These large projects tie up considerable resources, and coping with them justifiably raises the question: what will come next? Or put differently: once SEPA, PSD2 and instant payments have been launched, and mobile and internet-based payments are up and running, will the payments revolution be over, resources return to normal levels and, as a side-effect, the number of conferences on payment issues fall again?
By no means! Significant changes and upheavals will also continue beyond 2019. The following illustration summarises the five key drivers of the ongoing revolution. Each is described briefly below.
In the coming years, the payments industry will feature fewer new trends, and more updates of existing regulations.
The revised SEPA Regulation will be issued at the start of 2018. After the first Regulation defined the parameters for the SEPA modules IBAN, XML, Credit Transfer and Direct Debit, the revision will focus on limiting fees for cross-border payments in non-euro currencies, and possibly also amending existing, or introducing new, playing rules.
The rules on money laundering and the prevention of terrorist financing will also be revised. PSD2, itself, is scheduled for revision from 2021 onwards, and it’s not unlikely that instant payments will also be legally regulated by 2022.
The propagation of standards is a central element of modernising the payments industry. Standards provide for a uniform and level playing field, creating incentives for efficient, modern and profitable structures.
Progress in propagating the XML format and ebics standard, in particular, can be expected in this field.
The ECB’s interbank system, TARGET2, and SWIFT messages will migrate to XML in the coming years.
The internet communication standard, ebics, which originated in Germany, is becoming increasingly popular across Europe. It provides a secure and cost-effective access method for processing payment files within and between banks.
Digitalisation of products and processes
Significant upheavals and transformations will be seen in the area of digitalisation.
Mobile and internet-based payment methods will become more prevalent, as too will person-to-person (P2P) payments using mobile devices.
Particularly interesting will be developments in the use of artificial intelligence (AI). These will include new possibilities such as voice-activated payments (e.g. via Alexa or Ok google), machine-to-machine payments (e.g. vehicle-initiated payment after refuelling at the petrol pump) and dealing with customer communication by chatbots (such as handling simple complaints).
Blockchain technology will also become further entrenched in the payments industry. However, contrary to predictions made in its early days (buzzword: bitcoin), Blockchain will fail to impact bulk payments, but only individual payments; this is because the technology’s performance remains far behind that needed to process bulk payments. Blockchain can, however, be used to process high-value payments and improve efficiency in the documentary business.
Not only Blockchain, but other technologies, too, will have far-reaching consequences for individual-payments processing – which currently requires by far the most manual intervention: the sector will undergo further standardisation and digitalisation, and the market will start looking for alternatives to correspondent-bank business.
Reorganisation of the value-creation chain
Besides the aforementioned, essentially operative changes, structural upheavals will also be seen in the business models and competition structures of the market as a whole.
In five years’ time, instant payments will be an established part of the payments landscape and fundamentally change the payments industry over the long term. This new payment method could prove particularly critical for the card business and, to some extent, also for the trade finance business. If shoppers can transfer their shopping bill directly to the supermarket’s account in a matter of seconds using instant payments, the elements of the card infrastructure (such as terminals, payment guarantees and schemes) will essentially be rendered superfluous. In trade finance, an exporter’s goods received by an importer in Rumania can be paid for in sec-onds.
The modularisation of the value-creation chain will continue to progress. In doing so, different suppliers will, to varying degrees, establish themselves horizontally and vertically on three levels: customer frontend (notably fintechs), product management, infrastructure and processing. At the same time, particularly the fintech sector will consolidate as not every business idea will flourish.
The Internet and retailing giants will play a major role in these upheavals as they continue to penetrate further into the payments business.
Against the above-mentioned background, it’s hardly surprising the market is already experiencing turmoil amongst its market players. Increased activity can already be seen in the areas of M&A and private equity investments, as evinced by e.g.: MasterCard’s takeover of UK clearing house, Vocalink; die deutsche Kredit-wirtschaft’s sale of its Concardis holding to private equity investors; and Klarna’s acquisition of Sofortüberweisung. This trend is set to continue.
Impact of mega-trends
And if all of that weren’t enough, a number of global mega-trends will also have noticeable repercussions for the payments industry, the most noteworthy of them being cybersecurity, terrorism, migration and aging.
Especially legislators’ requirements regarding the resilience and security of the IT systems used in payments processing are set to rise. The same applies to combating terrorist financing. Migration will lead to a significant increase in money transfers back to the migrants’ home countries, and to a growing attractiveness of this business field.
In Germany alone, the above-mentioned upheavals will cost the ca. 2,000 credit institutions up to €1 billion in staff costs for payment-system projects over the next two to three years. Banks are facing the risk of staff bottlenecks, given the large number of payments-related projects. Even though the author will doubtlessly profit from this argumentation, these bottlenecks won’t go away. An aging society and the associated staff shortages will leave their impression on the payments industry, also. Banks are already starting to have difficulties in attracting qualified personnel; and the situation is further aggravated by the fact that these are expert topics – ones which are not generally regarded as “sexy”.
We therefore believe this topic should be addressed briskly to avoid inflated staff costs later on. In the end, it will pay off. Ultimately, it is the account which is at the centre of payments – the main interface and central link to the customer.