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Digitalisation
The future started yesterday
Levente KOVÁCS - Secretary General Zoltán LADÁNYI - Chief Economist
Szumi, 25 October 2018
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Introduction
• Trust is fundamental to the banking sector, therefore
innovative applications must be built on a firm, secure base.
• The adaptation of IT does not depend on technical
possibilities, but rather on how willing customers are to
apply it.
• Customers change rapidly and need a few years to adapt to
new technologies.
• Regulations and infrastructure service providers have the
ability to speed up technological change.
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Agenda
Industrial Revolutions
Changes in Approach
Impact of Regulations
New paradox in payments
FinTech and BigTech Companies
How should banks react to new ecosystem
Instant Payment
How is the winner?
Looking into the future
Conclusion
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Industrial revolutions
Industrial revolutions have brought significant changes
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What is Industry 4.0?
Industry 4.0 optimizes the computerization of Industry 3.0
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Changes in approach
is the world’s largest taxi company. It owns no vehicles.
is the world’s most valuable retailer. It has no inventory.
is the world’s most popular media owner. It creates no content.
is the world’s largest accommodation provider. It owns no
real estate.
is the world’s biggest „bank”, with no real cash and branch.
Tech Platforms don’t Own Products
* Source: The New York Times, 16.04.2017
*
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Payment Services Directive (PSD)
The Payment Services Directive (PSD, Directive
2007/64/EC, replaced by PSD 2, Directive (EU)
2015/2366) is an EU Directive, administered by the
European Commission (Directorate General Internal
Market) to regulate payment services and payment
service providers throughout the European Union (EU)
and European Economic Area (EEA). The Directive's
purpose was to increase pan-European
competition and participation in the payments
industry also from non-banks, and to provide for a
level playing field by harmonizing consumer
protection and the rights and obligations for
payment providers and users.
2007 – PSD
2018 – PSD2 The new rules aim to better protect consumers when
they pay online, promote the development and use of
innovative online and mobile payments such as
through open banking, and make cross-border
European payment services safer.
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How banks should react to new ecosystem
Growing Complexity Needs
Cost effectiveness
Simplicity
Service Quality
Answers
Innovation
Value-added
Services
Digitalisation
Payment Market has to keep up with the increased needs of
customers
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PSD2 may accelerate this process in Europe
FinTechs take over customer interface
It is important that European payment service providers are active at a
global level, rather than establishing national solutions.
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Fierce competition
*Source: VISA
Profitability concerns 3
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Customer expectations, requirement and behaviour
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Key drivers inducing changes in business models
Due to mobile phone and other improved access methods the barriers
to entry in the financial services industry are being reduced.
77% of Europeans use their phones to bank and make everyday payments*
Regulatory changes
4
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New paradox in payments
More players (FinTechs, BigTechs)
More technology
More solution
Payments part of a “bigger game”
Globalisation
More regulation • Harmonisation (Single Market – e.g. SEPA)
• Consumer protection
• Price regulation
• Integrity and continuity
• Security (SCA)
Existing payments vs. “new payments” methods
More complex ecosystem expected to produce simpler, faster
and cheaper payments
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Key trends in reacting to FinTech
Employing new technologies to
transform internal and external
processes
“digital transformation” component
Rethinking interaction with
customers experience through the
use of innovative technologies
“digital disruption” component
Technological change calls established business models into question
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Institutions
Issue with existing IT infrastructure / IT legacy systems
Need to develop internal “innovative” culture and mindset / organisational transformation
Need to attract and maintain talent and skills
Customers trust banks compared to new entrants (mainly due to data protection concerns)
Strong on customer relationship providing the full value chain to customers with respective customer expectations and behaviour
Partnering
New entrant FinTech firms
• Agile, flexible and familiar with technologies
• Learn and grow through partnerships with banks
• Through their interaction with banks, they receive funding, access to customers and distribution channels, visibility, and banking expertise (including legal, compliance and regulatory knowledge)
• Do not currently provide the full value chain to customers
Partnerships with FinTech firms
Technology is opening the door to competition from non-banks in core
areas such as payments
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Proactive/ Front-runners
• Ambitious or aggressive innovation strategies, high-targeted transformation projects accompanied by unclear impact and risk assessments (aiming for first-mover advantage)
• Well-thought and comprehensive strategies and targets with strong research orientation and focus on governance, organisational aspects, operations and risk management
PROACTIVE
Reactive
• ‘Followers’ of technological developments, taking a ‘wait and see’ approach, with carefully defined strategies and steady-pace on internal changes
• Institutions reacting to peer pressure, taking a ‘go with the flow’ approach in combination with the concern of staying behind.
