Immediate Payments Require New Business Models First, IT Solutions Can Come Later
Hungary is probably not the first country that comes to mind when talking about fintech hotspots and innovation hubs. However, the country is very much at the forefront when it comes to banking innovation in Europe. In late 2017, I had the privilege to speak at the annual Fintech Innovation Conference in Budapest. Organized by Privatbanker.hu, this was a great opportunity to meet not only Hungarian experts, but finance professionals and industry stakeholders from across the continent.
Immediate Payments was, unsurprisingly, one of the hot topics in payments last year. In 2019, Hungary will launch its own domestic IP scheme. Participation is mandatory for all banks in Hungary; therefore, preparing for the launch of this scheme is on top of the agenda for most financial institutions, and the topic dominated many of the event presentations and individual discussions I had.
One of the main takeaways for me was the importance of explaining and highlighting the business case for Instant Payments (IP).
A key leader from one of the most important Banks in Central and Eastern Europe communicated his views in a refreshingly frank way when he asked me: “Dome, we are about to launch IP in our country. We know it is a Central Bank decision, but we still don’t see business opportunities in relation to the new services. Where is the business case? Are we sure our clients are interested in Instant Payments?”
His question made me realize that some banks seem to be missing a crucial part of the project. While much of the debate focused around the best IT solutions, it is important to point out that IP is a business and organizational model first. The IT solutions come later, and should be tailored to meet the new dynamic IP business model.
I have worked in the banking sector for close to 25 years, including serving as Head of International Payment Applications at one of the key EU banking groups. As such, I understand that developing an in-house solution based purely on IT, without taking into consideration all aspects of the proposition that are necessary for a new evolution in payments, is tantamount to committing to failure almost straight ‘out of the gate.’ Just to give you an example, 15 of the 40 initial banks involved in the first window of the EBA RT1 IP service decided to step away and defer their ‘go live date.’ It is important to understand why these banks felt the need to postpone the project. The answer to this question is simple - a partial or complete underestimation of the cash and liquidity aspects, ignoring the fact that IP is not just a new payment typology, but, as noted, an organizational model of the bank that should evolve as a bank evolves too.
At ACI, we are investing a lot of time and energy into research aimed at understanding customer demand for IP from consumers, small and medium-sized businesses (SMEs), corporates and even governments. This year, we conducted surveys among consumers and SMEs in the US and Europe into the demand for real-time payments and the results are conclusive globally: many consumers are ready to switch banks if their existing provider does not offer Instant Payments. In Hungary, for example, 69 percent of consumers will consider switching banks for the offer of real-time payments.1
Sharing and analyzing data that supports the business case for Instant Payments is a key part of our commitment to partners, clients and prospects.
The message delivered during the conference by the Deputy State Secretary for Financial Policy at the Ministry for National Economy, Mr. László Balogh, was probably the most interesting and open: “Banks should invest in technology and innovative services to meet consumers’ expectations, in compliance with new regulations around data protection and money laundering. This should lead to significant cost efficiency; however, this benefit should be shared between service providers and consumers.”
Going forward, I hope that banks will start looking at the business case and understand that real-time payments are not just an IT investment. In Hungary, several PSPs are already active and will soon be able to offer competitive services. They are poised to take clients from more traditional financial service providers and we expect to see similar developments in other countries where IP is already firmly established. Without a dynamic solution that allows a financial institution to offer new services quickly, tailored for specific client typologies and using an Open API approach, traditional banks will experience difficulties. Judging by the lack of awareness I saw at this event, the list of banks could be long. However, the good news is that it isn’t too late to turn things around. If banks start looking at IP as more than just an IT project, and develop long-term business cases now, they will be able to rise to the challenge and compete in this brave new payments world.
1 All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1,000 adults. Fieldwork was undertaken between May 31st - June 5th, 2017. The survey was carried out online.
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