Toekomst van het Betalingsverkeer took place at the Amsterdam Beurs van Berlage in mid March. The meeting of the minds touched on a wide range of forces changing the payments industry, including the role of banks, policy makers, and new developments like central bank digital currencies.
Payments are loss making
Dutch banks' payments divisions are loss-making businesses. Most banks see payments as a necessary commodity, but to keep down costs a more collaborative approach may be needed. Partnerships make the payments world more accessible. For example, banks could opt for cost-sharing and more cooperation around payment traffic. Banks need to be better incentivized to share data – there’s huge potential for open finance.
Open Finance and Collaboration
Open finance, and open banking, are key to improving payments. For banks, more open and collaborative business models can increase efficiency and lead to better product and service provision. The centre of this is data and ensuring interoperability between internal systems, which is one of the biggest transformation challenges for banks. Creating banking ecosystems can significantly increase revenue, reduce risk and operational costs, and unlock new revenue streams. Yet, many banks aren’t ready for open finance, and legacy infrastructure is an impediment to modernisation.
The overwhelming majority of banks have relationships with fintechs, with much un-realized potential. There's tension between siloed institutions with legacy offerings and the need to create bespoke offerings. The right tools can help. So can moving bank employees to physically occupy the same space as fintechs.
In an overview from the European Central Bank on the progress of digital Europe, three key points were noted:
1. the digital Euro will be distributed via supervised intermediaries that have PSD2 licenses, i.e. payment service providers,
2. it will not be programmable
3. the central bank will not have access to users’ private data.
The digital Euro may bring together a fragmented payments market, enabling people to easily pay digitally throughout the continent and increasing financial inclusion. It could further make Europe more independent in payments.
One speaker suggested that the payments industry could learn from the telecom industry when it comes to these cross-border issues. Mobile phones can be used throughout the European Union no matter their origin — a similar feature for digital money would be advantageous.
Atomic settlement (settlement that is both simultaneous and instant) and tokenisation were named alongside DeFi (Decentralised Finance), as distribution channels to deliver SME finance.
Law and policy makers consistently fail to underestimate the complexity of payments, and this will impact the Digital Euro. A Europe-wide digital identity wallet (EUDI Wallet) is coming and will to revolutionise the way EU citizens interact with merchants online. Pilots are already underway but the uses cases are not clear yet.
Change is inevitable
Overall, the event atmosphere was one of change. Change is coming from all directions, whether banks like it or not.
The fusion of offline and virtual worlds offers both opportunities and risks – from digital identity to crypto, stablecoins, CBDCs and metaverse. Ensuring identity and preventing fraud are therefore vital within payment transactions.
To stay relevant in this rapidly changing landscape, banks need to comply with applicable laws and regulations in all jurisdictions, keep innovating, align their business models to changes in technology and customer preferences, and optimise their services, products and operating models.
Elliot Lyons is a content producer in Cognito's Amsterdam office