28 June 2017
Money2020 Europe - Day 2
Every once in a while something beautiful happens.
Something that catches you by surprise and in so doing breaks down barriers and challenges age-long prejudices. Anyone familiar with Money 2020 will know that it can sometimes be a heroic task to hail a taxi given the exceptional demand. Running late this morning, my anxiety gradually turned to panic as it dawned on me that I wouldn’t make it to the conference centre in time. Suddenly, like a bolt out of the blue, a door flashed opened and three kindly lawyers seeing my distress offered to let me share their cab. Not only did they offer me a ride, but they also waived my contribution to the fare. Yes folks, contrary to popular belief, I can confirm that lawyers are people too!
So thanks guys and a big shout out to my new best friends at Hogan Lovells. Partner, Roger Tym, also graciously gave me a demo of an exciting new product which they have launched today. Engage is a user-friendly online service designed to provide banks, payments companies and other financial institutions with easy to navigate, accessible guides on key regulations affecting our industry. It also features a whizzy online tool for Fintechs to guide them through the key stages of the FCA authorisation process. It is worth checking out.
With the morning drama over with, and arriving on time, I began my day in a way all market intelligence professionals love to do: a cup of coffee and some new research to mull over. In this case, Euromonitor’s Michelle Evans provided a summary of their latest findings on Europe’s digital consumer. Their headline figures claim that 76 percent of Western European digital consumers browse or search the internet daily, while 18 percent of Western European digital consumers buy an item or service on a mobile daily. The latter figure is of particular interest as it highlights the significant potential for banks if their customers are digitally engaged. It reminds me of what Paul Stoddart, CEO of Vocalink, mentioned at yesterday’s session on tomorrow’s payment perspective. Commenting on mobile P2P, he noted from a bank’s perspective it is not about how to make money from a basic service. Products such as Paym in the UK and Mobile Pay in Denmark can be a stepping stone to create more engaged digital customers. Indeed the case of Mobile Pay is great example of how a simple P2P service, can blossom in to a whole digital commerce platform. As well as providing future opportunities around more complex digital interactions, it also reduces costs for banks as consumers rely less on expensive to run legacy services, such as cash and cheques.
The great joy management consultants bring to the world is the creation of strange new words. Often taking two words and creating a third – such as fintech – my word of the day comes from Olivier Denecker of McKinsey & Company who noted: “the holy grail for banks is to become the best at fintegration”. Ok so I’ve peaked an interest, but what does it mean exactly?
The evolving banking and payments environment – particularly around Open Banking - will mean that banks will need to think about what their options are going forward. Banks today typically operate across all areas of financial services, and manage most of their functions in-house. As competition heats up, the question is whether this is still the best place for banks to be. One option would be for banks to retreat in to a back office function, where they provide the accounts and someone else does the interface with the outside world. There would be still be money in what is effectively a white-label bank, however, it will probably be much less than it is today. Some may decide to narrow their focus specifically on one product, such as an SME bank. We’ve seen a number of new challenger banks adopt this approach. However, the most effective option in Olivier Denecker’s opinion will be for banks to become what he describes as an “Ecosystem Orchestrator”. Banks will bring together all the “best of breed” payment systems, lending, wealth management, and other banking services and take them directly to the customer. Banks can do this because they still hold the trust of the customer and therefore are best placed to take strategic advantage of customer data to bring new services and solve customer problems. Banks will not only be providers of financial services but will also be orchestrators for other services in your life. For example, PingAn in China started as a simple insurance service but moved into online banking. It then expanded further to capture what Olivier describes as the “entire ecosystem opportunity” (automotive, housing and healthcare solutions).
In short, the world is no longer about banks versus fintech, but one of “fintegration” (i.e. the integration of fintech within the bank's business models and services). The bank of the future will combine its existing inherent banking skills, the trust is has built with the consumer, and product knowledge, alongside some of the new skills brought about by completely new technology companies. These companies will sometimes be front end towards the customers, and sometimes suppliers to the banks.
In a further discussion assessing the future for banks in the payments market, Derek White of BBVA passionately described the change banks need to embrace. He argued whether it be domestic payments on traditional rails or cross-border payments and the FX component, whether it is on the bank or merchant side, the revenue pools for these transactions are under significant threat. But there is hope. According to Derek, the introduction of open platforms means banks don’t have to own every aspect of the customer relationship, and every aspect of the payments system. By allowing developers – and seeing developers as customers – to build businesses on the bank’s platform, this creates a potential new model for monetisation in the future. Offering one of the more quotable lines at this year’s event, he said:
“Payments is a listening mechanism for understanding how our customers use money. The role of the banks is to use these understandings to help solve the issues they may have”.
Jesper Nielson of Danske Bank, using the bank’s successful Mobile Pay business as an example, offered similar advice. Banks need to stop thinking about profit pools in payments as static. They evolve and if you look at things around payments: there are plenty of revenue opportunities. This could mean finding different roles, creating new markets, and utilising data.
