With the impending arrival of the second payment services directive [PSD2] in January, the pressure is on financial institutions to ensure they’re ready for the digital age of banking. Internet of Business is on hand to smooth the way, with its second annual Internet of Banking & Payments event, taking place this week in the global heart of banking – Canary Wharf, London.
PSD2 leads the march towards a Digital Single Market in Europe. Customers stand to benefit in several ways and with this comes opportunities for service providers to distinguish themselves.
With data rights back in the hands of customers, thanks to Open Banking, ready access to transaction and account information opens the door to FinTechs and other innovators to create products and services that best suit the needs of end users.
Yesterday, industry leading speakers at the Internet of Banking & Payments expressed their belief, across presentations, panels and workshops, in the pressing need to move beyond regulatory compliance and undertake digital transformation with customers’ requirements in mind.
The global financial crash of 2008 means the banking and payments sector is badly behind most other industries in undergoing digitalization. In the face of the glaring need to innovate, several European nations look set to miss the imminent January deadline for PSD2 – not least because of their banks’ reliance on legacy systems.
Are you IoT payment ready?
Yesterday’s opening speaker, Gijs Boudewijn, chair of the Payments Systems Committee at the European Banking Federation, illuminated the threshold the industry finds itself on. We face an era where every device will be a payment device, machines will pay machines and many transactions will occur without in-the-moment awareness or triggers from the user. Setting up the day’s sentiment, he explained how APIs will be the golden standard for the internet of banking.
Even beyond ensuring PSD2 compliance, there are tough dichotomies to navigate, such as strong security standards versus the facilitation of future market solutions and easy user experience. Then there’s the promised high interoperability between Account Servicing Payment Service Providers [ASPSPs], Payment Initiation Service Providers [PISPs] and Account Information Service Providers [AISPs], versus flexibility for market participants.
These challenges (and the accompanying tangle of acronyms) are for the banks and payment solution providers to overcome. The user, on the other hand, will see widespread simplification in the ways they pay for things.
Commerce for every device
In his keynote presentation, Christoph Zehnacker, head of strategic digital partnerships at Mastercard, revealed how payments will become increasingly frictionless for end users. Cars will be hired simply by holding a smart watch to the door handle, petrol paid for automatically by your car communicating with the pumping station.
This is a natural extension of the unquestionable success of contactless and mobile payments (via the likes of Apple Pay and Google Pay), especially when other connected devices are expected to soon outstrip the ubiquity of smartphones.
The average user is growing used to IoT but there is something uncanny about such friction-less payments. Yet, the above examples are not theoretical applications. Garmin and FitBit, Zehnacker reveals, are both working on implementing contactless payments into their devices.
These changes sound appealing from an ease-of-use perspective but there are surely glaring security implications to overcome. Mastercard, who now thinks of itself as a technology company, is employing tokenization to mitigate such risks. Through its Mastercard Digital Enablement Service (MDES), each connected device is given a digital code (a token) that grants it the necessary access and permissions to make payments on your behalf. These can be individual revoked in case of loss or fraud. The solution is already utilised by 1000 banks worldwide.
The importance of tokenization and APIs
To keep customers in control, the MDES express program allows you to use your payment information across multiple devices by using a token that resides in the cloud. You can then switch these tokens on and off at will. Mastercard’s APIs and SDKs will also allow banks to implement further control such as spending limits.
When you put on your MDES-enabled watch each morning your will need to enter a four-digit pin, which is valid for 24 hours. Similarly, when you get into your car to drive to work, biometrics, such as facial recognition, will enable it to transfer funds, when desired.
As we wander deeper into the digital maze, we will see machines paying other machines for delivery of products and services. Chatbots will also be able to process transactions natively within the conversation stream. This raises questions around legal liability. Where does responsibility lie when things go wrong – can it rest with an AI?
Yesterday’s panel debate, on the opportunities created by PSD2 and the internet of banking, seemed to have little concern for this issue, with participants arguing that liability surely lies with the owner of the instigating AI. But the situation may not be as simple as this, given the historical lack of transparency in AI processes.
The panel also raised the topic of trust, which remains the big institutions’ trump card. Until the large banks catch up with the services offered by innovative newcomers, customers have a choice between the apparent safety of the incumbents and the superior service of the up and coming – the likes of Monzo and Starling Bank.
The post PSD2 banking world
Damian Richardson, head of payments strategy and innovation at NatWest spoke on how Open Banking will evolve banks’ relationships with customers. The arrival of aggregated banking apps, that combine all your accounts across numerous providers into one platform, highlights the prioritisation of the customer.
Natwest’s own efforts in this consumer-centric space, its ‘Get Cash’ function and integration with Amazon’s Alexa smart speaker, show that the big banks are capable of innovation and digital transformation in timely fashion.
Richardson implored others not to get stuck in the regulations and start with the users’ needs, rather than the payment methods. Opening up Natwest’s APIs to students and FinTechs is helping to tap into this ethos. Customers think ‘freedom’, not ‘car loan’, ‘lunch’, not ‘mobile payment’ and ‘home’, rather than ‘mortgage’.
From services to platforms
Elsewhere in Europe, Juergen Von Der Lehr is implementing the internet of banking at Deutsche Bank, as head of digital innovation and think tank. In a compelling presentation, he argued for the need for banks to become relevant on a daily basis. Deutsche Bank has adopted a strategy of building platforms influenced by client, tech and regulatory trends, helping it to stay relevant to customers.
Von Der Lehr sees a great opportunity to focus on life events, and what he calls ‘micro moments’, to provide value to users – offering financial advice and other guidance, via apps and AI. FinTechs are potential partners, not competitors, he reasons.
By investing in R&D, in the style of chemical and pharmaceutical companies, and moving from legacy systems to agile APIs, banks can open the door to fintechs and provide innovation and value to their clients.
Almost one in three (31 percent) of people are willing to buy banking services from non-banking companies such as Google or Amazon. Yet, almost half (48 percent) are willing to purchase non-banking services from banks. There is therefore an opportunity for established banks to leverage this trust and learn from the digital strategies of tech companies.
Read more: SAP: Banks must prepare for open banking age
Internet of Banking & Payments: a brave new world
Further presentations on digital transformation from Imran Younis, of Aldermore Bank, user-experience guidance from design consultant George Voke, as well as enlightening sessions with Metro and Crunchfish, completed a fascinating day.
The event continues today with many key influencers and thinkers in the industry. Take a look at the full agenda.
Overwhelmingly the mood at the Internet of Banking & Payments is one of opportunity and excitement, rather than concern. PSD2 is not without its challenges, as shown by those nations set to miss the deadline, and many of these obstacles are caused by internal resistance to change.
Yet, PSD2s arrival and the wakeup call offered by FinTechs and disruptive startups such as Starling Bank, Monzo and Crunchfish, usher in the greatest shake-up to banking and payments since the internet. And when commerce is made easy, it stands to benefit all those who were ready and willing to keep up.