Passive
• Lagging behind technological developments due to other significant priorities, slowly trying to catch up following customers’ changing expectations
• Conservative/more traditional institutions reluctant to change
In terms of the level of adoption of innovative technologies, working together with FinTechs, current digitalisation, innovation strategies, along with the respective stage of development, incumbent institutions seem to fall into three groups:
REACTIVE
PASSIVE
Status of FinTech adoption
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Where FinTech startups are most active
FinTechs are everywhere, especially in payments
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Overview of the Fintech Sector
Categories Product Areas Examples
Blockchain Cryptocurrencies Smart Contracts
Coinbase, Bitcoin, Ethereum ChainThat
Analytics Artificial Intelligence Machine Leaning Deep Learning Big Data
Kensho Avant Shift Technology
Deposit and Lending P2P Marketplaces Crowdfunding (both investing and lending)
Lending Club, Zopa, SoFi. CreditKarma KickStarter ZestFinance
Payment Money Transfer Online Payment Mobile Payment
Transferwise Stripe, Adyen M-Pesa, One97
Banking Infrastructure Self-service banking Identity and security issues Open bank (API) Personal financial management
Rocketbank iDGate FidorOS3 PostFinance, Qontis
* Source: SWIFT Institute Swift Institute Working Paper No. 2017-002
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Evolution of FinTechs
1995
2008
2018
Fin
Tech
1.0
F
inTech
2.0
Digital Wallets
Online Brokers
M-Cash
World Wide Web • E-Commerce • Online securities trading
Mobile Telephony • G2 Standard (64kB)
New:
• Cloud Computing
• IoT & Big Data
• Smartphones
• QR technology
• Machine Learning
• Blockchain
Faster, cheaper innovation
Increased transparency
Changed customer expectation
New payment channels
Deeper insights into markets
Disrupts Intermediaries
Has a new period started?
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BigTech companies
Source: Medici’s Global Fintech Report 2018
Large companies with digital knowledge and experience
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Advantage and Challenges of Players
Fintech
Startups
Banks
BigTechs
Advantage
• Quick
• Focused
• Specialist
Challenges
• Customer Acquisition
• Competition
• Trust
• $$$
• Customer relationships
• Experience
• Trust
• Customer relationships
• Data
• $$$
• Legacy Systems
• Regulators
• Need to manage risk
• Trust
• Motivation
Trust is very important to customers
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The required time for digital adaptation is different in each country
Branch dominance
Online users
Strong online presence
Online dominance
Online dominance: more than 95% of transactions and more than 30%
of sales are completed on an online channel
Hungary
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Key features of SEPA Instant Credit Transfer (SCT Inst)
National Instant Payment Solutions are in progress, but we
should seek to develop global solutions.
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Instant Payment in Hungary
24 hours a day, 365 days a year (24/7/365)
payments will happen immediate (5 sec)
low value domestic payments via Electronic channel (10.000.000HUF ≈ 32.000EUR)
usage of proxy
maintenance (24 hours in year ≈ 99,7% availability)
Request for payment
These are in line with the Definition on Instant Payment
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Development of Payment System in Hungary
1984
2012.07.02 2019.07.01 00:00:00
debit : D D D
credit: D+1 D + 4 hours D + 5 sec
Over 25 national instant payment systems already live today around the world
and many others are in the planning or development phase. Instant payments
are rapidly becoming the “new norm” for electronic payments.
