Open banking, crypto, embedded finance, ISO 20022, the European Payment Initiative – what’s happening with payments these days and what will be happening tomorrow? How can banks select a system for their digital future?
To get the answers, we interviewed Ron van Wezel, Strategic Advisor in Retail Banking & Payments for Aite-Novarica.
Aite-Novarica is an advisory firm providing mission-critical insights on technology, regulations, strategy, and operations to banks and other companies. In 2021, Aite-Novarica named OpenWay the "best-in-class payment processing platform" in its Aite matrix.
Here is the full interview recording. Additionally, for your convenience, the video is acсompanied by the interview transcript. Enjoy watching!
The top 3 global payment trends
Ron van Wezel: There’s so much happening. Since I’ve been in payments, there hasn’t been a moment where I’ve seen so much change. I’ll pick a couple of trends. First, of course, was the shift to digital. The last year during the pandemic, we have seen an increase in growth in e-commerce that’s comparable to the whole 5 years before that, a massive shift to digital. That puts a lot of strain on the banks to meet merchant demands for faster payments, frictionless payments through all kinds of channels, for all kinds of currencies, all kinds of payment methods that clients require to make payments as easy as possible. For banks to basically manage that digital transformation is quite a challenge in itself.
The other trend we have to highlight here is open banking and embedded finance. With API, there is a whole value chain being recreated. While in the past, banks were delivering everything from start to finish, so you would produce your own services and then distribute them yourself to your end customers through a one-way street, now you see that ecosystems are being developed where banks are partnering with enterprises, with fintechs, to create these kinds of new value chains. Enterprises make use of that by integrating banking services into their customer journeys.
The payments opportunities alone for embedded finance is worth, when you fast forward to 2025, is expected to grow to 140 billion. And it’s not new, right? Embedded finance has been around for ages. If you are on an airline website, they’re going to ask you, do you want to have travel insurance? There’s already a form of embedded finance. But it’s so much more simplified by APIs. It’s easier to integrate between enterprise and a banking service, by banks delivering banking-as-a-service to corporations and fintechs. So that’s the second trend.
Maybe looking forward, what I think is going to be a big thing is crypto. I also just heard in Las Vegas in Money 20/20 now that that’s a very hot topic. So people there tend to agree with me, so probably crypto is going be accepted by merchants within the foreseeable future. Merchants basically want to offer the payment methods that their customers are used to. So cards of course is the first payment method that is being used, but now we see many others. Like these account-to-account payments that are popping up around the world. In the Netherlands, it is iDeal… in Poland… in Finland, around the world where new payment players are being accepted. From a merchant’s perspective these payment methods are sometimes faster, so you get the money faster than what you’d get with cards, sometimes they are cheaper, because they may be using a cheaper payment rail, and they are also final, so these payments are going to be pre-authenticated. So the transaction, when it reaches the merchants, is going to be final, there is going to be no chargeback. So operationally it is easier to manage. Cryptocurrency has all these characteristics. It’s real-time, it’s cheap, and it is irrevocable. From a merchant’s perspective that is a really good payment instrument to use. And you see this adoption growing the consumer base, so it gets the ubiquity that payment methods need, those two will eventually connect and they will start accepting it. Of course, because of the volatility of this currency, there is still some anger, some risk around it. But I think that we are at a brink of making the transition. So definitely on my research program for next year, to look at this.
Projected payment trends in Europe, 2021-2026
Ron van Wezel: We already talked about API, we mentioned open banking, which is in Europe a little bit ahead of the rest of the world, because of the regulation. I think the first one that we have seen already happening is, if you look at the US and the top ten processors, they process about 90% of the payment volume. It’s a very consolidated market, and there is not a case yet in Europe. There are still many processors, many clearing houses, many organizations that do something with payments, and you see this integrating. We have seen a lot of merchant acquirer acquisitions in the past two years, and this is going to continue. I would say that within the next five years, in Europe we’ll have a similar situation as what is happening in North America. Expect more M&A in the near future. So that’s specific for Europe.
And then, of course, we talk about Europe as if it is a market. But there are a lot of differences between the different countries. So maybe what you’ll see is a trend that these local flavors will start to kind of not really disappear, but maybe the markets will become more open. It will become easier for one citizen in country A to use a payment method in country B. There is a very interesting project that agended in Germany where they opened up Giropay, which is a local German debit card to be used online. It was not possible to use this online, but now they’ve opened this up. I think these kinds of things will start happening to make Europe a real payment market, rather than traditional, 28 different markets that we call Europe.
On the future of payment protocols
Ron van Wezel: The big thing is ISO 20022. I’ve never understood why you have to pronounce it like that, but there it is! That’s the way people speak about 20022. In two respects payment protocols are going to change a lot, because SWIFT is migrating to ISO 20022, so in the next coming years the SWIFT transfers are going to be based on that standard or formulated using that standard. Also the route of payment networks around the world is basically based on ISO 20022. And even in the UK it’s been around for a while, but now they’re migrating to this new standard. If everyone is using the same kind of data elements, that facilitates or smooths away to interconnect all these networks around the world, you potentially develop a new cross-border payments network that reduces cost and makes cross-border payments easy, transparent and more cost-effective, and that’s what the market is looking for. It’s not going to happen overnight, it’s going to take years, I think, at least 5 years to realize, but at least the potential is there with these new standards.
