15 April 2019
It is time for banks to take back control
This article was originally published in the Journal of Payments Strategy & Systems Volume 13 Number 1
Banks are increasingly worried about losing control. This concern is surely justified because the development of modern electronic payment systems has made the agendas of banks increasingly driven by the demands of others.
This means that banks had to implement changes driven by others, under time pressure, according to timetables set by others, and at huge catch-up costs. Think of the requirements set by regulators (PSD2, SEPA) and customers (pan-European solutions), as well as the arrival of new techniques (mobile, API, DLT) and agile competitors (FinTech, challenger banks, big tech). Banks are struggling to keep up, so maybe it is time that the banking sector takes back control and steers the agenda itself.
Monitoring is not enough
Many banks monitor new developments and consciously adopt selected changes that respond to the market and fit in with their strategy. This is an excellent first step, but it is far from ‘taking back control’ as it does not shape the industry. This is a follower position with at best, an optional engagement. The identified topics are usually addressed by individual banks (single-bank solutions) or isolated banking groups (e.g. regional solutions). As a result, we get fragmentation, and it is not a joint initiative of the sector.
To regain control, more than this is needed. Developments must be actively and timely shaped, together with other players from the banking sector. This is not easy for individual banks with limited resources and also difficult for groups of banks due to competition concerns. Besides that, it is even harder for a whole industry to move in a concerted way due to the need for alignment across many actors.
Banks will never change from turtle to hare - nor should they. Reliability, solidity and compliance are major assets in comparison to other market players. But surely banks can and should become more active, regain the initiative through smart approaches, and not just continually chase the hare’s tail. This does require a strategic approach that balances potentially large future gains with the current uncertainties and perhaps even some initial sacrifices. We need to look at the bigger picture because real entrepreneurial leadership is about making choices without knowing all the facts – such as will there be a business case and what will it be based on? - and without the guarantee of making the right choice.
Proven in the past
Financial players have shown in the past that this is possible. More than ten years ago, Dutch banks created iDeal, for example. iDeal is a world-class solution that has won against all competitors to this day and has amazing growth rates. Scandinavian banks also saw the need and opportunity to create leading solutions for bank-based identity (BankID) and mobile (Swish). These developments have ensured that customer relationships, data and profits all remain with the banks.
But how would such a new proactive approach work in practice? The following steps towards a SEPA 2.0 are recommended:
Organise an open discussion within the main banking communities. Discuss how to regain control through a proactive strategy that involves new developments before anyone is driving banks into them. Forge a 'coalition of frontrunners' who are willing to help shape these developments.
Organise joint initiatives across banking communities to investigate the future vision of banks and collectively move the sector forward. Ideally, we suggest that the new approach should be built on current developments such as Open Banking and Instant Payments - topics where Europe leads in the world. Of course, there will be divergent views between communities and amongst the banks on how to move forward here, but it is imperative to put local and individual interests aside for the greater good of the industry and of Europe.
If there is indeed the will to act boldly, the results of this joint approach should be vigorously made public to and with regulators. If regulators see that banks are making changes faster, they will be much less motivated to develop preventive regulation or to act against what they see as a (forthcoming) market failure. Regulators may want to moderate the process even more and be an even greater part of the solution.