robust control frameworks to ensure they can progress with open banking initiatives while at the same time protecting their brands.
Payments convergence…and divergence
Another key theme of 2018, and one that will continue through 2019 is the evolution of the payments landscape. Payments services are singular in that their future lies both in greater convergence and greater divergence.
Divergence will come through service differentiation enabled by digital disruption and the open banking partnerships I’ve already discussed. Convergence, on the other hand, will occur through technology integration. This is something we’ve already seen in the case of mobile payments where mobile phone, banking and telco systems have converged around the customer experience. Next will be real-time payments at the point of sale, where organisations will give consumers greater choice over how to pay. To enable this functionality, payments providers will need to implement context-rich front-ends to payments platforms that can differentiate between debit, credit and real-time payments; as well as closely integrated back-end infrastructures that enable easy and low-cost payments switching.
All to play for
This year, we saw the regulatory foundations laid for a new banking and payments system based on open, partnership-enabled services that are focused on the needs of customers. Next year will likely be the year that the opportunities of open banking start to be exploited at scale. And as financial organisations look to do that, partnerships will be critical; both in creating exceptional customer experiences and ensuring banking services remain compliant and secure. As a result of these partnerships, I predict that this time next year we will find a banking industry that is more innovative than ever and more truly customer-centric.