Payment Evolution or Revolution?

ATEB Treasury Summit26 April 2018

• François Masquelier, Chairman of ATEL

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Payment revolution is underway…

Motto = Faster, Cheaper, Better, Safer, 24/24 and more virtual…

• Electronic payment can be simply defined as paying for goods or services on the internet

• It includes all financial operations using electronic devices, such as computers, smartphones or tablets

• E-payments come with various methods, like credit/debit card payments, bank transfers and much more new emerging methods

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What do we mean by «e-payments»?

DJ-tization: question is not WHETHER our businesses and payments will be affected by it, but WHEN and HOW

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Payments will be affected by DIGITIZATION

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Numerous stakeholders for e-payments

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Challenges for industry: many disruptions coming together in a short timeframe and cost-pressured environment

Source SWIFT

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What does new payments landscape imply for industry players?

At the end of the day, never forget that paradoxically payments remain a cultural and regional/local issue

Source SWIFT

• Fraud is at its peak (according to AFP 2017 survey)

• It is what I call the « paradox of sophistication »

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Fraud at a peak in the mean time…

« The fraud survey serves as an important resource in understanding the potential risks within the payments industry.

With more than 3/4 of MNC’s experiencing fraud in 2017, it is important that business take preventive measures by educating their employees and implementing processes to prepare and protect their infrastructures from cyber fraud » (Bob St Jean)

• MNC’s business models are changing with this “DIGITALIZATION” with all consequences in terms of payment habits

• Targeting a young public means opting for new modern ways of paying

• Dividing line between banks and "e-industry" is very thin

• Internet giants are appearing on the banking market and compete with banks in certain domains incl. payments & loans

• New 4th industrial revolution launched…

• However, technology is evolving quicker than regulations

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In a constantly changing world need to adapt continuously and look ahead

• World is changing fast with Tech’s fundamental transformation and need to collect/pay using new payment solutions

• Need to embrace varied payment methods to make operating models viable

• Difficulty derives from high volume of receipt transactions & low/tiny value

• New niches encourage service providers (e.g. software houses, TechCo’s, search engines, telco’s, etc..) to develop alternative solutions (genuine competition for traditional Bk)

• Non FI’s get banking licences, enabling them to carry out transactions which banks themselves have always tried to shield from competition

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Business model of MNC’s shifted towards B2C

Without having same regulatory and financial constraints, with shorter response times and capacity to

develop appropriate IT solutions very fast, these new players are on a race, in time, to gobble up online payment market

• Cannot say whether Bks will try to adapt own business model or whether e-business cies. will diversify into neutral ground

• Fighting will be fierce and there will be bodies lying by the wayside

• New arrivals have immeasurable advantages compared to banks (cost structure, speed of response, tech specialists, less regulation, huge liquidity, …)

• Portability and new methods = crucial advantages in attracting new clients

• E-businesses can make full use of big data to profile and target customers

• For them size will be crucial in building businesses that will last

• Security, interfacing, flexibility and price = key challenges to be overcome to be able to attract new users

• Cash could be an issue for TechCo’s, although cash raising is easy

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War has broken out - No one knows who will win it

Can treasurers decide they don’t need to bother about this genuine tsunami?

• Banks try to become more “virtual", GAFA ready to swoop and Corp’s wish to grasp solutions to solve problems themselves, without relying on others

• Technology evolving faster than economic and Reg environment need to be able to adjust to make sure that you don't miss the bandwagon

• Diversification is a way of protecting your strategy competitive advantage

• Changes in consumption habits with coming new Gen “Z”

• Plethora of Cies ready to offer e-payments harder to decide best approach (Alibaba, iPay, Monitise, PayPal, Discover, TrueMoney, the list is long)

• Alternative methods proliferate in various forms: "e-wallet" concept has made its appearance, with idea of holding plenty of other data on a single medium

• Access to info, not currently being used by banks, on consumption habits might give selling power to MNC’s operating over Internet

• Algorithms + robots are coming, providing new functionalities and selection criteria (e.g. FB friends is thought to increase likelihood of loan repayment)

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Profusion of players make situation evenmore complex

• Virtual Ccy, mobile wallets and many other novelties, retail banks are trying not to be left by the wayside on the road to digitalisation by social networks or mobile devices

• Bk offer rebates based on the number of "likes" that you have or promote services

• Banks develop new innovation strategy to stay in the game and to avoid being killed by Internet Giants

• Must increase innovation capacity to adapt to the changing needs of Internet users and B2C trading companies

• Look enviously at online lending systems and P2P solutions (e.g. Zopa, Kantox,…)

• Some banks have set up mobile P2P payment solutions

• Private individuals look for virtual banks they never visit and for portable solutions

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Challenges but some banks are reacting…

Users are looking for media-type banking experience

“Everywhere, for everyone, on all devices”

• Institutions invest in funds which acquire start-ups working on transforming financial services industry

• Challenge for TechCo’s is becoming banks or something very like it while at the same time avoiding restrictions imposed on FI (narrow area between traditional FI under regulatory supervision and e-FI)

• Risk of technical "no man's land" to be filled

• Google electronic wallet is making major inroads into mobile payments, enabling users to store debit/credit & loyalty cards, to send funds by email, to shop online and to touch phone onto any PayPass-enabled terminal

• Google still requires traditional bank account, but for how long? Alias-based solutions like Pay-Pal?

