At a recent round table hosted by The Banker, a panel of industry experts discussed the changing nature of technology and innovation with regards to economic and regulatory influences. The experts also considered how these factors shape the competitive landscape and create opportunities for co-operation. The event, the last in a four-part series, was sponsored by the Royal Bank of Scotland, but independently written and edited.

Customers have always been king. No more so than today, when customer acquisition and retention strategies drive innovation. Banks say they listen to their customers to understand what services they should provide. But listening to customers is just one side of the coin – the other side is interpreting this need, the panellists say. In payments, both on the consumer and corporate side, the ultimate goal is to keep things simple, but efficient and secure, they argue. With various regulations pending, finding the balance of making payments simple yet efficient and, most of all, secure is a challenge, but not impossible if institutions leverage each other’s individual capabilities. 

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This is an edited video of the discussion from The Banker's Exclusive Leadership Series. Click below to view more:

PANEL-The technological innovation behind making payments simple

Economic outlook

It is not all doom and gloom in the financial sector. Some of the optimistic aspects that the financial crisis has created are taking place in the payments area on the consumer, corporate and financial institutions side.

“We are in a period of extreme change and heightened uncertainty,” says Neal Livingston, global head of transaction services origination at the Royal Bank of Scotland. “We hear a lot of talk about agility and the ability to plan your business for the future – and I think this is the prime challenge financial institutions [FIs] are facing. How do you plan for that future, given the uncertainties in today’s environment? In the payment industry, some segments and areas are growing faster than others, so the level of optimism depends on the payment flows of the particular segments and geographies.”

Mr Livingston adds that among the emerging BRIC economies of Brazil, Russia, India and China, Brazil stands out in particular and, to a lesser extent, Russia. “There is a real step change in how these economies operate and this is clearly visible in the payments industry.” 

For Mike Jones, head of financial innovations at PayPal Europe, the Middle East and Africa, the challenge is to steer away from being a commodities business. PayPal, he says, is not impacted by the economic outlook as much as high-street banks are, and there is still room for innovation. PayPal has a “focused agenda” on developing multichannel payments services and its growth, despite the sluggish economy, is in line with its forecasts.

“We have a significant international business which is now outstripping our domestic market in North America,” says Mr Jones.

But things are not going to go back to how they were, the panellists acknowledge. Laurence Leyden, head of financial services industries for SAP in Europe, the Middle East and Africa, says that from his insights as a technology provider, the market has reached a tipping point in the way FIs view the economic downturn.

“Some FIs see the economic downturn as an advantage to review their systems to streamline, to understand from a customer perspective how they can gain an advantage over other competitors,” says Mr Jones.

A user’s perspective

It is not just the economy, but also user habits that have changed. In some cases, the results have been surprising. The rise of debit cards has been an interesting aspect of this year’s World Payments Report and one key topic of discussion among the bankers. Cards are still the most used non-cash payment device and among them it is debit cards that are experiencing a great uptake. The report found that in 2010, the year for which the latest data is available, debit card usage grew by 15.2% on the year before to 107 billion transactions. Debit cards are now favoured over cash for low-value transactions. For Mr Livingston, debit card growth may continue to grow disproportionally to other payment streams until there is a disruptive change in the market place, whether through the banking system, telecommunications or regulation.

“I am fascinated by all the new technologies, be they contactless or mobile payments innovations. But which of those will take root and what impact will that have on the different payment types and their respective growth rates?” asks Mr Livingston. One such disruptive case is PayPal. Although around for 14 years now, Mr Jones says PayPal is still growing at 60% to 70% year-on-year in markets where it is still relatively new and by 20% in markets where it has an established presence.

Now banks are asking how they could achieve more standardisation, industrialisation. There’s a good opportunity to collaborate to enable banks to move to a lower cost platform

Laurence Leyden

“The challenge for us is to continue to find ways of making a difference to people, helping people do more with their money, not just in the consumer space, but also in the business space. The key questions for us to ask are: how can you add value in a way that is relevant and useful to somebody and then become the preferred payment stream to use? And, how can you do more, but quicker and more easily? This is our mindset and it is proving effective,” says Mr Jones. 

