Structural changes have been spurring payments industry participants to evaluate the future of the business and their role. Payment gateway providers are becoming more sophisticated as they innovate to include value-added services to meet heightened customer expectations. Increased competition from fintech firms is also driving the development of this open and collaborative payments ecosystem. These firms also focus on high-risk payment gateways, new payments-enabling technologies, and an ever-changing regulatory landscape.
This environment is dynamic. We’re witnessing a transformation of the intermediary function for traditional payments-processing, which is forcing payment vendors to consolidate and collaborate just to stay relevant. Payment infrastructures now require next-generation tools like instant payments and distributed ledger technology (blockchain) to create an experience that delights a more sophisticated customer. At the same time, alternate channels such as contactless payments and wearables continue to gain traction.
Payment infrastructures now require next-generation tools like instant payments and distributed ledger technology (blockchain) to create an experience that delights a more sophisticated customer.
Along with new opportunities, this open and collaborative environment also presents vulnerabilities related to cybersecurity and data privacy, which create risks for industry stakeholders. From February to April 2020, financial sector cyberattacks increased by 238 percent, according to VMware Carbon Black data, and 82 percent of financial institutions surveyed said cyber criminal behavior has become more sophisticated.
The environment, combined with technologies like Application Programming Interfaces (APIs), is pushing banks and payment service providers to evaluate their roles and to adopt a more collaborative mindset. The goal is to deliver the customized, quick-to-scale products that customers and corporations expect. I’m also seeing how global regulatory directives are stoking competition and innovation, which ultimately influence collaborations.
Key Regulatory and Industry Initiatives (KRIIs) related to cybersecurity and anti-money laundering (AML) continue to impact banks’ business models. General Data Protection Regulation (GDPR) data privacy, payments systems modernization that include instant payments, and PSD 2 influence the engagement strategies of banks with other industry stakeholders. Apart from these, Distributed Ledger technology and Digital Currencies have created opportunities for all stakeholders as businesses are starting to transact in cryptocurrencies.
Within the payments domain, fintech firms are eliminating pain points across key value chain segments to solve for inefficiencies, client dissatisfaction, or traditionally high margin, high-risk areas for banks. Businesses prone to chargebacks or that have a greater risk for fraud pay higher fees for merchant services provided by these platforms, and banks need to have the right controls in place to mitigate the risk.
Strategic Response to Structural Changes
Increasingly, banks are positioning themselves as the intermediary between customers and external producers. A bank’s customer base, combined with its partnerships with service providers and fintech firms, is what builds a position of strength within the payments ecosystem. Payments is not just a commodity service for banks today, but a core differentiator and a strategic focus.
Payments is not just a commodity service for banks today, but a core differentiator and a strategic focus.
Digital payments are becoming a larger part of the retail domain, with more corporations adopting digital measures like e-invoicing that help banks play a central role in facilitating payments services between key partners and customers. BNP Paribas (the parent company of Bank of the West) has partnered with a leading provider within the supply chain industry to offer e-invoicing linked Receivables Purchase and e-invoicing linked Supply Chain Finance (e-SCF). This partnership showcases the power of collaboration between fintechs and BNP Paribas in driving innovation in the industry.
Rather than focusing solely on products, banks now offer platforms that provide producers with made-to-order, customer-centric services. A successful use case in this connection is private platform-as-a-service providers, or PaaS, for developing apps and providing services to third parties by leading banks through their platforms. These orientations ensure that banks retain customer trust and relationships while developing their ecosystem with external service providers.
Banks also collaborate with a variety of services producers to ensure connections are meaningful and focused on customer needs. This collaborative ecosystem enables banks to explore new revenue models, such as monetizing API-based value-added services. The ecosystem also provides a choice of payment methods for customers and allows corporates to select the strategic partner that best meets their collaborative needs.
A successful payments ecosystem affects a banks’ ability to understand customer requirements, as the bank is then able to use that understanding to create meaningful platform-based applications through mutually beneficial partnerships. As technology continues to advance and new payment systems are developed and adopted, providers need to be at the forefront of these opportunities to maintain their market share and customer base. Partnering with the right bank that has innovative solutions and can mitigate risk appropriately will help keep providers at the forefront of the new payments ecosystem.