8 minute read 15 Jun 2018
Smiling man paying with smartphone on beach

How global initiatives and other trends are modernizing payments

By

Hamish Thomas

EY EMEIA Payments Leader and UK Advisory Banking Technology Leader

Transformation leader in payments and open banking. Passionate about technology’s potential to create opportunity and manage risk. Optimistic runner. Film enthusiast.

8 minute read 15 Jun 2018

The payments industry is transforming dramatically, replacing outdated architectures and working with regulators to enact new standards.

The traditional role of payment service providers (PSPs) is becoming outdated. New, digitally sophisticated market entrants are offering consumers innovative, value-adding services that complement payments execution and fundamentally shift consumer expectations.

However, the payments infrastructure is typically not agile or mature enough to capitalize on the benefits of the new technology. In countries with highly developed financial systems, payments structures have become complex, inefficient and inflexible due to decades of incremental development. Conversely, some countries with less sophisticated financial systems do not have architectures that are advanced enough to meet consumer demand. These countries also include large numbers of nonbanked and newly banked consumers who may be excluded or limited in the way they can use payment systems.

Given this landscape, regulators and other players within the payments industry are responding to drive strategic change.

  • Industry-driven change: There has been unprecedented collaboration in the payments industry in recent years. Banks and other PSPs recognize they need to drive change to stay relevant in the market.
  • Regulatory-driven change: Regulators have taken a pivotal role in fostering modernization in some jurisdictions by creating new regulatory requirements or acting as leaders and coordinators of industry-driven initiatives.
  • Individual innovation: FinTechs and other disruptors are setting new benchmarks for payments.
Hong Kong aerial scene
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Chapter 1

Locations prepare for payments change

See where the UK, Australia, Canada, Singapore, Hong Kong and Europe stand.

United Kingdom

Unlike some initiatives, the UK’s strategy isn’t focused solely on new payments infrastructure. It also includes parallel initiatives to improve trust in the payments system by collaboratively working to prevent financial crime.

In 2017, the Payments Strategy Forum (established in 2015 by the Payment Systems Regulator) published a blueprint for the future of UK payments. The blueprint recommended a layered architecture with a thin collaborative infrastructure to enable competition and innovation. Adoption of international standards (including ISO 20022) is also part of the plan. By the end of the year, initiatives proposed by the Forum were passed to the New Payments System Operator (NPSO) and UK Finance, which now continue the work.

Australia

The New Payments Platform (NPP) program, launched in June 2013, brings together 13 financial institutions. Their goal is to deliver a leading payments infrastructure that meets the needs of modern consumers.

The NPP is currently introducing a real-time payments capability, a more flexible payments architecture, enriched payments data and PayID — a feature that allows users to identify the recipient using memorable information, such as a mobile phone number.

NPP implementation will be incremental throughout 2018, with real-time payments one of the early features. End-user access to the platform will continue to grow as bank and PSP adoption increases.

Canada

Canada is often recognized as a leader in payment services. However, like many other developed payments infrastructures, it uses legacy systems that have become outdated. To respond, the Canadian Payments Association (CPA) has published plans to modernize Canada’s payments industry.

The CPA’s modernization strategy will be implemented over several years, with completion planned for 2020. The strategy includes five pillars:

  • New core clearing and settlement system
  • Real-time payments capability
  • Enhanced automated funds transfer
  • Alignment of the Automated Clearing Settlement System with global regulatory standards
  • Modernization of the rules framework

Singapore

Unlike the UK, Australia and Canada, cash is the most popular way for individuals to pay in Singapore. Recognizing this, the Monetary Authority of Singapore (MAS) is encouraging adoption of its real-time payments platform, Fast and Secure Transfers (FAST), which is at the heart of its Smart Nation vision.

Singapore’s Smart Nation payments strategy is part of a wider government initiative to foster innovation across all sectors and improve standards of living in Singapore. In addition to wide adoption of electronic, real-time payments, the payments vision also fosters competition and interoperability and encourages efficiency and security and an enhanced, standardized consumer experience.

Hong Kong

In September 2017, the Hong Kong Monetary Authority (HKMA) announced A New Era of Smart Banking, a vision of an efficient, flexible and safe payments industry, founded on a convergence of banking and technology.

