Banks need to keep pace with customer expectations and fintech disruptors or risk being left behind.
According to the 2017 B2B Payments & Working Capital Management Survey, 45% of participants consider the quality of a bank’s B2B payments offering to be a critical factor when selecting a banking partner. Furthermore, for those focused on global expansion, the ability of banks to align their services with an enterprise’s own growth trajectory is important, with around 20% of survey respondents mentioning that they use alternative options for B2B cross-border payments.
Not only does this highlight that businesses are transitioning from inefficient and costly paper cheques to electronic payment methods, but also that banks have not been able to meet demand for innovation and simplicity in the international payments arena.
Meanwhile, corporates struggle with the fragmentation and complexity of cross-border payments. Navigating the multitude of payment options and identifying the most suitable ones while handling evolving compliance and regulatory requirements can prove to be frustrating.
A survey by Saxo Payments focused on cross-border B2B payments indicated that the costs associated with international payments are a major cause of dissatisfaction: 48% of respondents were unhappy with the fees charged, while 80% of businesses would consider changing providers to reduce costs. Other challenges cited include a perceived lack of transparency, foreign exchange rates variations and slow transactions. This prevailing discontent has been one of the primary factors underpinning the growth of fintechs, many of whom provide innovative solutions that help companies manage their payments more efficiently.
Gaps in knowledge sharing, where traditional banks are unable to meet requirements or guide companies regarding the best ways to execute global payments, can hamper progress. This has created an inefficient and unsustainable ecosystem that prompts companies to look for other options. Paytech firms are leveraging technologies such as platforms and artificial intelligence (AI) to provide the building blocks for more efficient solutions. Technology-based platforms also deliver better value propositions and facilitate innovative business models.
For example, automated systems can identify and ensure fulfilment of all requisite payment protocols before initiating a payment process. TransferMate (Ireland) offers a range of global services for international payments that can be integrated with businesses’ accounting and enterprise resource planning (ERP) systems. With access to 117 currencies, 145 countries and transparent exchange rates, corporates can initiate secure and fast cross-border transfers.
According to Frost & Sullivan research titled ‘The Global PayTech Market: Driving Transaction Transformation’, a noteworthy growth opportunity in the coming years will be instant or real-time payments. Expected to be implemented globally, the massive adoption of mobile devices and mobile payments will underpin this trend. Previse (UK), which received £2 million in seed funding to develop its proprietary artificial intelligence (AI) solution, enables buyers to pay their suppliers as soon as an invoice comes in. Ripple (USA) offers a global real-time payment system that enables banks and financial institutions to send money globally using the power of Blockchain. Many such use cases of advanced technologies are being explored and will likely be adopted to further increase efficiency and reduce costs.
The value propositions and business models of paytech companies can vary considerably. However, they essentially all work towards creating a seamless and easy-to-execute system. Integration with existing systems, Single Euro Payments Area (SEPA) transfers, FX conversion automation, marketplaces, payment gateways, automatic compliance and notifications are some of the benefits that paytech companies offer.
For instance, dynamic currency conversion (DCC) and multi-currency pricing (MCP) are technologies that enable banks and merchants to price goods and services in the local currency of their customers and receive payment in their chosen currency. It simplifies international sales, while offering a tailored, transparent shopping experience to consumers. Irish fintech firms working to reinvent global finance by developing innovative solutions for merchants and ATM networks include Fexco, MonexFS and Continuum Commerce.
The corporate cross-border payment cycle is complex and paytech companies can disrupt different parts of the value chain to improve customer experience. CurrencyCloud (United Kingdom) automates the entire payment lifecycle by eliminating the need for companies to build a payment infrastructure or conduct negotiations with banks to enable international payments. The cloud-based platform enables frictionless global payments and rapid launch with its application programming interface (API). Paytech firms can lower costs by leveraging streamlined process and online or branchless models. Take Flywire (United States), for example. The global payment and receivables solution provider can charge its customers currency exchange margins that are almost 50% lower than traditional banks because it has a streamlined system and low overhead infrastructure.
Reinventing the cross-border payment ecosystem
The innovative cross-border payment solutions offered by paytech start-ups are encouraging incumbents to redesign their solutions to meet customer demands and remain competitive. Banks are either collaborating with or investing in paytechs to access innovations and enhance their services. For example, AIB acquired a minority stake in cross-border B2B payments company TransferMate and, as part of a strategic partnership, will offer business customers a convenient and cost-effective way to send or collect funds globally. European banking giant ING also entered into a strategic partnership where TransferMate services will be available to the bank’s SME and corporate customers.
