The future of competitive advantage in banking and payments

As financial firms turn to new solutions to stay competitive against the bleak backdrop of the global pandemic, there’s no surprise to see an increase in adoption across digital technologies, real-time payments and digital transformation. Businesses have had to prioritise their strategies in order to gain a competitive market advantage and stay compliant amid new regulations.

Bottomline’s latest report, The Future of Competitive Advantage in Banking and Payments, highlights the effects of the global pandemic and outlines the key components for banks and financial institutions (FIs) to remain competitive against the drive towards real-time payments, key regulations and trends, and consumer expectations towards speed, agility, and fraud protection.

Digital transformation and addressing innovation

For the banking industry, competition in the short term will depend on a successful digital transformation, as the overwhelming feedback from banks and FIs report that institutions require a greater focus on digital-centric solutions and better support internally from the top-down to accelerate change.

Sixty-four percent of respondents reported that digital transformation is the biggest objective for their business, followed by 41 percent reporting real-time payments, and 37 percent reporting cross-border payments as their main focus.

Digital transformation, real-time payments & cross border transactions are all closely linked as legacy systems require to be updated for real-time rails. Yet, nearly a fifth of banks and FIs (19 precent) are “somewhat sceptical” about their firm’s efforts towards creating a successful and modernised strategy.

Transitioning to a payments ecosystem

Connected finance was one of the key themes and takeaways from this report. Businesses recorded that 76 percent have a strong or extremely strong appetite to transition towards a payments ecosystem over the next five years, suggesting a strong use case for having an aggregated connectivity solution.

Respondents also confirmed that the biggest issues around their current payments infrastructure were legacy systems (47 percent), followed by the lack of operational efficiency (40 percent).

Lack of interoperability between internal systems ranked third, which ties back to the lack of operational efficiency as well as legacy infrastructure systems.

“Banks globally recognise the need for digital transformation as their end user expectations change,” says Gilles Ubaghs, strategic advisor, commercial banking & payments, Aite-Novarica Group.

“Putting off digital transformation is no longer an option as the Covid-19 pandemic has dramatically accelerated this shift, changing end user expectations, and is now changing the competitive landscape.”

Perhaps the most surprising discovery from the report is that despite the strong push towards payments modernisation, banks and FIs haven’t factored in the benefits of the payments ecosystem being SaaS rather than on-premise – only 31.5 percent saw migrating to cloud or SaaS technology as a top priority over the next 12 months.

Barriers to adoption

The payments industry has faced rapidly evolving technologies and adoptions of new services around real-time payments. It’s apparent from the findings that businesses that don’t provide real-time payments functionalities risk attrition and falling behind the curve.

And the growth of real-time payments is setting new records; in 2020, a record 70.3bn transactions were processed, up 41 percent from 2019, and is estimated to be on track to hit a 23.6 percent annual clip for the next five years.

By 2025, it’s also estimated that Real-time Payments (RTP) will have a 17.4 percent share of global payments.

However, it’s evident that with the ongoing global pandemic, businesses have found it difficult to prioritise their efforts on ramping up their offerings of digital payments in an already-busy roadmap of transformative initiatives.

Difficulties around adopting a legacy infrastructure ranked second among respondents (36 percent), followed closely by lack of IT resources (34 percent).

Banks & FIs have had to overhaul their business efforts from a regulatory and industry compliance point of view to keep pace with ISO 20022, SWIFT CSP, Confirmation of Payee and PSD2. The report highlights how leveraging real-time data, incorporating insights and analytics, and adopting a clear real-time payments strategy could be the difference between strengthening the customer experience and stemming attrition.

“The profitability of the payments business stands at a crossroads. The combined forces of fierce competition, regulatory interventions, and necessary investments in infrastructure and compliance put operating margins under pressure,” said Ron van Wezel, strategic advisor, retail banking & payments, Aite-Novarica Group.

“At the same time, the pandemic has boosted the adoption of digital payments, creating new opportunities for banks and other payment companies.”

Implementing ISO 20022

The report states that 13 percent of banks and FIs have implemented ISO 20022 to date, 15 percent are mid-way through implementing and 13 percent have already completed their implementation. However, 23 percent of respondents said that their businesses have just started preparations, with 25 percent noting that they have not yet started.

These figures show that many banks are under pressure or presumably facing the underestimated complexity of the migration and find it difficult to attain the right resources after understanding that the transition isn’t a simple upgrade of process.

SWIFT currently has 17 million payment messages exchanged each day, with numbers set to increase dramatically and imminently, so it’s imperative for businesses to get up to speed on the integration and transition required as soon as possible.

Navigating cross-border payments

Cross-border is a topic filled with regulation but critical to the health and success of any FI, especially in the EU.

Thirty-one percent of banks and FIs reported that the greatest obstacle to successful cross-border payments is the cost of maintaining so many ‘nostro’ accounts.

Other key pain points include issues with the slow or unknown speed for arrival of cross-border payments (21 percent), and the lack of visibility on payment status (24 percent). Furthermore, eight percent of respondents are also concerned about poor quality or loss of data.

It’s clear that there is now a need more than ever to reimagine the role of technology within the banking and financial sector, and it’s imperative for businesses to understand how to utilise new platforms and understand the impacts of new regulations in order to stay competitive and compliant in a crowded market.

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To find out more about the research from The Future of Competitive Advantage in Banking & Payments, download the full report here.

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