Is 2016 the year that all the promises of mass consumer adoption of new payment mechanisms finally occur? Or will it be another year of trials, debate, pilots and incumbents simply having one eye open for new, and then forging ahead with their core businesses?
There is no doubt that the momentum of banks, acquirers and processors is increasing towards fundamental change. They are engaging with APIs, investigating Blockchain type technologies, platform modernisation projects are creeping forward, and more partnering structure movement towards open collaboration with Fintech start-ups is increasing.
We clearly see a tipping point emerging where enough of the super-tankers of the payments industry are reaching a “real change” point. After which, just like always, the rest of the industry in its normal domino me-too adoption cycles gain confidence and mass occurs.
This time the mass rollout of change and adoption may surprise many, let’s explore why…
Open API cultures open more value per customer
The API revolution is happening, fact. It is wider than payments but payments are right in there too. Examples of movement are; the likes of MasterCard declaring to shareholders open data is a 3rd pillar of the future business, Visa opening its Kimono to allow developer access to basic functions; the UK government establishing the Open Banking API framework; Mondo, the first truly digital bank built for your Smartphone opens its APIs for developers, and Citigroup, BBVA Compass, Bank of America and Capital One are among the large U.S. banks already making pieces of their internally developed software available as APIs. Added to that of course there are the regulatory changes such as the European Central Bank (ECB) and the PSDII mandates forcing ALL European banks to have open APIs for 3rd party access in the next few years.
It is PayX’s view that banks with an open API culture will likely attract more customers and more value per customer than banks who choose to keep their core systems proprietary and closed. The future APIs enabled bank landscape typically splits into two roles; the trusted bank utility platform role (delivered by banks or selected 3rd parties), and the innovation value add role (delivered by more commercial/innovative players who lack the trust). Ultimately we see a symbiotic relationship for many years to come. Of course there will be those banks that try both roles, and in the short term they may win.
Given APIs are both attractive for future business and imminently mandated by the regulators then banks have to make this technological move. How to do this is a topic for another specific commentary all by itself.
Blockchain has the attention and funding of the largest banks and investors
Blockchain and its associated crypto currencies have been active in the news for some time now and many of us (even though we won’t admit it) are still none the wiser about what this all means to the world of payment processing. One thing we know for sure is that it has the attention and funding of a number of the largest banks and investors who see the long-term opportunity or else fear being left behind in the race (especially those with a central broker role like Swift, the card Schemes, and even Central Banks). Interestingly, more and more cases are being discovered for the use of the technology, for example, identifying and securing high value assets such as diamonds, watches and jewellery.
At PayX we can see the potential, and indeed we agree it could be the most disruptive event in Payments yet, but given things like EMV is 20 years in its rollout then our verdict is that large scale use of Blockchain technologies is at least 5 years out.
Banks modernising existing legacy platforms to be future proof
Banks are moving from decades of winning based on being the most efficient consistent processing organisation, through to now having to be agile, innovative and supporting as a contributor in an ecosystem of many, rather than being the master driving a few.
Many banks still operate platforms and systems that have worked for the last 20-30 years and are still used today for the majority of the core banks’ businesses. Banks know the legacy must change at some point but they are not sure what the new world will look like to create something that is truly future proof, and they are certainly not sure when they need to be there.
The billion-dollar question in most banks right now is how much longer will they be able to maintain day-to-day operations at acceptable service levels (legacy systems are getting harder to maintain and be compliant each year) and when will a sizable demand for new and convenient services requiring modern techniques such as APIs be critical to be supported. Once they know the ‘when’ and work out the ‘what’ questions, then the focus moves to ‘how’.
Some banks go for one of two options, both of which we are starting to see in practice in the early movers, but unfortunately have fundamental flaws:
1) Wholesale replacement of the old payment system with a so-called modern day version but essentially with the same functionality. End result: replace one legacy system with another vendor lock-in technical legacy system. The bank on the one hand feels a move has been done; the spend, risk, and change all implemented was tough but they got there. On the other hand, when the promise of the land of future, fast to market new products and services comes to play then it’s much a repeat of the challenges of before, yes a little faster, a little easier but no real league change of being future proof has occurred. Oops!
2) Re-create the old payment system with modern architectures and technologies. End result: create a new system based on existing legacy user requirements in new technologies and create a new business legacy system. So the technology capability is closer but still the bank fundamentally has not moved as an organisation, a culture or a business. Another Oops!
Both of these serve to increase the Technical Debt for the organisation and in reality carries on the underlying problem which then becomes the challenge for the next incumbent leader.
The answer to succeeding in modernising the capabilities technology and business is much sought after and in reality is still very complex, heavily linked to the personality of each bank. Banks have the fundamental change to make at all levels across culture, structure, business and technology. Ultimately the next topic below of collaborating with 3rd parties is helping banks experience first-hand the strategy that is needed which will then put in place a major, but slow, fundamental shift in place.
Banks collaborating more openly and seriously with Fintechs as partners
To attain the genuine collaboration results rather than the marketing innovate more image, C-Level bank executives are investing in trialling how best to embrace the Fintech disruption in the market. Our view is that loose collaboration through open systems, open source and API based functions are the key factors increasing the chances of successful change. Tight collaboration is hard work smashing two or more fundamentally opposed cultures together. Look at the likes of Uber, Airbnb, eBay, Facebook et al and note what they all have in common (apart from being extremely rich); none of them manufacture anything, they are all ‘Enablers’ that connect consumers with producers, that’s it, that’s all they do. Can banks do the same? We believe so, and more, based upon the fact that they also create and deliver banking products and services; with their current technology, possibly not, but with ‘layering’ of their technology, most definitely.
In our opinion:
1. Banks have open eyes to fundamental shifts that are needed in the “near” future. Near is not defined yet as exactly when, and it is for each bank to define based on a plethora of factors such as its appetite, market position and conditions. No doubt all the banks know fundamental change will come and each are in various stages in the process now.
2. Bank change will be slow even for the aggressive banks; they are moving from expert operators of banking through to players in a collaborative competitive ecosystem. No matter what level of pressures occur the change will be slow given it is fundamental and ultimately culture based.
3. Banks and 3rd parties will find ways to create win-win scenarios. We believe the most successful will be “Loose” arrangements as tight is too hard given the culture differences of the parties. The win is twofold; it enables banks to leap frog their own cultural constraints, and it allows cross fertilization of best practices of the new world.
4. Technologies and platforms will underpin “enabling” the implementation of the necessary capabilities for the future. Technologies will deliver little apart from spot fixes and sandbox learnings to a bank that does not have a total bank change strategy driven top down. Culture, business and technologies all need change aligned to make the needed fundamental shift.
5. The vast majority of banks do have the available time to make these changes. The scare tactics out there talk about Unicorn FinTechs (i.e. the successful ones) displacing banks, and even surveying millennials confirms the belief. What people are not seriously considering though, is that there is a reason banks are called Institutions. If core parts of Institutions go into freefall, then the financial system goes into crisis. Repeatedly we see the custodians and key players embedded in the global financial system holding everything together so we are pretty certain that there is no way a Unicorn FinTech company will be allowed to displace those cores, best case a collaboration and partnership will flourish. Still that means banks have time to change. Will they change? Absolutely, but because the bank next door did already, and next door can be virtually anywhere thanks to our global digital world. Therefore, there is considerable pressure but it will be at the mass bank change cycle pace not anything else.
So, To Play or Not to Play in 2016, our answer would be; everyone will play, but just with different appetites. Time will tell, it will be a very busy year…we look forward to working with you.
The PayX Team
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