InstaPay Interview with Liz Oakes of McKinsey & Company
We recently had the opportunity to talk with Liz Oakes, Associate Partner at McKinsey & Company and a member of the InstaPay Editorial Advisory Board to discuss the state of play for instant payments and how this fits into a broader financial services picture. Here is some of what Liz had to say.
Q: How do you see the current state of the instant payments market and what does the future look like?
A: Instant payments is gaining momentum as some major economies prepare to embrace a new service level for credit transfers. The pivotal point where Australia, Europe, the U.S. and Canada all go live with new services in 2018-2019 will shift customer experiences and expectations where instant is the new norm for account to account payments.
Q: Where are you seeing most instant payments activity globally? What is driving this?
A: Countries where there is a regulatory or mandatory deadline to adopt a new service are most active. They are at different stages of activity – some are planning, others designing and a few currently in build or test mode. In addition, the TCH launch of Real Time Payments is quietly gathering momentum, with a significant number of organisations in the US embracing the first radical change to payments infrastructure in a generation.
Q: Are instant payments a boardroom topic and if not, do they need to become one?
A: Boards concerned with digital disruption and growth should view instant payments as an enabling technology. For those in the payments business it is one of a number of market disruptions. In countries where it is a new initiative and resetting client expectations, it poses opportunities and new challenges in moving the organization to a true 24×7 model. The emergence of integrated services built on instant payments capabilities creates a new competitive pressure in the market. Many boards are examining how instant payments will impact the competitive landscape – examining whether it will enable banks to recapture transaction volumes lost to competitors.
Q: How are banks viewing instant payments? Is the business case clear enough for investment and prioritisation?
A: Banks are not all homogenous – each has a different perspective of the threats and opportunities that instant payments presents. In many countries, with no clear minimum product volumes to start the service, it is a challenge to create a business plan that can predict even the first month of the new service. When the UK introduced Faster Payments, there was a set volume of standing orders that constituted a mandatory migration of volume for the retail banks. At a minimum this provided indicative early numbers for a business case.
To introduce an instant payments capability, each bank must consider a long list of questions including:
1. Which customers should be offered access and how? How is this determined?
2. Which customers may adopt the new whilst supporting the legacy products?
3. Which product offerings might be attractive, why and at what price point?
4. What changes would be required to current products and services and supporting infrastructure?
5. What is the return on investment period?
The impact on people should also not be underestimated – training bank staff to understand the changes and to explain what it means to customers is also a significant investment.
Q: What are the main regulatory imperatives that have to be considered?
A: Payment service providers and banks operate in a heavily regulated environment and instant payments is no different to the existing payment products in terms of Sanctions, KYC, AML and other regulatory checks. Instant payments change the dynamics of the intra-day experience – the transaction cannot be reversed, and so additional requirements around authentication, authorization and fraud management and treating customers fairly are required in many countries. The degree of regulatory intervention versus market practice varies in each country, but for banks operating globally or regionally the highest bar usually applies across their systems and services.
Q: Are there benefits of combining instant payments with other initiatives such as a digital banking program or PSD2 compliance in Europe?
A: Yes. Instant payments is intrinsically a digital offering. It will be embedded in a digital/mobile banking or payments offering. PSD2 does not stipulate instant payments – they are separate initiatives. For any bank planning to offer instant payments in Europe, then compliance with PSD2 is mandatory from January 2018. Instant payments within the framework of PSD2 is a more complex project, given the 24×7 and non-batch nature of the service. Payment Initiation Service Providers and Account Information Service Providers will want 24×7 access to customer accounts where instant payments is possible – as the movement of funds on an account will be swift and non-revocable in both directions. Providing instant updates to the customer – whether directly or via a third party, will be essential 24×7. This will require integration or a re- engineering of many digital platforms.
Q: What will the role of FinTech’s be in realtime payments? Will banks view them as a threat or helper?
A: The banks will view FinTechs in the same way they view all other market participants – it depends on whether the FinTech is competing with the bank or not. Some are technical facilitators, some are direct service providers (product or services) to the bank; some are currently unrelated software providers in an adjacent market that may seek to expand their service offering under PSD2. Others are already Third Party Providers to the end customer and will be newly regulated under PSD2. A FinTech could be a service provider to one bank and compete with another. Some banks will choose to partner, others to compete and some will acquire FinTech capability to bolster their digital offerings.
Q: Are the technical standards sufficiently developed and will they allow for regional interoperability?
A: The technical standards for instant payments are typically very well defined for direct participants of the services. Bridging of the systems across multiple clearings will be challenging to orchestrate, but is possible. The volumes of such transactions are not likely to be excessive in the first years of these services, so a solution can be developed. The simplest model for clearing is usually the most robust and stable operationally, so it is imperative that efforts are made to simplify interoperability.
The regulatory technical standards for authentication and authorization under PSD2 are the subject of much debate in the market. The access criteria for FinTechs are not sufficiently developed or detailed at this point to enable FinTechs to easily access multiple markets within the EEA without significant investment in potentially hundreds of APIs and access mechanisms that are quite specific to each bank and region, particularly for corporate payments. Some standardization would help both banks and FinTechs to negotiate the path to serving customers better under PSD2.
Q: How can APIs be used effectively as part of a payments program?
A: Application Programming Interfaces are a set of functions and procedures that allow the creation of applications which access the features or data of an operating system, application, or other service. They are quite simply a communication mechanism. For many years, APIs have been quietly deployed within IT architectures to connect systems internal to many banks. APIs are increasingly being exposed to enable clients and external service providers to connect to bank systems to access information, initiate transactions and perform routine tasks. This is not new, simply a more streamlined, cost effective method to provide access.
Q: How should overlay services, running on the instant payment rails, be looked at? Which appear to offer the greatest potential?
A: Overlay services are the commercial propositions, products and services that banks and service providers can make available to their corporate and financial institution clients and customers. The first range of overlay services to typically appear in most countries with instant payments is a mobile payments service – associating a mobile phone number, proxy or alias (such as an email address) with a bank account number. These mobile payment services are in their infancy. They will gradually evolve into fully fledged payment instruments both remote and at POS. Depending on customer preferences in particular jurisdictions they could potentially replace plastic cards as a form factor over time as we have seen in South Korea.
Additional overlay services harness the core infrastructure and address specific opportunities to improve the current processes and experiences. Bill payments are in some countries a target – either for the replacement of cheques, or to speed up the just-in-time delivery cycle for businesses; or providing additional data or remittance information that was previously not possible in the old payment system.
Changes in technology, regulation and market competition are driving a shift in the small business and mid-market banking market. The immediate nature of the payments and the quality of information that is available with instant payments creates opportunities for the corporate market in supply chain financing, working capital and cash flow management. In an environment with Faster Payments already in place, the UK Government has launched a competition in 2017 to enhance competition in the small business banking segment under the guise of the Nesta Open Up Challenge for Open Banking. This is likely to result in the emergence of a wave of investment in new products and services targeting this segment of the market, bringing capability previously reserved for large or sophisticated corporate clients.
Many thanks Liz for sharing these thoughts with the InstaPay Community I am sure they will be very helpful to our members. We appreciate all the support you give to InstaPay as one of our Editorial Advisory Board members.