• Customers want new apps smarter & more ingenious non-stopping innovation race

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Challenges for new FinTech players too

Banks are weighed down by admin burdens, slow-moving IT, system legacy, risk aversion and shortage of entrepreneurial spirit

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Fast growth of technology

• FB is moving to electronic payment by linking account to profile/plans to obtain bank licence or is entering into partnerships with TransferWide & Azimo to retain "friends“

• Solutions for payments between users without going through intermediary of "traditional" banks will be challenge for e-industry, and risk for overly conservative FI’s

• Speed of innovation is dreadfully high - “Adapt or die"

• Boundaries are disappearing and everyone may end up being each other's competitors

• Old value chain is dismantled and constantly shortened by tech developments

• “4-corner payment model" is under challenge (unknown cy. pop up e.g. Yapital/Digicard)

• Legal framework has also evolved: DIR on PSD & Electronic Money for "e-money institutions“ to harmonise prudential framework

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Fierce « e-competition » everywhere

Goodbye analogue, long-live digital !

• Need to adapt and plan ahead so that payment methods do not become an obstacle to transactions, but a benefit or a competitive advantage

• Huge challenges for the banks

• They will lose up to 1/3 of their payment income as of 2020 !

• Even worse, consumers clearly have greater trust in TechCo’s, preferring them to banks which look less sexy to Internet users !

• New entrants are opening up a gulf between consumers and traditional banks

• Banks could end up as enormous "back offices" !

Banks need to remain another link in the chain

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A world of opportunities is opening up, be optimistic

• Some FI reacted (e.g. payment solutions via Facebook Messenger for sending funds between private individuals, account opening on smartphones,…)

• Credit card suppliers are also eventually innovating

• Retailers look for alternatives to be able to manage it alone

• Competition takes nasty turn – TechCo’s are prepared to provide payment services as a free add-on, part of a package

• Banks are held back by dead-weights: restrictive regulations and their conservatism and reluctance to embark on IT innovation

• “Customer-centric approach" must be on-boarded by all

• Challenge = becoming virtual FI without constraints of burdensome banking regulations (e.g. KYC, PSD, B3, MiFID2, SEPA, ECB…)

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A world of opportunities is opening up

Tomorrow's bank will be more “virtual” than ever

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Who are the proactive banks in the e-payments sphere?

• There are few international banks rather pro-active in developing solutions in order to reinforce their capabilities in terms of new payment methods

• For example among others we can list: BofA, JPMorgan, BBVA, Deutsche Bank, HSBC and ING (it is difficult to list all of them)

• They also make acquisitions in the FinTech sector, internationally and localy, in order to build the future of banking (and obviously not only in the payment area –e.g. working capital, trade finance, P2P solutions, FX, etc…)

• By these acquisitions, they tend to integrate new solutions into their own systems

• These active players try to shape the future of banking by testing new channels and new solutions. These proactive Financial Institutions will be better placed to protect their position, their customer base and ensure their future profitability

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Future trends driving payments

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10 key payment trends in summary

1. Gen “Z”er’s Rising, whom give up leather wallets

2. Customer Experience (UX) is the new gold a differentiator

3. Mobile hits groove (64% digital wallet in 2020)

4. Rewards revolution to increase customers’ loyalty

5. Power / Effect of network (Person2Person payments / Zelle)

6. FinTech & FI fusion / platform (collaboration: e.g. BofA & PayPal in shops)

7. Payments everywhere (24/7) and for free…

8. Fraudsters innovate too… robotics and algorithms to fight

9. RIP & replace required – IT legacy in banking overhaul of systems

10.Race in code (credit cards with unique code per transaction)

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New opportunities offered by emerging block chain tech’s, despite uncertainties on crypto-currencies

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Is there still a role for bankers?

YES, for example as an INTEGRATOR of different payment methods, via smart-devices providing they move fast…

Need to find, extract, refine, distribute and monetize data

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Beyond capture of payment flows, FinTech’s are looking for DATA

« Information is the oil of the 21st century and analytics is the combustion engine » (P. Soundergaard)

Conclusion: the future is now… be ready!

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Be ready to onboard changes in payment methods…

Thank you!

François Masquelier, Chairman ATEL

Twitter: @FrancoisMasquel

Blog: https://mytreasurer.wordpress.com

LinkedIn: ATEL group

https://mytreasurer.wordpress.com/