18 June 2019
Europe can reform their payments industry by unlocking the full potential of Open Banking and instant payments
The European payments market has been reformed several times in the recent past by non-European players. This situation has had a detrimental effect on European financial institutions, as they lost market share because they were insufficiently aware of customers' need for cross-border solutions.
This is the reason that the current European point-of-sale market is dominated by Mastercard and Visa, while PayPal leads the e-commerce market, leaving domestic banking solutions behind. Meanwhile, we see that non-bank players like WeChat and Alipay are producing pan-European mobile payment solutions. They can be seen as a new threat to the banking sector.
Boost European financial institutions
The European Central Bank (ECB) has previously expressed its concern about the fact that there are no European companies competing in the battle for global payment solutions. This is badly needed if we as a continent do not want to rely on non-European payment providers. With user-friendly pan-European payment solutions, we can guarantee the integrity of payment services and besides that, it also gives an economic boost to European financial institutions.
The dependence on non-European payment solutions can come to an end, however, now that we have the solutions to reform the structure of the European payment sector in European favor. I am talking about the winning combination of Open Banking and instant payments. Instant payments are capable of unlocking the full potential of Open Banking by speeding up the development of new user-friendly payment solutions that turn European financial players into strong global competitors again.
The new normal
To do so, banks need to add instant payments as an extra layer to their infrastructure. 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 in the era of Open Banking and PSD2.
When it comes to instant payments, the added value is increasingly recognized worldwide, as demonstrated by implementation initiatives in the Netherlands and the Nordics. However, the adoption rate varies from bank to bank and country to country. Some banks position instant payments as a premium product of which customers have to pay extra, in other places this payment method is only used for local P2P solutions. 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 such as what is implemented in Spain, France and Belgium. Instant payments are approached in different ways, which makes it difficult to position it as the new normal.
Focus on pan-European solutions
In order to make the most of the combination of Open Banking and instant payments, we need to make instant payments the new normal. How? The answer lies within European collaboration and standardization.
If it comes to standardization, it is important that everyone use instant payments in the same way, so financial players should standardize their instant payments-infrastructure. This can only be done when banks seek for European collaboration and focus their efforts on pan-European solutions. Although banks in Europe operate mainly locally, their customers are increasingly looking for cross-border solutions. Retail and wholesale customers often pay across borders, for example for holidays, e-commerce or cross-border trade. Customers will switch to another payment solution provider if local or regional banks do not meet these needs. Payment functionalities that are only locally oriented will not be sustainable.
This does not mean that banks cannot initially focus on domestic market adoption within communities, as each community has its own wishes, habits and ambition. However, when developing domestic solutions involving instant payments, attention should always be paid to a standardized pan-European infrastructure with interoperable features so that it is possible to connect the communities later with which we can easily fulfil pan-European reach. 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 cross-border potential of Open Banking and instant payments is unlocked I am convinced that we will add extra value for merchants, corporates and consumers at a high pace. The big winners will be both European financial players and European customers.