Maybe another standardization topic or issue is around API standardization. We all work with APIs, banks in Europe with APIs, fintechs work with APIs, but there’s no real standard available right now that works on a global basis. It kind of hampers the development of things like open banking. If you look specifically at Europe, it hampers the development of this open banking proposition. Of course, there are intermediaries playing in this world, like Tink or Plaid and others that develop an intermediate connection, so do all the heavy lifting by connecting to all these different banks, and so then they provide their own API to the market. But still that’s not optimal for me. I would say that to really drive open banking, you need not just the standard, but also what we call a scheme. A set of rules that everyone will respect when using these APIs. So I would say similar to what the UK has done with their implementation entity, really an entity looking over the implementation of the project, which is basically lacking in Europe.
The European Payment Initiative: goals, challenges, perspectives
Ron van Wezel: The first challenge is how to develop a business model for EPI. It’s nice to develop a new payment method, but what does that deliver, for instance, to the retail banks – retail banks that are putting their card issuing revenues at risk? And what do they get back from it? Is there an interchange model that is acceptable for the commissioner, for the competition authorities to work with? So this is the first challenge they have.
The second thing is how to realize the governance around EPI. We do so many banks, and you have to create a common organization, and the real work begins in developing this new infrastructure, while the world around you is still changing. I would say that it takes at least a couple of years to develop something like this, in the meantime, new developments have been coming around, they also have to integrate while you’re already on a running train.
It’s a massive challenge. It has been tried before, if you’re like me, long in the payment system, there was the Monnet Project that failed. But this time, the good thing is that there is a lot of political will, from the Central Bank, regulators, and from the banks participating in the initiative. If that is around, maybe this has a better chance of success than the other initiative that I mentioned, in the past. But we have to see. The ambition is huge. I saw at Money 20/20 Amsterdam that they gave some predictions, which I don’t think are realistic, but at least we can put the ambition level here, and get maybe to this level, to get it going. It would be great if it really would succeed, then we would have a European payments scheme next to Mastercard and Visa, which is good for the market and good for competition.
Why should banks invest in payment modernization?
Ron van Wezel: Well, we discussed all these big trends in client demand. Payments have to be frictionless, they have to be easy, they have to be invisible, they have to be cross-currency, they have to be cross-channel, that’s one thing on the client demand side, there are a lot of requirements coming up.
But also the industry is changing the way finance is done. We discussed banking and embedded finance. These developments drive the change in the banks from the industry side.
And then there are the regulators that are coming up with more strict requirements around KYC and AML, and run things like open banking, and at the same time, requiring banks to be open to competition and innovate more.
These three big drivers put the bank in the middle, and in our research the banks are most concerned about the increased competition with the new entrants, and with the big three payment providers. All the commodity payment services are being driven – you see a race to the bottom in terms of price, you see a revenue at risk. We did a kind of quick poll on banks, if they go like this, what do they think, 10-15% of retail revenue is at risk if you don’t modernize your payment system. So that’s the big thing. For banks, payment modernization is very much on the agenda. We talked to 20 of the largest banks in the world, retail banks, and many of them said that it is in their top 3 investment priorities. That’s about all investments. It is really high on the agenda for them to upgrade their payment systems and to be able to compete more successfully in the future.
Many banks are working with platforms that are maybe 20 years old or even older. I’ve been in those banks. And that’s not even the worst, because some banks have multiple platforms, super-legacy platforms that are sometimes interconnected, but sometimes they’re not interconnected. To replace that with something new, well, when the world around you is changing, again, that is a formidable challenge. And you’ve seen the investment budgets that some banks are setting aside for making that digital transformation.
Which payment system is best for digital transformation?
Ron van Wezel: On the functionality side, many of the payment platforms already do have the functionality the banks are looking for. So from a functionality perspective, I think the modern payment platforms are good. But what is required is to really start looking into the future.
Being completely cloud-enabled is something that the banks are looking for. Increasingly, right? A couple of years ago, we still could say, hmm, I would still like to continue running this on-premise because it’s less risk. Now I’d like to be on cloud more because it gives me more flexibility, I could be faster to market, be more flexible in creating new products for my customers. So the whole cloud enablement is important.
And of course, allow the banks to get easy access to the platform for APIs. So great, flexible APIs with a perfect developer experience, to make it as easy as possible for the bank as well as the customers to use those. If the vendor can create a digital transformation system, where banks can basically outsource most of the operation and development to a third party, that’s something that’s important, rather than then having to implement these solutions in their own environment because that’s going to be a challenge.
And then be able to make the transition: so a big bank is not able to, if you’re a really big bank, to go from one system to another is not going to be possible. So look first at instances where you can create real value: make those first, and then start migrating the other parts of the system to the new system. So basically, what I would say is to make it modular. The bank can pick and choose, and maybe keep some things in-house because it works, and they don’t want to touch it. Then other things that they think are important, they can create some new experiences around that. I think that’s what the banks are currently looking for.
What value does OpenWay Club bring to you?
Ron van Wezel: The whole conference was quite close to my business, right? It’s always great to hear from OpenWay clients, how they perceive the world, how they work with your platform. For me, that’s the most interesting thing to learn about. Of course, the presentations, but then there are the off-presentation and networking that we all do with clients and with OpenWay people that we look forward to.
This is the first conference since ages, so I’m really looking forward to interacting with people and learn some new things. Lots of things to learn. There are some great organizations that are present here. So looking forward to it.
