Payments (R)Evolution - Industry Insights: Traditional Banking vs. Electronic Payments

By Madhvi Mavadiya | 4 April 2016

In this article, Madhvi Mavadiya takes an inside look into how large institutions have adapted to suit the digitalisation of the payments industry. bobsguide are proud to present Payments (R)evolution, a special edition magazine available for download HERE. Featuring exclusive content and in-depth conversations with Europe’s most exciting FinTech innovators, Payments (R)evolution is an astute examination of an industry in the midst of an incredible transformation. 
 
How is the electronic payments industry disrupting traditional banking?
 
Christophe Chazot, Group Head of Innovation, HSBC: The rapid growth in the popularity of online and mobile banking has clearly changed the traditional banking model. The digital revolution and the increasing popularity of smart phones are changing how all generations interact with their banks, and are trends which are encouraging banks to become much more consumer centric than they have been in the past and ensure that they invest in technology that enables customers to access their money whenever and however they want. However, there are many areas of banking where traditional banks still do exceptionally well, such as keeping customers’ funds safe, securely moving money between accounts, identifying fraud and managing risk are all areas where banks have become incredibly proficient.

Liz Oakes, Director, KPMG UK: I think it depends on what country you’re in and whether you’re in the consumer or wholesale sector.The consumer area has seen a huge amount of change with new disruptive platforms such as Uber, Lift and Airbnb. All these systems want to embed payments and make transactions seamless and frictionless, so the consumer does not actually see it occurring. With businesses attempting to make these activities more convenient, more protection is required in the form of cyber security so that hacking, phishing and mule account activity disappear. In the EU, there is a lot of regulatory change that is imminent with the PSDII and Payment Accounts Directive. There is a massive amount going on and trying to keep track of all of it is hard.

Michelle Tinsley, Director, Mobility & Payments Retail Solutions Division, Intel: We are seeing a bigger focus around customer experience and as a result, looking at reducing both wait times and the friction of payments. Banks can be part of the disruption but they need to be less focused on foisting products on people and really think more about what the consumer’s frustration points are and how these can be solved. Banks want to innovate around a seamless experience and do this by providing online banking at home or the ability to get quick balances on mobile devices.
 
Michael Carbone, Director, Sage Payments UK and Ireland: Electronic payments disrupt in many ways, from on boarding and customer acquisition to customer journey, financing and customer management in the form of newly equipped bank branches or branchless banks. New entrants to the industry are online first, and online only. There is a new way of banking that uses technology to help businesses to manage their financial affairs and making payments no longer requires people to go into their bank. Disruption will occur by using technology to help businesses manage their finances and have real control over their money, in a way that they haven’t had before. Real time and situation relevant solutions will therefore, be the standard.
 
Is it important for traditional banks to implement technology platforms?
 
Christophe Chazot: The growth in the volume and value of electronic payments in both developed and more noticeably developing economies is unprecedented.  Maintaining the integrity and security of these systems is fundamental to modern society. It is essential that banks capitalise on the data that they already own. Banks have a unique opportunity to improve the lives of their customers: by using their customers’ data more effectively banks have the chance to work with customers in understanding their businesses and in taking solutions to them that better meet their needs. Banks have a wealth of data that needs to be used to make our customers’ lives more efficient. We can help companies to do better and to measure their risk better.
 
Liz Oakes: A move towards 24/7 and a harmonisation onto XML will allow new actors to come onto the marketplace and provide new services, so investment in these core platforms is critical. These systems are incredibly complex, expensive and risky to change. However, traditional players now have to make changes under risk based parameters and in a highly regulated environment. In the UK, we see lots of challenger banks establishing themselves, which is the most interesting thing. To see a platform that can start from scratch, acquire many new customers, go to market in a short period of time and become profitable is commendable. It’s taken traditional banks a long time to get to the stage of having a stable business and this is a pivotal moment, where big legacy banks can move into the new market with new participants, but are still servicing the big manufacturing base.
 
Michelle Tinsley: iZettle really caught our eye a few years ago as a leader in EMV technology in Europe, and because of their add-on dongle approach to bringing payment to a consumer device, price point is kept low. They are focused on small businesses and have used that payment capability as a beachhead to expand their services, as they announced their involvement with small business lending earlier this year. It seems like a lot of the innovation today is centred around the consumer, and beyond next year, a lot of wearables for the worker will emerge and it will be great to see the consumer tapping to pay. But the real questions are whether or not the retailer will accept this form of payment and whether the consumer will have the ability to pay on the spot.
 
