2019 predictions: Open Source, Instant Payments and PSD2 to spur payments transformation

Payments transformation will take centre stage for banks in 2019.

Bank resilience hit the headlines in 2018, prompting the UK’s Treasury Select committee to announce a probe into the reasons for and the impact of – mainly payments related – IT failures. This comes after a number of well publicised events, where payment systems went down, and customers were left unable to use their debit cards, pay bills or pay rent. Creaking legacy systems are now risking the reputations of major banks.

Regulations like GDPR and PSD2 along with competitive pressures from big tech players and fintech upstarts are driving banks to re-imagine and begin re-architecting their technology infrastructure. This transformation goes beyond basic digitisation efforts as institutions explore new business models in a data-led rather than transaction-led economy. The acceleration of instant payments, maturity of open source tech, and adoption of a modular, micro-services architecture will be critical in arming banks with the systems and services to maintain competitiveness.

Whether eliminating the failures of legacy systems or taking steps towards a platform model, in 2019 we believe that the biggest changes in bank IT will centre around payment transformation:

Some [banking] elephants start to dance 

“Elephants can dance” was the book by Lou Gerstner, the CEO who transformed IBM in the 1990s that showed that veteran companies could adapt and prosper. Today, banks are at a similar fork in the road.

In 2017, 92 of the world’s top 100 banks still relied on IBM mainframes from the mid-60’s. This legacy architecture is no longer fit for purpose. In 2019, we expect a number of global tier one banks to break away from the elephant herd and build distributed, interlinked-services on cloud-based open source systems that work in real time. Centered around payments as the primary consumer touch-point, this will be banks’ first and biggest step in defending their industry from disruption.

PSD2 isn’t the same as Open Banking

In 2019, banks will realise PSD2 goes much further than Open Banking and that Strong Customer Authentication (SCA) in particular is a ticking time bomb. SCA requires banks to introduce further security checks for online transactions over €30. Not only does this require technology investment, banks will be under immense pressure from retailers and consumers to avoid creating friction in the online buying process. Any misstep, and the big story next Christmas will be about how banks ruined it because no one could shop online.

Instant payments become an innovation battleground

The UK was one of the first markets to go live with real-time payments following its introduction in 2008. Ten years later, there are now 41 instant payment schemes globally, including in Australia, China, Europe, India and the U.S – making instant payments reach near ubiquity levels. 2019 will finally see a raft of leading edge banks launch innovative new services on instant rails ranging from cash management, slicker lending, and possibly cross-currency real-time payments, all with the help of ecosystems and platform business models in partnership with fintechs. Instant payments will become a key battleground for banks as they seek to retain customers in the face of fierce competition.

Card transaction growth slows as PSD2 bites

SCA will add a degree of friction to many transactions, including card transactions as we know them today. In parallel, PSD2 has opened the door to PISP’s (Payment Initiation Service Providers) who will be able to, with consent from customers, initiate payments from their bank accounts to entities such as billers or merchants. For merchants this opens a route to lower cost payments and coupled with real-time a significant uptick in cashflow plus potential loyalty enhancements. As a result, we’ll witness the start of slowing of card transaction growth as instant payments increase.

Adoption of open source

Open source technology is second nature to big tech and challenger upstarts who are looking to build ecosystems around their platforms. In 2019, to meet the resiliency and scalability demands of an open, data driven, real-time market, banks will increasingly adopt open source technology. The use of a DevOps approach to deployment, utilising open source tools, will enable greater use of the cloud (public and private) and help banks to provide the flexibility needed to serve customers, partner with fintechs, and leverage the opportunities of platform banking in an open world.

In 2019, the banking market will increasingly be distinguished between those who are innovators and those who are not. Payment transformation will be a pivotal point for those wanting to go further than glossy exteriors to deep and lasting transformation. Those that embrace new technology models will lead the market. Those that continue to lean on legacy systems will become laggards and fall behind. It’s a simple choice, but it couldn’t be more important to the future of our industry.