The panellists discussed the migration to the cloud extensively, with Mr Jones saying that PayPal deploys its technologies in the cloud as a digital solution, which is not linked to a specific technology such as near-field communication or specific mobile devices. “A digital wallet in the cloud could potentially offer a richer user experience. You could incorporate coupons, loyalty schemes and receipt storage,” he explains. “Customers now want a different relationship from their banks, so there is a lot of change coming. I think this is almost like a revolution. The change will be the norm.”

But Mr Leyden highlights that financial institutions were not realising the benefits of standardisation and industrialisation. One of the strategic evolutions that SAP has undergone in the crisis is the move from a purely applications company into a number of other different areas, such as the cloud, mobile, big data, databases and other new technology, he says. With so many new channels, it is important to be able to have a seamless cross-channel experience as a user, he says. As corporate-to-bank relationships continue to evolve and be strained by economic volatility, SAP created the Financial Services Network in conjunction with seven banks, including RBS. The network is a cloud offering that enables corporates and banks to use just one connection to connect to each other.

“Having individual connections to each bank and corporate is costly. Through this network, it is not just payments that go through – it is a value-added service. I think there will be more and more services available on the cloud,” says Mr Leyden. Mr Livingston reiterated this, saying that one of his largest clients values the insight, operational content, analysis and reporting that RBS provides. “This is based on a trade and payment service. The insight into the data that we can slice and dice and report is the piece they really value. So leveraging capabilities and connectivity options, be that on the cloud or otherwise, is the direction banks need to move in,” he says. 

Regulatory challenges

The World Payments Report highlights 32 regulations worldwide that impact FIs most. But according to Mr Livingston, the exact number of regulations impacting each institution depends on their individual position, footprint and the segment areas that the bank is serving.

“Let’s be clear, the impact is massive and probably unprecedented – not in the number of regulations, but the cumulative impact and timing,” he says.

He groups the regulations into two areas: some are enablers and some are more compliance-focused. This both encourages and forces banks to consider a completely different set of economic assumptions and economic variables that drive and run their business, which calls for a high degree of standardisation.

A financial institution may be a competitor, a collaborator and a customer at the same time. So you have to explore ideas and be very explicit about where it makes sense to leverage each other

Neal Livingston

There is, however, a contradiction, according to Mr Livingston: while banks have to be standardised to comply with regulation, the approach has to be relevant to each client to attract and retain their business. “There is no more room for superfluous activities that are not core to your key strengths. As we are in the business to make a return on serving our customers well, it is very important to standardise, but also to leverage new opportunities in technology as they come along,” he says.

Regulation, the panellists say, could be the catalyst for change in the market, but as Mr Livingston points out, FIs are at different levels of compliance.

“I think FIs are very pressed,” says Mr Leyden. “There is a difference between the emerging and developed markets, but all banks are looking at the end-to-end value chain and analysing which parts are value-added services and which aren’t to make the most efficient use of their capabilities. So standardisation is taking place, but they are also looking for return on equity and how they can distinguish their brand from others.”

Although not a bank in the traditional sense, PayPal nonetheless operates a banking licence in Europe and the fact that it processes payments means that the e-payments service provider is keeping an eye on regulation as well.

Mr Jones says that while Basel III does not necessarily impact PayPal, the remittance rule under Dodd­–Frank 1073 does require the company to be “very aware” of it. Regulations such as Dodd­–Frank 1073, which are national in their formulations but, as Mr Livingston puts it, “export a huge implication for transaction banking”, are a big challenge for the industry to take on.

To have a payment service provider such as PayPal, that can process payments and offer an easy customer experience with the assurance of data security, in turn impacts the traditional banking sector, says Mr Livingston. He also highlights that in cross-border terms, national regulators may adopt their own versions of regulation, as is currently the case with the Single Euro Payments Area (SEPA). As an FI, he says, you then need to find a common denominator and run to that standard. “We see SEPA as a unifier that will, hopefully, bring together national clearing systems. But we are under no illusion that there will continue to be a local variance in payment types and so we will need to accommodate those variables.”

Having the right data and knowing what to do with it will be key in future. Regulation is forcing organisations to make decisions upfront and this raises the question of big data.

“You need to understand where the risk is, what the cost of doing business is, the risk you are taking when processing transactions and how you can get a profit. So you can’t rely on siloed reports and solutions that meet different regulations,” says Mr Leyden.