Michael Carbone: A fundamental priority should be the implementation of platforms that use real time customer data to improve the financial experience with added convenience and efficiency. For example, using real time dates to enable buyers and suppliers to authenticate each other is important so that speedier commerce can be delivered. Banks need to build faster ways for people to buy and settle. Buyers and suppliers want to interact quickly and securely in a fashion that enables speed of order, payment settlement and delivery. With cross border commerce expanding rapidly, the authentication of buyers and suppliers is a critical for underpinning and reducing friction in the purchase and payment process.
 
Where do you see the internet banking space heading in comparison to the use of cash?
 
Christophe Chazot: There are sizable advantages to the electronic transfer of money in comparison to cash, not least in helping prevent financial crime. Transitioning to full digital will allow new services and innovation to be created. That aside, reducing and/or removing physical cash from an economy can be cost effective for individual banks, their customers and the economy as a whole. While the use of electronic transfers has increased dramatically in recent years, notably in northern Europe and developing economies, we don’t expect to announce the end of cash any time soon.
 
Liz Oakes: Ireland has just become the latest country to abolish the one and two cent piece, but if this is to continue in other countries, children and the elderly need to be taken into consideration and whether or not it is convenient for them. Personally, I would like to carry cash with me as a protection mechanism and that is partly psychological. Until we move to become fully biometric and where you can literally stand in front of something and your picture debits an account, we will need cash, especially for transactions that people do not want to be tracked. What’s legal today might not be legal tomorrow, and what is seen as being a good thing to be doing, may not be seen as a good thing in five or ten years. We haven’t thought through the ramifications and it’s easy for us to say that we’d love to move to digital everything, but I don’t think life is that simple.
 
Michelle Tinsley: I think cash is decreasing and leading countries like Sweden and Denmark are in a race to be the first to become “cashless”. Interesting technologies are coming to the surface, for example, Danske Bank is using a combo approach of contactless as well as QR codes, so regardless of what phone a consumer has, it will still allow them to onramp onto digital payments and not have to deal with waiting for change. Europe will be leading in the contactless space with new regulations coming round which will mean that terminals will have to have a contactless capability, but the US will still be ten years behind as we are still struggling to deal with EMV adoption. 
 
Michael Carbone: Tracking of money is vital to small and medium businesses and electronic payments result in tighter cost and working capital control. I believe that more and more businesses will turn to electronic payments and payment technology to track and manage their finances. Financial providers who manage internet banking portals could use more of the information that they hold to provide more timely offers to their end users so that they are responding to their real financial needs.

In what ways have you adapted in order to serve the digital customer?

Christophe Chazot: Adapting to changing environments is something banks have historically done well. Traditionally, innovation in banks has been very product oriented.  With the digital revolution and the change of customer behaviour we are seeing a new environment where everyone has the same challenges.  Banks can no longer tackle customer interaction, leveraging data and security in separate silos, we need to look at how we operate more holistically. Without the customer expectations fuelled by innovative, customer centric technology companies, it is highly unlikely that innovations such as faster payments, mobile banking and contactless payments would have developed so quickly.

Liz Oakes: We have seen banks, big financial institutions and insurance companies trying to figure out how to provide a digital transformation journey for their customers. Our organisation has helped banks to take a step back and look at how they can rationalise the customer journey and in turn, streamline it and build in a better model that memorises data. It has been fascinating to watch the upturn and the speed at which people adopt technologies that the bank didn’t consider possible in the past because they assumed these services were complex. I would argue that that in this day and age, it’s almost daft to have a chief digital officer because the entire thing is digital. Your whole lifestyle has moved and your entire day can be digital.

Michelle Tinsley: What we’ve seen a lot of in the mobile banking space is that it better services a client because you are not just opening an account: you are having a dialogue with the customer. The major banks need to embrace the change and be less fearful about cannibalising existing ways of payments. Setting up a little startup within the company is what works and this almost drives the charter of inventing the new future, as well as blending it with technical and business process experts. Again, there is a human adoption factor to this and those that work at the bank need to feel as if the change is good for them and not that their jobs are being eliminated. From a banking perspective, these digital teams don’t need to be giant armies.

Michael Carbone: Mobile wallets that can support mobile payments with integration of those payments and this is where the future for payment providers will be. Your wallet will house most of your cash for both low value payments and b2b everyday payment to suppliers and payroll payments. We realise that the future of payments should bring real benefits to the end user. There are three key areas that we see for payment innovation, which are real time settlement, data rich payment transaction information and real time integration of sales and expense data into the company’s ERP and accounting systems.

Read more articles like this in our new Payments (R)evolution magazine here.

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