Banks and innovation, not the odd couple anymore: financial industry filling in the gap to fend off competition
Changes in the payments ecosystem introduced by the revised Payment Service Directive (PSD2) are creating a major challenge for banks: staying relevant in a competitive environment by offering existing and prospective customers the same agile, user-friendly services they would expect from new entrants rather than incumbents. Let’s take the example of Instant payments (or instant credit transfers, the SCTinst scheme defined by the European Payments Council), mandating the speed of euro payments throughout the European Union up to less than 10 seconds.
Enabling beneficiaries to access transferred funds immediately 24/7 and any day of the year unlocks clear advantages for the end-user: the ability to make time-sensitive payments immediately, wherever and whenever necessary. Instead of seeing this as a threat triggered by the new regulatory framework, incumbent banks can view it as the basis for the enhancement of existing services and the development of new value-added services.
Several financial institutions are already shifting perspective. In the euro area, Italy was among the first countries to launch instant payment initiatives, and TAS Group, as a financial technology solutions provider servicing major commercial & central banks as well as main financial services centers throughout Europe, has been able to collect and compare the opinion and sentiment of multiple players challenged by the competitive scenario being opened up by PSD2 to (authorized) third parties.
Not only are incumbents investing in larger and more diverse portfolio of retail payments solutions. A real-time payment offer for corporate customers is also underway, underpinned for example in Italy by a cooperative effort through the well advanced national CBI consortium PSD2 Gateway initiative. Bigger amounts involved in Corporate customers payments need larger technical and organizational changes, mainly related to fraud prevention and to liquidity management issues. Reach and Credit Risk are definitely two main factors that impact Instant Payments adoption in our view. Both factors are largely addressed by TIPS, ECB’s TARGET2 Instant Payment Settlement initiative, planned to go live end of November this year, offering final and irrevocable settlement for instant payments in central bank money on a 24/7/365 basis. TIPS intends also to act as an interoperability bridge for any SCTInst ACH. It will allow participating banks to set aside part of their liquidity on a dedicated account opened in TARGET2, from which instant payments can be settled around the clock; the balance on these accounts will count towards their required minimum reserve and instant settlement will eliminate credit risk for all involved participants. This will allow banks to improve the efficiency of their liquidity management and be shielded from any potential miscalculations and subsequent impacts on liquidity and reputation.
A question that many banks are still trying to answer is how to best participate into apparently competing systems, such as TIPS on one side and EBA-RT1 (the first EPC compliant scheme to go live last November) or other Instant Payments CSMs on the other side; here again TAS Group has concrete early adopters’ experience to share, advising on approaches and tools that help reduce the complexity.