Next, I turned my attention to the growth in in-app payments and commerce orchestrated across social media apps. With the runaway success of Alipay and Wechat in China, which combined have over 750 million active users, a key question is would we see similar “super wallets” in the West? Ryan Stanley, founder of Bloombees, which is an ecommerce solution that plugs into social platforms (i.e. the tech sitting behind a buy button) doesn’t necessarily think so. He said that while social platforms have good trust and engagement with their users which could allow them to make a successful play in this area, he thinks the Wechat phenomena is a bit of a one off. Some of the social platform businesses he has spoken to do not seem interested in owning the payment, as they do want to deal with complications around returns and other related problems. Elaborating further on the trust issue, he said consumers are generally resistant to leaving their data with unfamiliar merchants. For example, consumers are much more comfortable making a payment with a relatively unknown merchant, when they are offered the option to pay using a familiar e-retailer payment tool. When I think from a Vocalink perspective, this is exactly one of the key advantages our mobile payment solution can offer - customers do not have to provide their bank details or personal data, as the transaction is made from within the banking app. As mentioned numerously at Money 2020, banks are consistently cited as the most trust worthy to deal with our payments. The opportunity to support in-app payments with a bank-based services, has significant potential.
Another topic discussed was on how to build scale for a new startup payment services. Both Alette Broex of MyOrder (a mobile platform combining payment and loyalty), and Marieke Flament of Circle (a block chain-based mobile payment service) agreed that for startups who are battling banks with large customer bases – it is important to initially focus on what you do well. It is not a good idea to add multiple layers to your service too early as it can become confused. If you try to be all things to all people, it becomes difficult to manage. The danger is that if you do not do it very well, your business will fail. In my view, the notion of starting simple and gradually building out is a concept that could apply to all levels of business, both startups and more established brands.
For my last session of the day I attended a meeting looking at customer perspectives of instant payments. Discussing whether instant payments represent the next evolution in payments, ING’s Erik Tak, noted in terms of selling the service to customers, instant payments is the wrong name for the initiative and puts people on the wrong foot. The instant part is a just a fraction of the value they can deliver. While real-time has some strong use cases, for merchants looking at an alternative to card payments, they are much more interested in the fact that the service is operational 24/7 365 days a year.
Tomas Halpin of HSBC agreed with Erik, saying we need to give our customers options. Every mechanism that consumers and businesses need to move money is going to be driven by the purpose of the payment. For example, perhaps a business is trying to close a deal and the payment needs to be processed instantaneously for this to happen orin other scenarios it may not matter if the payment arrives in one or two days. The important thing is to give the customer the ability to control the payment and to choose the rails that align to their need.
After encouraging the market to develop pan-European instant payment solutions, the ECB has caused a bit of controversy by announcing the launch of its own service, Target Instant Payments Settlement (TIPS). With plans to set an extremely competitive pricing for the service, moderator Gareth Lodge of consultancy firm Celent asked a pertinent question of the ECB’s Helmut Wacket - Drawing parallels to what happened in the US in the 1980s where the Federal Reserve argued for more competition in the ACH market, cut prices and effectively forced most players active in the market to leave, how would the ECB balance its participation in instant payments with its role as a facilitator of the market to ensure it will not dominate it?
Helmut agreed that their role is as a facilitation body, to discuss what is good for the market, and find a solution that help bring strategic needs together. He said:
“We had doubts that their objective of pan-European reach would be achieved because in some markets the ACH did not want to provide an instant payments service, while in other markets it was domestically focused. This is why we decided to provide a compliment to what is out there. This is not a competitive proposal and we do not intend to dominate. It depends on the business models of respective players how they want to use TIPS, but at least it provides the opportunity to do so for anyone in Europe.”
From what I heard, I’m not sure everyone was convinced. However, whether TIPS achieves dominance or is just another solution, it is now a reality and some players have already announced that they will be connecting to it, such as Equens Worldline and SWIFT. Either way, it was certainly interesting to hear the rationale for TIPS from Helmut.
My time at Money 2020 is drawing to an end, but before I sign off, I caught up with our friends at Juniper Research who specialise in digital commerce and fintech. I asked Jon King what he thought the key takeaway from Money 2020 was. He told me that “What was striking is that PSD2 and Open Banking continues to be the stand out concern for banks and PSPs. Many banks seem to be drastically trying to work out their strategies in time for its implementation next year. In particular, how it is going to impact existing services they offer to clients.”
I would certainly agree with Jon, and it is also clear that some banks and PSPs seems to be lot further down the line in their thinking than others. I can safely say this topic is likely to be a feature of future Money 2020 conferences, not only because Open Banking has a much wider reach that just the EU, but because it has become evident that discussions have already been kicked off about PSD3. Expect more fun and games. See you next time.