European Banks Have the Right Tools to Stay Ahead – But Will Big Tech Overtake?
Open banking and immediate payments have come a long way, according to the panelists who joined me during the ‘Open Banking in an Instant World’ session at EBAday in Stockholm recently. The building blocks are now falling into place through the introduction of national and regional schemes, open banking initiatives, regulations such as PSD2 and the acceptance and use of APIs.
What we discovered at EBAday was the that European banks have finally learnt the lessons of collaboration and partnership, that innovation is necessary, and customer experience is of paramount importance to retain ‘relevance’ in the future. Nowadays, banks are more inclined to regard themselves as ‘fintech’ in terms of culture and the need to innovate, change and evolve consumer behavior; either through investments, partnerships or the creation of new entities with more nimble infrastructure.
That said, having just about come to terms with the advances of fintech and the push from regulatory changes such as PSD2 and Open Banking, European financial institutions are now seeing the threat of being leapfrogged by the spectre ‘Big Tech' and the likes of Facebook and the GAFA providers (Google, Apple, Facebook and Amazon). This is pointing directly to the need for one thing; the EU banking space needs to accelerate its adoption of Instant and Open, or risk being disintermediated.
The need for use cases?
Even the most optimistic of my fellow speakers could not help but point out that a viable use case is yet to emerge that will justify the billions in investment that have gone into new payment rails, modernization and digital transformation. What we all did agree on is that the value of instant payments will eventually be delivered in combination with standardization of Open APIs, which allow the building of digital overlay services.
“For a bank, it is crucial not to merely offer products but also to provide networks and associated services. Recently, challenger banks have leveraged open banking mandates to become service aggregators to SMEs. The B2B sector thrives when a strong banking centre drives SME growth; however, banks are typically at arm’s length from the originating business,” said Cedric Derras, Global Head of Cash Management, UniCredit
Being relevant requires either scale or deep competency in a sector and often both. Technology excellence is important, but relevancy requires understanding business propositions. Connecting or linking third party service providers via APIs is not an end in itself and may in fact hasten disintermediation.
While we await API standardization, Request 2 Pay (R2P) is one of the missing links that real-time payments and open banking will need on the road to mainstream adoption. In fact, the pan-European blueprint announced at the conference by EBA Clearing describes the R2P infrastructure as a thin layer solution aimed at the PSP space based on real-time messaging, but separated from the payments layer. This will allow RtP to be adapted to existing products and services regardless of the use case.
Let them eat cake
“We need to provide the services the customer wants. We often talk about APIs and Innovation for the sake of it, but first we need to make payments work in a way that is seamless, work alongside traditional schemes, and are available everywhere,” said Sarah Häger, Head of Open Banking Community, Nordea
Even with the laser focus of banks, open banking may become outdated even before it gets started according to a recent Cap Gemini report. Society is moving away from products to experiences, from owning assets to sharing, and is geared towards more data sharing: there is a sea change taking place in the wider economy that needs to be acknowledged.
That said, the emergence of a single regulated instant payments standard for Europe will open up a host of new opportunities for competing players ranging from the global tech giants to fintech start-ups.
And, as outlined by Hakan Eroglu, Global Open Banking Expert Lead, Accenture; “…some banks may have concerns of disintermediation and loss of brand recognition, but it is very likely that banks will keep their name and authority while fintechs and third-party providers deliver the final part of the process. Arguably, fintechs can manage the ‘last mile’ of service better than banks, including end user engagement and community building, because of their customer-centric environments.”
So maybe Big Tech and European FIs can find a natural equilibrium, a bit like we’ve seen with fintech? The question is whether EU culture will embrace such a move, like we have seen in India? Or will there be more of a backlash against the perception of disintermediation in Europe? I for one expect the EU banks to fight for this space, and it will be interesting to see how the landscape unfolds, as we see the banks working more adamantly to secure a long-term future that looks like their past – but of course, real-time and digitally enabled.
How to Respond to the Convergence of Real-Time Payments and Open Banking
The convergence of real-time payments and open banking is introducing new complexity as well as new opportunities into the payments ecosystem. Understanding the implications of this change and how it will affect the competitive landscape will prove essential to gaining an advantage in this dynamic market. We developed this whitepaper as a key resource to help outline an overarching strategy for navigating these changes successfully:
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