Going forward, as corporates increasingly use innovative services, they will benefit from cross-border payment trends that encompass instant payments, better FX rates and technology-based platforms that help to streamline processes, cut costs and reduce delays. Although some transactions may still require
the involvement of banking entities, paytech will reduce costly errors and complexity to ensure better customer service and agility.
Disruption across the financial services industry has led to an increased focus on creating a secure and seamless experience for customers. The Experian 2018 Global Fraud and Identity Report identifies online shopping and personal banking as the top two activities performed by consumers on mobile devices in their online interactions with businesses.
That’s why traditional methods for customer authentication such as passwords, PINs and tokens are obsolete; they are easy to forge and do not protect information from being stolen or compromised. Meanwhile, biometric-based security systems make forging difficult and are more accurate, cost-effective and scalable than traditional methods of authentication. New regulations made by the European Banking Authority recommended strong customer authentication (SCA) that uses strong multi-factor authentication (MFA) for certain payments, which will come into effect in September 2019.
Multiple options to strengthen authentication
Daon (Ireland) and its IdentityX platform enables an omni-channel approach to biometric authentication. Users can opt for a variety of combinations including traditional security measures such as passwords along with biometric parameters such as voice or facial recognition or fingerprint ID.
Over the years, a range of biometric authentication options have been launched, with banks typically using more than one method to deliver comprehensive security. These include:
- Smartphone companies introduced fingerprint authentication to secure devices and the financial services industry has used this to its advantage, enabling consumers to log into their banking app or confirm payments through Apple Pay or Google Pay using an individual fingerprint instead of a PIN code. TouchTech Payments’ (Ireland) first product was a MasterCard and Visa certified fingerprint-based payment system for 3D Secure authentication.
- Voice recognition allows users to create voiceprints by repeating a short phrase. Nuance Communication (United States), a voice biometrics technology provider, cross-checks against more than 100 unique identifiers that include behavioural and physical aspects. PayPal plans to let Siri users conduct peer-to-peer (P2P) transactions with a voice command. The increase of voice-based virtual assistants can provide impetus to this trend.
- Facial recognition uses the in-built camera on a device to capture the image of a customer’s face for verification purposes. ID-Pal (Ireland) uses facial recognition to enable an end-to-end customer onboarding solution for Know Your Customer (KYC) and anti-money laundering (AML) requirements.
- Behavioural biometrics captures user characteristics such as hand-eye coordination, keystrokes, scrolling, and other device-based inputs such as geo-location to create a unique user profile. Gemalto (Netherlands) utilizes data that includes user and device identity, behavioral biometrics and user banking profile to power Gemalto Assurance Hub, an authentication solution.
Other innovative authentication methods include iris recognition and vein and heartbeat biometrics. Industry interest is evident with growing adoption and investment. Each of these solutions relies on the uniqueness of the associated features for individuals.
Towards a seamless and secure banking future
According to Frost & Sullivan research titled Biometrics in Financial Services, Forecast to 2022, security protocols impact customer trust. A focus on retaining goodwill and brand image are significant drivers to the adoption of biometrics solutions. Banks are introducing a variety of methods for consumer authentication to avoid hefty penalties in case a breach occurs. Additionally, with customer engagement becoming a cornerstone of good business practice, 75% of businesses surveyed in the Experian’s global fraud and identity report said they were open to adoption of advanced authentication and security measures if such solutions would not impact the digital experience of customers.
The move away from cash-based payments, coupled with biometrics such as thumbprints, and use of advanced technologies such as machine learning (ML) and artificial intelligence (AI), can yield a more secure and easy-to-use payment service. Research by the Oxford University and Mastercard suggests that 92% of banking professionals and 93% of consumers favour adoption of biometric solutions. Most biometric solutions are designed to meet regulatory and compliance requirements. This makes it easier for companies to adopt, while application programming interfaces (APIs) make implementation relatively straightforward.
Although biometrics-based authentication solutions are finding favour across financial services industry stakeholders, experts caution against complete reliance, citing a hybrid approach that uses MFA as more secure. Instances of fraud with just one level of authentication prove that financial services solutions continue to be targeted by scammers, meaning that security measures must evolve.
For now, the use of biometrics will enhance authentication and customer experience, while solutions will improve as they are fed with additional data on individuals and their transactions. Combined with other game-changing trends – such as smartphones enabled with fingerprint authentication and facial recognition – the industry can move towards more secure and frictionless payments.