SAP recognised this issue and is now moving from warehousing to in-memory technologies that can hold a greater level of detail. This, Mr Leyden says, will enable a more real-time approach to data, both in terms of storing and reporting. 

Pace of change

To innovate, you have to listen to what the customer wants. This is always the mantra that is quoted by thought leaders. Yet, as Mr Jones points out: “Henry Ford was listening to his customers and they were saying that they wanted to have faster horses. They were not asking for cars. You have to interpret what your customer is asking for.”

As the concept of the digital payment evolves, the mobile user experience will be a part of that, argues Mr Jones, but it will not be tied solely to the mobile phone. A cross-channel experience is becoming more and more important.

“People don’t use just one channel. I know people who still select the goods they want to buy using catalogues, then go online, buy the items, and then return them in the store. It’s not just one channel,” says Mr Jones.

Mike Jones 

Henry Ford was listening to his customers and they were saying that they wanted to have faster horses. They were not asking for cars. You have to interpret what your customer is asking for

Switching channels and expecting to pay no fee for doing so makes offering such payment services complex and expensive from a banking perspective, but it is happening. “We are in a world where almost anything can be digitised and the value held in digital form. And a payment is nothing other than a digital packet to which we ascribe value or use as a mechanism to transfer value. It doesn’t stop there, however. It goes all the way back into the payee’s ecosystem and all the way into the payer’s ecosystem. Hence the integration and the end-to-end costs, as well as making sure that data integrity is there. The transfer of trust all the way down the value chain is also a big challenge,” says Mr Livingston.

Taking the thought one step further, Mr Livingston says that if a payment is considered a set of digital values, it would not be any different from another asset that can be held and quantified digitally.

“If you can put the appropriate trust framework around that, combined with the right user experience, you’ll create the potential for a wide range of different digital services beyond the traditional payments or digital payments space. So I think the innovation opportunity is there. We have increased regulation running in parallel, but this is an opportunity for the financial services industry to move into that space. Clearly, businesses will move at different speeds. There will be early adopters and some will be in the middle while others will move more slowly, but the world now offers a completely different range of service opportunities that didn’t exist previously,” says Mr Livingston.

One such example is the Bank Payment Obligation (BPO), which is an electronic trade finance solution that offers the security of letters of credit with the flexibility of open-account trades. For Mr Livingston, this is revolutionary. “It is a new form of providing assurance and confidence around settlement risk, but it is too early to determine whether it will be adopted throughout the industry. There are closed-loop proprietary systems and so it will take significant time and investment to adopt the BPO. But it is innovative,” he says.

Competition from other areas

Relationships with customers, the panellists agree, are best built if FIs focus on value-added services, but as Mr Livingston points out, FIs need to collaborate to gain the most efficiency. “You are a competitor, a collaborator and a customer at the same time. So you have to explore ideas and be very explicit about where it makes sense to leverage each other,” he says.

For Mr Leyden, these are exciting times. “Now banks are approaching and asking how they could achieve more standardisation, industrialisation. And I think there’s good opportunity in collaborating now to enable banks to move to a lower cost platform,” he says.

In that sense, the popularity of PayPal among small and medium-sized enterprises, as well as consumers, is not just a threat. Mr Jones says PayPal is extending its portfolio of products to FIs in the retail and commercial banking space. The service is powered by PayPal, but the bank owns the customer. So there is no disintermediation, according to Mr Jones. PayPal also has a programme for banks to link their financial product to a PayPal account and their customer can then put that card at the top of their digital PayPal wallet. Additionally, there is a fund-withdrawal service from PayPal balances into a bank account.

Indeed, Mr Jones argues that a lot of innovation seen in the retail payments space could be applied to transaction banking as well and that could add value to corporate customers. “In the UK, the Faster Payments initiative enables faster access to funds, but this is not the case in some other countries. So we are looking to develop relationships with banks who want to try and add value to their customer,” he says.

Ultimately, such collaborative efforts will enable FIs to focus even more on their own business strengths and help them establish themselves as one of the top five providers for particular services.

“At RBS we have strategic tests to analyse which business areas we are active in and those where we are not. Our bank has made some tough decisions in the past in order to focus effectively on core business lines. This is becoming a fundamental approach to business for every institution,” says Mr Livingston.

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