In the face of falling margins and rising competition – including some from non-traditional sources – the payments industry is under pressure to deliver digital, seamless and transparent solutions. How should it react? Embrace Open Banking, APIs and real-time payments, while maintaining client trust, say Europe’s leading experts at this year’s EBAday in Stockholm
Sampling kottbullar, or Swedish meatballs, at a traditional Swedish townhouse dating back to the 13th century, while being obliged to pay only by card or mobile (Sweden is on track to become the world’s first cashless society), perfectly encapsulates Stockholm’s embrace of both innovation and tradition.
Successfully finding this delicate balance is the challenge that now faces the correspondent banking industry. Cross-border payments are an age-old business underpinned – to a large extent – by legacy systems and infrastructure. Yet, at the same time, banks are accelerating digital transformation and embracing application programming interfaces (APIs), Open Banking concepts and artificial intelligence (AI).
In the opening roundtable at EBAday 2019, titled The art of the possible, Deutsche Bank’s Global Head of Cash Market Management, Marc Recker, outlined two key strengths that the industry could call upon: an innovative mindset and commitment.
“In terms of innovation, the powerful combination of Open Banking and real-time payments provides huge opportunities for us to meet the real needs of clients,” says Recker. He also noted “real commitment from the C-suite to transaction banking as a business line”, citing Deutsche Bank CEO Christian Sewing's speech at the Annual General Meeting in May, in which he heralded the business as core to the wider bank’s growth strategy, as a recent example.
All in all, transaction banking is in relatively good health: growth exists (it doesn’t always in other areas of banking) and payments volumes continue on an upwards trajectory. Yet Recker was not oblivious to the sizeable challenges ahead: the industry must address the still sluggish pace of technological change and upgrades, it must resolve issues around standardisation (especially with respect to API development) and it must find new revenue models in the face of falling margins on payments transactions.
The first live poll of the day – asking what key issues keep bankers awake at night – placed increased competition level-pegging with falling margins as the number one worry. Five years ago, competition would have meant FinTechs. It’s fair to say this has changed, with FinTechs being warmly welcomed into the banking fold: this year’s event was notable for the vast number exhibiting (with fraud prevention solution Bleckwen scooping the event’s prize for the most cutting-edge start-up).
Some of the shift in rhetoric around FinTechs from competition to collaboration can perhaps be attributed to a shared threat: the emergence of BigTechs in the world of financial services. EBAday was awash with buzz around Facebook’s first foray into the world of payments, announced on the morning of the first day.
Recker, talking about the emergence of BigTechs in financial service provision more generally, noted the lack of a level regulatory playing field between them and more traditional financial service providers as a concern – and something he believes the industry should be lobbying regulators about.
The dual threat of slimming margins and swelling competition has no easy solution – banks will need to think outside of the box to arrive at innovative answers. Take note of the telecoms industry, urged JP Morgan’s Global Head of Clearing, John Hunter: “Forty years ago, selling long-distance services was the industry’s cash cow, but now that business has been marginalised and most provide it for free. Telecoms companies, however, had the foresight to completely rethink how they run their businesses, and it worked. I have six children and now pay a $400 monthly cell phone bill – a large expense I would never have considered paying for long-distance services!”
Hunter and Recker concurred that the payments industry will similarly have to figure out where revenue pools will sit in the future and innovate around them, providing value-added services that wrap around the payment itself. This will require insight, skill and a willingness to be bold (hence the art of the possible).
Collaboration and co-creation
Creating this future will require more than one artist. Recker pointed to the vast number of overlapping payments industry initiatives and urged banks “not to re-invent the wheel over and over again” (a much-repeated mantra over the two-day event). He highlighted Swift gpi as major evidence of the power of coming together in collaboration, with over 10,000 institutions upgrading technology infrastructure and changing business practices in the space of a few years, all with clients’ demands for speed and transparency in mind. This is something that Deutsche Bank is “going full steam ahead on”, he affirmed.
Collaboration also extends to clients. The time for simply listening to clients had passed, said Recker. Instead, banks now need to be open to co-creation of innovative solutions in partnership with their clients if they are to discover and tap new revenue pools.
Open Banking and instant payments: the perfect match?
As EBAday progressed, it became clear that the future of transaction banking will rely as much on science as art – and it was the potential of Open Banking and real-time payments that really stole the show in Stockholm. The combination of PSD2 and SEPA Instant Payments (SCTInst) has huge potential to disrupt existing business models, enabling third-party providers to make instant payments directly from customer accounts, bypassing card schemes and fees.
On a panel dedicated to the topic, Nordea’s Head of Open Banking, Sarah Hager, cited the move by the International Air Transport Association (IATA) and Deutsche Bank to combine account access and instant payments to create a new online payment scheme for airline tickets as one of the most encouraging industry examples of this.
Open Banking is underpinned by APIs. Innopay’s latest Open Banking monitor revealed that most financial institutions are delivering solutions beyond PSD2, and therefore beyond a limited API scope, with Deutsche Bank as one of the top three leading banks in terms of API developer experience. This is something that Rene Keller, Chief Data Officer and Group Head of Innovation at Deutsche Bank, mentioned was key to the bank’s API strategy. He also affirmed that the bank now had 19 live solutions and 2,500 developers on its API platform.