The financial services sector, led until recently by traditional banks, is undergoing a period of unprecedented change and disruption. Technology, as well as consumer demand for innovative services, are driving fintech startups, while regulators are proactively participating to create a level playing field. One such move is the introduction of the revised Payment Services Directive (PSD2), which came into effect in January 2018 and recognises new and emerging payment providers by creating a secure and competitive environment in which they can compete with the industry behemoths.
According to the 2018 World Payments Report, an executive survey by Capgemini and BNP Paribas, 21.4% of respondents indicated complete PSD2 compliance, while 18% are in an implementation stage. PSD2 has extended the scope of payment providers by enabling new companies to participate, improving transparency of payment fees and curbing transaction costs.
Changing the Rules of the Game for PSPs
The focus of PSD2 on open banking and application programming interfaces (APIs) is ultimately driving innovation for the benefit of consumers. It allows third-party providers (TPPs) – upon customer approval – to access their bank account data and offer value-added payment services, which in turn will accelerate industry disruption. New interaction models now meet customer demands for real-time, customised and seamless payment experiences.
PSD2 requires banks to open their payment infrastructure and customer data to TPPs, thus taking away their privilege over direct customer engagement. The subsequent shift in competition manifests itself with the growing presence of fintechs, technology firms, retailers and telecommunications providers in the payment ecosystem. Incumbents are evolving with new business models, innovations and collaborations to sustain relevance. For example, UniCredit (Italy) launched Buddybank, a mobile-only ‘conversational banking’ model, with claims that 75% of its customers are new to the group. UniCredit plans to use customer feedback and information to improve other parts of the business. Similarly, credit card companies Visa and Mastercard are actively seeking collaborations to develop new services and identify other revenue sources.
While new industry participants innovate based on their newfound access to customer data, consumers are increasingly using online and mobile banking and payments. The natural progression is visible with the adoption of advanced features such as personal finance management, instant and peer-to-peer (P2P) payments. Fire (Ireland) is a Payment Initiation Service Provider (PISP) that provides business and personal customers with digital accounts and debit cards and enables users to easily pay funds directly to another
Fire (Ireland) is a Payment Initiation Service Provider (PISP) that provides business and personal customers with digital accounts and debit cards and enables users to easily pay funds directly to another person or business in the Eurozone or UK without sharing any account or card details. For instance, utility billers can add a ‘pay from your account’ link to emails, enabling people to click and pay from their accounts without using a card.
A Radically Different Payments Industry
PSD2 goes beyond enabling Access to Account (XS2A) for third-party payment providers; the guidelines focus on many other aspects to ensure customer protection. Some of the other influences are:
- Catalyst to change – PSD2 encourages open banking, which in turn impacts business models and service innovation. Customer experience can be enhanced across the payment value chain with multiple payment initiation options, apps to integrate and monitor financial information, geo-location-based coupons, instant and P2P payments. Ulster Bank announced Ireland’s first banking open API for seamless and secure linking of customer accounts to TPPs.
- Impact across stakeholders – Lower entry barriers enable PISPs, PSPs and account information service providers (AISPs) to enhance their services based on their ability to harness customer data and integrate it into other networks and apps. The impact of Google and Amazon will be compounded with innovation and demand evolution. According to the 2018 World Payments Report, e-wallets and payment apps offered by large tech firms contributed 71% of non-cash transactions globally during 2016.
- Pace of innovation – Beyond viewing PSD2 as a compliance requirement, or adopting a ‘wait and watch’ approach, many companies identify it as a stimulator for competition. Investments in start-ups focus on collaboration and phenomenal growth of some of the start-ups in the payments industry are a testimony to the immense potential. Stripe, a San Francisco-based digital payments platform, plans to capitalise on open banking by offering its infrastructure to any new or emerging fintechs looking to enter the sector without the hassle of being regulated.
APIs are effective, standardised and easy-to-use interfaces. TPPs offer their core capabilities via APIs and benefit from access to data to further improve solutions. Companies that integrate APIs benefit from easy implementation, testing and lower innovation cost. N26 (Germany) is a mobile-only, pan-European bank that provides consumers with a single digital platform for all banking needs. It integrates APIs from many partners and customers can access new services without any fees. APIs help to scale and add value as well as fit well in companies’ compliance and strategic plans.
With game-changing technologies and business models, the linear model of the payments industry that customers and banks once operated in has ceased to exist. Today, the industry is a complex web with multiple industry participants, many associated and complementary services, and a focus on creating a seamless and personalised payments experience for the user.