What we heard at EBAday 2019

As one of the leading payments conferences in Europe, EBAday is a great forum to gauge industry sentiment on a number of challenges and opportunities taking place in the rapidly changing payments landscape. Through some very interesting conversations with clients and delegates, we were able to identify a few key themes from the event. These include the new opportunities around open banking, innovation arising from Request to Pay, the slow adoption of instant payments and the challenges of migrating to ISO 20022 messages. 

Open Banking, a Slow Open

With final compliance dates for PSD2 imminent, the conversation is shifting from compliance to service provision – what can banks now do on top of the provided APIs to continue being viable in a marketplace when they are becoming increasingly remote from the customer experience relationship? The reality is that aside from some banks that took APIs and open banking as a call to action very early – some before PSD2 was formalised – the vast majority of banks continue to breathe a sigh of relief from their compliance projects and are not yet in a position to take advantage of the wider world of open banking. 

One reason is the continued need for effective and efficient orchestration between external APIs and internal systems, particularly given that many of the latter are still not well suited to API access and real-time operation. Banks may have solved those orchestration needs for the basics of payments initiation and account access as required by regulation, but not in a scalable way, so more work is needed when it comes to opening up additional services such as lending or FX, or account-opening – all of which will be required in a truly open banking world. In addition to “known unknowns” like the impact of 24x7x365 real-time open banking on bank liquidity management, new concepts are arising. For example, the concept of “B2D” as a new entrant into the financial technology lexicon, standing for “Bank to Developer” or “Business to Developer” – the notion that banks now need to add the developer community as a set of stakeholders, in addition to the traditional ones of client/partner/regulator.

Request To Pay, coming soon to a device near you

As Request To Pay (RfP) starts to move from concept to emerging reality, a number of distinctive features are coming into focus. The first is that RfP opens up the possibility of requesting a payment, either in a business or consumer context, in a recipient’s preferred method. This helps improve financial inclusion in areas such as Asia-Pacific and other regions, where many people don’t have credit cards but do have bank accounts, or indeed don’t have bank accounts but have mobile phones and emails connected to digital wallets.

RfP can also be used as a means to combat fraud, such as “CEO fraud” where a bad actor sends a payment request to a finance employee impersonating the company’s CEO. RfP would eliminate sending of payment requests by email and similar unsecured and unauthenticated channels. While fraudsters will eventually find ways to play the system, the barrier to entry will be raised.

A key element that makes this possible is the proposed design of European Request To Pay which decouples the request mechanism and request customer experience from the payment rail. This is unlike, for example, the US TCH Real-Time Payments network request for pay mechanism, which requires fulfilment of the request through the RTP network. On balance, while it’s early days yet, RfP looks well positioned to deliver new waves of payments innovation to benefit European consumers and businesses. This provides opportunities for new innovators and poses a threat and opportunity alike for incumbent providers.

Instant payments yes, instant adoption no

This was the first EBAday with two live instant payments rails – the ECB’s TIPS and EBA Clearing’s RT1. While this in itself was a cause for celebration, any celebration of the growth of the networks in terms of number of banks signed on or meaningful transaction volumes relative to the huge volumes of non-instant SEPA, was muted. Adoption is proving slow even by the most forgiving of measures.

The reasons for the relative slowness of adoption are familiar: the lack of a mandate such as PSD2; the challenges of 24x7x365 real-time operation overall; the difficulty that many banks are having in adapting existing SEPA bulk payment systems from legacy vendors (or their homegrown SEPA engines) to the requirements of instant payments; and the lack of clear monetisation pathways and business case structures for instant payments. There is also the issue of the availability of two networks each with different properties and advantages and disadvantages – for example, TIPS has no transaction limit making it well suited to corporate payments, while the current transaction limits of RT1 tend to favour retail flows. This has created a ‘paradox of choice’ where an increase in the number of choices results in a decrease in the number of decisions being made. 

“Do nothing” in the face of complexity and uncertainty is certainly a possible course of action, but our discussions with banks indicated a different response to the instant payment landscape. There is a clear preference for multi-scheme instant payment solutions, easing the burden of committing to one network or the other or requiring two separate connectivity solutions. Banks are looking for APIs that enable them to quickly build end-to-end customer experiences and products based on instant payments, beyond basic connectivity. There is also a need for openness to managed-service and cloud-based solutions for instant payments, as these have multiple benefits. These capabilities allow banks to onboard onto instant payments networks quickly and with minimal upfront cost, while preserving agility as business cases and product offerings are released and validated. It also helps banks deal with the great unknown of volumes.

Transition strategy for ISO 20022

The industry is working on the migration approach for ISO 20022. UK and European banks (at least direct participants) will need to be ready to send and receive ISO 20022 messages in early 2022. Initially this will be a like-for-like migration, with the extension of the standard one year later. This has caused some concerns among the European Financial Institutions around how to create a unique migration strategy, what kind of support Central Banks, ACHs, Payment associations will offer for the testing phase around schemas, how to define testing windows, and how to avoid a “big bang” cut-over weekend. Post migration, there is also some concern over the “post mortem strategy” – the scenario where one or more participants won't be ready. 

There was a real mix of excitement and some hesitation when it comes to the changes happening in payments at EBAday this year. What is clear, however, is that banks must start innovating if they want to stay relevant and continue generating revenue, as yesterday’s technology cannot deliver on the business opportunities of today.