18 June 2019
Banks can take back control if they use PSD2 and instant payments in the right way
EBAday has begun, the conference that features keynotes and session about the latest innovation and visions from the payment world. An interesting moment to hear how experts and payment providers view developments and payments trends. Topics such as open banking and instant payments will undoubtedly be discussed.
I would like to share my thoughts on these two developments. Both open banking and instant payments are solutions that can turn banks into leaders instead of followers again. Especially now that it is clear that banks do not dominate the payment market as they used to do in the last decades. This is mainly due by the development of modern electronic payment systems, new requirements set by regulators and customers and the arrival of agile competitors.
Speed up development
How can banks take the lead? By using open banking and instant payments in the right way. These solutions play a central role in the search for European payment solutions with cross-border reach. Open banking and instant payments strengthen each other and that is why they can speed up the development of new user-friendly payment solutions and turn banks into a strong competitor in the world of payments again.
Instant payments are user-friendly and offer transfers of money from the payer to the payee almost immediately. These are crucial characteristics in an era of open banking because they add value to new functionalities and services. Imagine what the possibilities are when banks add instant payments as an extra layer to their infrastructure. In the words of Michael Steinbach, CEO of Worldline: "The new functionalities and services built on this layer generate an abundance of real-time customer data. Data that can be used directly for better and personalized domestic and cross-border services created by banks and third parties." I fully agree with that.
However, banks are not yet fully exploiting the potential of instant payments and open banking. Both PSD2 and instant payments are recognized as important building blocks in the financial sector, but banks do not always feel the need to move forward with the development of these solutions. I now see that banks do not fully embrace PSD2. A recent survey shows that 41 percent of the banks failed to have their test facilities in order by the end of March, while compliancy is the important first step towards the creation of new innovative products with which they can attract customers. This is partly because there is no punishment for not being compliant in time. In my opinion, punishment should not be necessary because it is not following rules but the desire for development that should be the driving force behind innovation and change.
When it comes to instant payments, the added value is increasingly recognized worldwide. However, the adoption rate varies from bank to bank and country to country. Besides that, some of the banks in Europe focus on EBA Clearing's pan-European system for instant payments (RT1) or ECB’s TARGET Instant Payment Settlement (TIPS), while others opt for a community solution that differs from the criteria set by the ECB in terms of higher service level, settlement methods or more appealing maximum process time. Instant payments are approached in different ways, which makes it difficult to position it as the new normal.
Fulfil pan-European reach
The good thing is that nothing is lost for banks now that the possibility arises to take matters into their own hands. There is still time for banks to catch up with the PSD2 timeline, as they must have their payment system ready for stress testing and wide usage by regulated third party providers (TPPs) by September 2019. By being ready in time, European banks can develop new functionalities for customers to ensure that customer relationships, data and profits all stay with them.
In order to speed up the adoption of instant payments, I recommend the following (European) approach. We should initially focus on market adoption within communities, as each community has its own wishes, habits and ambition. It is much easier to implement instant payment solutions on a national level because there the focus can be even more stronger on use cases and there are almost no cultural differences between national banks. Developments must be actively and timely shaped, together with other banks and payment processors out of the community. Besides collaboration, it is also possible for one or more banks to take the lead and actively embrace and promote instant payments as a unique and outstanding feature. This is possible because many banks already ‘accept’ incoming instant payments.
Whichever way we go, we have to bear in mind from the very beginning that we have to see instant payments as a European system that connects the national communities. That means that when developing domestic instant payment structures, attention should always be paid to interoperable features so that it is possible to connect the communities later with which we can fulfil pan-European reach. The EACHA Instant Payments Interoperability Framework is idealy positioned to support this. This way, we don’t make the mistake again of only creating local communities that can only be partially connected at a later stage.
When the full potential of PSD2 and instant payments is unlocked, I expect that we will be able to add extra value for merchants, corporates, third party providers and customers at a high pace, both on a consumer and a corporate level. The big winners will eventually be both banks and customers.