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Impact of Instant Payment on Payment System
40%
60%
NON-Cash
Cash
20%
80%
Volume of Payment Transactions
* Source: G4S Cash Report (2016)
** Source: National Bank of Hungary (2017)
HU**
We have to find the way to Cashless Society!
PSD2 Instant Payment New Technology
Mobile payments are the new key to success
EU28*
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Who is the winner?
Regulators believe that
New Payment methodes
• will expand access to banking
services,
• support economic growth,
• provide alternatives to bank cards and
cash,
• are opening the real-time payment
markets to new agents and stimulate
competition,
• provide a basis for launching new and
innovative products.
Banks know that
Banks
• are facing a very challenging „new
norm”,
• want to and will remain the key player
within the payment ecosystem,
• want to and can stay a key actor in
payments,
• remain a key trusted partner of billions
of customers.
Real-Time Economy
The Winner is the Customer
Encouraging the use of real-time
electronic payment methods Development & New Solutions
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Profitability in the Age of Digitalisation
Banks (should) shift priorities toward digitalisation and innovation for
future growth
• Customer needs changing
• New competitors entering
• New technology
• How should banks innovate?
• What will the current account
of the future look like?
• Aggressive innovation
strategies and quick response
• New business model,
partnering with Fintechs and
BigTechs
• Trust as advantage
• New technology to increase
income and cut cost
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Machine Learning (ML)
• Self-learning algorithms
• "Big Text" more important in some financial markets than "Big Data"
• Machine Learning builds heavily on statistics
• In banking: Chat Bots, risk predictions, pricing
• Front-, Middle & Back office
• Biggest Challenges: collecting data + privacy concerns (General Data Protection Regulation)
Machine learning can help banks to make smarter decisions
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Artificial Intelligence (AI)
• AI: “ability to learn, understand and think”. • AI is the study of how to make computers make
things which at the moment people do better. • Weak A.I. - Machines with weak Artificial
Intelligence are made to respond to specific situations, but can not think for themselves
• Strong A.I. is able to think and act just like a human. It is able to learn from experiences.
• Examples: Self Driving Cars, Boston Dynamics, Navigation Systems, Chatbots
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Is this really the future?!
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Looking into the future
• Real time economy needs new and innovativ Real time payment solution
• How fast and how far will Instant payment develop?
• PSD2 + Instant payment = (R)EVOLUTION?
• Customer experience is the key and Customer must be put at the centre
• Battle for data and customer relationship
• Now Mobile is the key, but future developments in technology remain uncertain.
• (Cyber)security as a key priority
• Will there be banks in the near future as we know them today?
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Looking into the future
• PSD through open banking
accelerates the innovation in online
and mobile payments
• Real time economy needs real time
payment solution
• FinTech 3.0 period
• FinTech payments build on existing
payment systems
• BigTech with new payment solution
(Alipay, WeChat pay)
Cashless Society!
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Conclusion
• New streams (Instant Payment, PSD2, SCT Inst) will change
the payments landscape forever and are rapidly becoming the
“new norm” for electronic payments.
• FinTech 2.0 (3.0) is an evolution, not a revolution.
• Banks are and will be the key players within the renewing
payment ecosystem.
• The shift towards a Real-Time Economy and a Cashless
Society is accelerating the PAYMENTS (R)EVOLUTION.
• Instant payment is the future of payment.
• Consumers are moving to online payment channels, with
retail payments increasingly being carried out via mobile phones.
Mobile payments will be a new key to success.
• BigTechs are offering innovative, consumer-friendly solutions.
• Innovation may start at domestic level, but it should not face
barriers preventing pan-European expansion.
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Q A &
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Thank you for your attention!
