Macro-Trend // A Cashless Society
1. Introduction To The Payments Industry
We live in a world where two-year old children know how to “finger swipe” on mobile devices and, as adults, we get frustrated when waiting more than three seconds for a web page to load. The demand for instantaneous actions is integrated into our way of living, and the same expectations are increasingly manifesting in the banking and financial services. Customers expect dynamic interactions and seamless user experiences.
The banking industry infrastructure, however, is not at all based on modern technology – in fact, some systems in the payment processing sector are more than 40 years old. Nor does the industry always respond with the speed that it should to competitive threats. Banks are threatened to have their profits eaten by new entrants to the market, such as PayPal – which despite a dependance on the same clearing and settlement systems as the banks, has managed to invent a profitable business by giving its customers an exceptional user experience without the burdens of a system based on legacies.
Banks should therefore to take back control and re-assert their place at the heart of financial services. Instant payments are impacting the banking landscape today, and from this derive challenges as well as opportunities for banks to increase their relevance and retain their important customer relationships.
2. Why We Are Going To Love Instant Payments
Instant payments allow users to have access to instant credit availability (leading to better credit risk and treasury management), irrevocability of transactions, the ability to make urgent payments, ease of use, 24/7/365 availability, and increased transparency of the payments process. The leading actors in the payment industry even think that immediate payments have the potential to replace checks and cash to a certain extent, and even replace debit cards as they could lower banking fees at POS terminals. 
3. The Barriers Towards Adoption
There are numerous challenges faced by retailers and corporates regarding adoption of immediate payments. In some cases, retailers are reluctant to replace existing POS and card infrastructures – in which they invested heavily, as long as there already exist alternatives to make funds available quickly with the existing infrastructure. Corporates needs to adapt liquidity management processes to the real-time world and there is also a lack of common standards for service offerings and communications among banks, which can be confusing for clients.
4. Possible Solutions To Overcome The Barriers
- Value-added services. More than 80% of the executives surveyed for WRP 2016 survey believe that the availability of value-added services will increase corporate adoption of immediate payments in the future.  Potential services include the integration of immediate payments with electronic invoice presentment and payment (EIPP), financial supply chain services, and unified payment interface.
- Market education. Banks, industry organizations and regulators will need to invest in educating key stakeholders including corporates, merchants, and end customers on the benefits of immediate payments – ease of transaction, instantaneous funds and receipt, better management of funds.
- Infrastructure upgrade. Merchants and corporates need to invest in upgrading their payments infrastructure to support immediate payment transactions. If the upgrade takes place on the existing infrastructure then it will be easier to upgrade and keep costs down, ensuring higher adoption rates.
- Enabling transformation. According to the same survey for WPR 2016, it has been reported that more than 60% of industry executives think that joint regulation and industry efforts will help to drive sustainable growth in the adoption of immediate payments.
5. Regulations And Objectives For Banks and PSPs For 2020
The current regulatory landscape for banks and other payment service providers (PSPs) is complex as they not only have to adhere to existing regulations, but also comply to new regulatory initiatives – some of which are affecting established operating and business models. The four primary objectives of these regulations are: risk reduction, standardization, competition and transparency, and innovation.
- During 2015, there was a rise in the number of new regulations in emerging markets promoting competition and innovation. For example, the NPCI launched the Unified Payments Interface (UPI) in April 2016, which enables users to make payments across payments instruments, bank accounts, and payments channels.
- Another one includes open application programming interfaces (APIs), which enable banks to develop innovative services for the benefit of the end customer. The impact of regulations depends on the maturity of payment systems and other local factors such as technology adoption, payment habits, and existing payment infrastructure.
6. Prescriptive And Transformational Innovation
The scope of payments industry regulations ranges from very detailed and prescriptive to more transformational and subject to multiple interpretations.
Prescriptive regulations reflect the traditional rules-based approach of regulators that ensure compliance to a checklist of rules. Such transformations support developments in the market, technology, and industry players and reduce banks’ exposure to risk and therefore ensure system stability.
On the other hand, transformational regulations are responsible of the disruption and innovation in the payments industry. These are subject to multiple interpretations because they are not prescriptive and ambiguity can lead to extending deadlines of across countries and banks to enable them to achieve compliance.
In Europe, regulators are prescriptive regarding security and data protection while they are more open-ended when it comes to innovation. EU authorities believe that innovation will emerge from competition. They argue that competition is achieved through transparency that enables the comparison of services and costs and standardization, which keeps down the cost of change. The number of local factors to consider for each region is increasing, requiring a more holistic compliance vision from the banks.
7. New Players Will Help Banks To Keep Up With The Changing Environment
As the complexity of the regulatory landscape has increased, there have arisen opportunities to use technology to ease the process and increase transparency. Such technology solutions help banks and businesses to automate the compliance tasks and reduce operational risks. With the FinTech environment, a niche set of firms, RegTechs, started to make use of emerging technology to target regulatory compliance. Areas of focus include prudential regulation stemming from Basel III/CRD IV, risk analysis, KYC utilities for storing due diligence information, and cloud-based plug-and-play software that can be integrated via APIs.
Among the new roles that regulators play is that of providing a safe environment in which businesses can innovate without putting their customers or their institution at risk. Such a move has been taken in the Netherlands, where the Authority for the Financial Markets and the Dutch Central Bank are jointly promoting start-ups and innovation. The initiative includes an InnovationHub where pilot projects can run under a temporary license including industry stakeholders and new entrants in discussions about how regulation could be altered to stimulate innovation. A similar project can be seen in the U.K. where they developed a Regulatory Sandbox and we can expect this model to escalate from a regional level to a global level.
8. Future Changes That Will Disrupt The Banking and Financial Industry
- Payment Service Directive (PSD) II
PSD II encourages competition and innovation through a new set of technical and business practices in three areas: consumer protection, payment security, and opening of access under XS2A. Its impact on banks is that it will require them to accept mandates given by their clients to third parties to access their accounts for reporting or payment initiation. Corporate treasurers will benefit from it by gaining predictability of costs and performance as well as promoting indirectly new service offerings to their benefit and of users.
- Immediate payment systems
Multiple countries started to implement immediate payment systems and these have been well-received in markets such as the U.K. It offers instant transactions, confirmation, and availability of funds, while also having an impact on business models at banks and corporates. Banks will see reduced processing costs associated with cash, checks, and some card transactions and will have to invest heavily to fully leverage the benefits. They will also have to manage liquidity in real time and the amount of refunding requirements will increase. Corporate treasurers will benefit of the disappearance the cut-off time concept, enabling new operating models with transfers received outside business hours.
Blockchain relies on a distributed ledger and consensus of the network of processors. Initially used for virtual currencies, the technology can be applied across financial services. The banks can gain greater efficiency in cross-border payments, supply chain, and trade finance, as well as seeing it as a possible solution for digital customer identity and transaction verification. On the large-scale and automated domestic transactions, Blockchain will not bring significant benefits. Corporate treasures could also benefit from increased transparency, as well as benefit from the solutions provided by their banking partners in cross-border payments and trade finance.