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The digital era is rapidly changing every aspect of our lives through more recent inventions, innovations and new business models. We no longer have to wait for many of the things we did in the past. Want to see a movie? Click here. Need a place to stay? Click here. Looking for a mate or a date? Swipe left. And I just read about Elon Musk’s recent proposal for intercontinental travel. He says it can happen in less time than it takes to watch the evening news. (Does anyone still watch the evening news?)
More recently in the financial services sector, the settlement period for stock trades in the U.S., once T+5, was reduced to T+2. Perhaps that’s a response to the old axiom that nothing good ever happens between the trade date and settlement date. But more likely it’s a response to a pervasive trend in banking and financial markets: customers want faster, more personalized experiences, not just transactions.
There is a similar “need for speed” in the payments business. While banks are working on strategies – and searching for elusive ROI – to address the growing demand for Faster Payments; the reality is that it’s the cost of being in business today. And this demand for accelerating payments is creating disruption, risk and massive opportunity, all at the same time.
The disruption has been introduced by fast-moving fintechs such as PayPal, Apple Pay and Venmo, among many others. These companies are delivering powerful, mobile-first, customer-centric experiences that are simple-to-use and provide instantaneous payments. Better yet for these companies, they are unburdened by assets such as brick and mortar retail branches, allowing them to operate on very thin margins.
This disruption has not gone unnoticed. One response is Zelle, a faster payment system supported by more than 30 major banks and credit unions. Zelle promises to deliver the same type of payment experience, such as splitting the bill at a large business dinner meeting, but with the imprimatur of some of the world’s largest financial institutions.
In addition to this, in the United States, The Clearing House will begin its Real Time Payments pilot later this year, while in Europe the new SEPA Instant Payments scheme goes live in November.
This disruption has at least one pervasive benefit: it’s driving innovation and making a strong case for modernization across the financial services industry.
The risk is best summed up by the reality of “faster payment, faster fraud.” When payments took hours or days, banks had time to look for anomalies. In fact, most payments were made as part of huge batch processing jobs that took place at the end of the day when banks were closed. (Remember the days when banks closed and cash was inaccessible? I wonder what the millennials think of that.) If potentially fraudulent transactions were spotted, they could be delayed, set aside and examined more closely by an inspector.
Today, payments are made constantly around the clock, leaving an artificial intelligence algorithm less than five seconds to determine a transaction’s legitimacy. Moreover, the fact that payments are being made 24x7x365 is, by itself, another risk. Just a moment or two of downtime can cause a large number of transactions to fail. The longer the downtime, the greater the risk. To participate, banks must commit to bulletproof, continuous system availability.
No matter how you look at it, Faster Payments is a huge opportunity on a number of fronts. With online retail hitting trillions of dollars annually, faster payments can mean faster deliveries and even more satisfied customers. It also benefits the growing number of on demand jobs in the “gig economy” including areas such as transportation, entertainment, construction and healthcare.
Of course, not everybody is taking the same approach in getting ready to provide these services to their clients. Some geographies have outpaced the U.S. to this point, going with a single-operator approach for Faster Payments. The U.S. so far prefers a more market-driven approach, with financial institutions creating their own solutions and ecosystems. IBM was an active participant in The Federal Reserve’s Faster Payments Task Force that helped establish a series of recommendations for the industry. This work continues as we now focus on guiding principles and actions to get to Faster Payments in the U.S. by 2020.
Another significant change is happening in 2018 when the new Payments Services Directive, commonly known as PSD2, takes effect. This will provide additional traction to the API economy where enterprises start leveraging APIs to achieve their digital transformation goals. Under PSD2, banks in the EU must expose their APIs, allowing banking competitors and merchants to access customer banking account data – with permission, of course. This represents a big risk to traditional banking institutions and with the fintechs nipping at their heels, a first mover advantage may become critical to their long term success. These risks and opportunities are not limited to institutions in the EU and are equally relevant to all global banking institutions.
To be a leader in the API economy, there are several paths to follow. Here are three recommendations to chart the course and come out ahead:
- Become an API leader: Don’t just comply with rules and regulations. Strike first. APIs make the banking experience easier and open to a greater ecosystem of participants. Be a central part of that ecosystem or you may find yourself on the outside.
- Use analytics to create value. Banks have an immense trove of individual customer data that can be analyzed to cater to customer needs better than they do today. This is an opportunity to monetize data in your ecosystem. The real beneficiary of this will be customers, who see increasingly personalized experiences.
- Cross-sell with others in your ecosystem. Join with car dealers, real estate sellers, anyone who needs access to capital. Keeping the customer’s needs in mind, extending your immediate capabilities via partnership with fintechs should be explored actively.
But most important of all is the need to get started. Innovation is happening at breakneck speed, alliances are being formed and business models are being disrupted. The greatest risk of all is the risk of being left behind.
At Sibos 2017 in Toronto, IBM will have experts available to talk about designing, building and managing Faster Payments quickly and, just as importantly, securely. To learn more about the latest in Faster Payments, we hope you’ll meet with us at Sibos 2017. To schedule a meeting, please contact us at www.ibm.com/sibos
And visit IBM’s Stand at Sibos located in the Metro Toronto Convention Center, Stand E08.