Keller says that while conversations around disrupting your own business are not easy, it is clear that the industry needs to embrace this new environment with FinTechs playing an important role in service provision. “Beyond technology development, this will also require improved internal processes,” he added. “Historically it would have taken six to nine months to onboard third-party suppliers – far too slow to be nimble and agile. We can now do this in a few weeks.” Keller adds that achieving such change has required cross-divisional teams across legal, compliance and IT to make things happen.
While being nimble and fast is the goal, reliability and safety and soundness remain critical. “The biggest asset we have is trust,” said Keller. “We need to remain trusted guardians of our clients’ data and not expose it to unnecessary risks.”
Per Astrom, open banking and innovation specialist at Swedbank, suggested that identity is the next stage for banks wanting to create value – banks have a wealth of customer data and should leverage this to go beyond working on APIs for credit card transaction history.
Keller agreed: “We are focused on exploring new ways of working, with services that go beyond what could be considered typical banking activities, such as those around identity management. Traditional banking services are likely to be chopped into pieces and become part of the value chain elsewhere, so we need to adopt a different way of thinking.”
Capitalising on this new landscape is made somewhat difficult, however, by the lack of common API standards, which can restrict the interoperability of interfaces. While industry initiatives in this space have helped to move the needle, there is still a long way to go.
Standards relating to APIs were not the only ones on the agenda, with ISO 200022 migration a consistent talking point across the two days. Over the next few years, the US Federal Reserve and The Clearing House, the Eurosystem, EBA Clearing and the Bank of England’s real-time gross settlement service, as well as Swift, will all modernise their high-value payment systems with ISO 20022 migration (read more in Deutsche Bank’s recent whitepaper).
While the panel on the topic listed the opportunities this migration provided for banks – from increased rich data transfer, greater transparency and more efficient compliance processes – it was also keen to herald the benefits for corporates.
“It's a unique chance to take what we do and make it digital, with rich data transfer allowing us to drive help straight-through processing reconciliation for corporate clients,” commented Paula Roels, Head of Market Infrastructure & Industry Initiatives at Deutsche Bank.
How well-prepared are banks for these seismic changes in payments processing? A poll concluded that 75% in the room were on track, although this is perhaps more reflective of the size of banks attending EBAday rather than of the industry as a whole. Certainly, the panel expressed concern that some of the smaller banks remain unprepared and unaware of the benefits, with the cost of migration a huge barrier to progress. Swift’s Head of Standards, Stephen Lindsay, said that the ability to get the long tail of banks on board would “make or break the project”.
Roels concluded that for banks to secure the necessary budget, resources and commitment will “require a clear strategy, with senior management involved from the very outset”. Treating this as just a compliance or a back-office project, she explained, would be to underestimate its significance.
To buffer or not to buffer?
Koral Araskin, Head of Liquidity, Investment Product and Portfolio Management at Deutsche Bank, made it clear that the move to real-time clearing and settlement systems – a key theme of the event – will likely shake the foundations of traditional liquidity management approaches built on the concepts of end-of-day batch processing and cut-off times.
“The move towards intraday liquidity is not purely about regulatory compliance or risk minimisation,” asserted Araskin. “We should use it to understand client behaviour in far more detail and find relevant solutions to their problems.” This means forecasting daily gross liquidity inflows and outflows, highlighting potential net funding shortfalls at different points during the day, monitoring intraday liquidity positions against expected activities and available resources, and ensuring access to funding to meet intraday requirements.
Lori Schwartz, Head of EMEA Liquidity solutions at JP Morgan, noted that “For many of us, it is a foreign concept to close out a cash position on a Friday and return on a Monday to a different one. But it’s an increasing reality.” The answer at the moment, said Schwartz, was “buffers all over the place” although she conceded that this was inefficient, as well as costly. The industry needed to challenge itself to find better solutions, for banks themselves and for clients.
Many are taking up this challenge. A paper by the EBA liquidity management group, released just before the conference, concluded that banks will need to extend their product offering to innovative solutions that account for the new real-time landscape, adjusting their risk frameworks and internal processes to be more agile, while considering partnerships with FinTechs on more niche offerings.
“Transparency on intraday liquidity is vital, but we need to be able to action that information,” concurred Araskin. “There is no point being able to see the speedometer in a car but not having a steering wheel to change lanes and avoid danger, or no brake to control speed.”
Compliance pain points
Regulation was rarely far from the surface at EBAday – with the complexity of compliance requirements noted as a key pain point for correspondent banking.
“While compliance can be a pain point, we also need to start to view regulation as an opportunity,” countered Tsvetanka Nankova, a Director in Deutsche Bank’s Institutional Cash Management division. “In particular, ensuring robust anti-money laundering (AML) and know-your-customer (KYC) processes can be used by the industry as a key competitive advantage”.
Nankova went on to explain that the industry must work together in this respect, pointing to the recent enhancements to the Wolfsberg AML/KYC questionnaire and the continuing development of the Swift KYC Registry as major success stories. Harry Newman, Head of Banking at Swift, emphasised that while achieving global standardisation of how banks conduct AML/KYC would be “phenomenally difficult”, it would be essential in driving down costs and making some types of business viable.
The event concluded by asking the question: is correspondent banking sustainable? The answer: you bet, but banks will have to take strong measures to ensure trust, drive efficiencies, find new solutions and discover untapped revenue pools.
Achieving that that will require part art, and part science.
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