The plan’s first initiative focuses on executing real-time payments, expected to be delivered in September 2018 through the Faster Payment System. Six subsequent initiatives focus on fostering innovation and competition, developing technological capabilities, and reducing friction between regulation and digital offerings.

Europe

The EU’s regulatory agenda is transforming the European payments industry. PSPs are being asked to comply with several overlapping and sometimes parallel regulations, such as the General Data Protection Regulation.

In January 2016, the EU published the most substantial payments legislation of recent years — the second Payment Services Directive (PSD2). PSD2 has a greater focus on promoting the development of innovative electronic payments solutions by creating a “level playing field” for new entrants into the market.

PSD2 will require banks to share customer data with third-party providers, rebalancing the power between new entrants to the industry and bank incumbents. The competitive landscape will be transformed, consumers will be offered more choice and convenience, and innovation will be key to competitive success.

The deadline for European Economic Area (EEA) countries to transpose PSD2 into domestic law was January 2018, but implementation is inconsistent. Although these EU directives aim to promote a single, innovative payments market across Europe, the reality of the EU and EEA as an alliance of autonomous nations remains a challenge.

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Chapter 2

Global trends: what does the future payments industry look like?

Unrestricted, real-time payments processing is one of the leading global trends in the payments industry, but capabilities vary between countries.

Real-time payments

Unrestricted, real-time payments processing is one of the leading global trends in the payments industry, with significant end-user benefits, but capabilities vary between countries.

  • The UK is one of the leaders in real-time payments. These payments are widely available and virtually unrestricted. For example, the UK’s Faster Payments Service is widely accessible, 24 hours a day, 365 days a year, for values of up to £250,000.
  • Japan and Canada also have real-time capabilities, but their services are subject to cutoff times. Both countries have outlined plans to move to an unrestricted real-time payments model.
  • Hong Kong does not currently have the ability to process real-time payments.

Promoting competition and innovation

Competition is critical to innovation, but there are significant barriers to entry within the payments industry. These barriers vary depending on jurisdiction, but include access to data, access to settlement and clearing systems and the cost and complexity required to navigate through different standards and systems.

Reducing these barriers to entry and promoting competition is at the heart of each initiative explored in this article. Some examples:

  • The UK has developed initiatives to provide both direct and indirect accessibility to nonbank PSPs.
  • Japan and Switzerland have recently allowed a selection of nonbank institutions — including PSPs — to access payment clearing directly.
  • Canada’s CPA plans to focus more heavily on improving indirect access options and interfaces via existing participants.

Interoperability

Historically, countries built their own, siloed payments infrastructure, which hinders interoperability. As a result, international payments lack speed, efficiency and transparency, and their cost is too high. International payments also cause concern for B2B payments, as they limit intraday reporting and liquidity management due to the lack of transparency in the cross-border payments process.

In recent years, consensus has grown that global commonality is needed to further drive collaboration and competition. As a result, ISO 20022 is becoming the common real-time payment messaging standard. There is already wide uptake of ISO 20022, with many more countries planning to adopt it.

Distributed ledger or blockchain is another technology that is increasingly seen as a potential driver of interoperability.

Enriched data and user control

In the new world of payments, consumers will be able to attach enhanced data to their transactions. This data could be a string of characters, a link to a page or document or, in the most ambitious plans, a document attached to the payment.

Enriched data will enable payment information to become an even more valuable data asset and lead to marketplace innovations. For example, users will be able to request payments from others, and payers can be given control over how and when they would like to respond. In addition, enriched data will support improved reconciliation capability.

Simplified payments addresses

Payments initiatives universally put users at the heart of their plans, and users commonly express a preference for being able to make payments with nonbank details. It is, therefore, unsurprising that countries including Canada, Australia and India have committed to substituting traditional identification details, such as sort codes and account numbers, with more user-friendly identifiers. A common substitution for these traditional identification details is a mobile phone number.

India’s central payment authority, the National Payments Corporation of India, has removed the need for users to hold a bank account, introducing a payments ecosystem to support the use of various virtual addresses via a central Unified Payments Interface (UPI). This allows users to send and receive payments using national ID numbers, mobile phone numbers and unique numbers provided by PSPs or other addresses.

Importantly, the system enables users to send and receive money without the transaction touching a bank. Since its launch in 2010, mobile payments have grown in popularity, with over 76 participating banks now offering the service.

Flexible architecture

The strategies outlined in this article largely depend upon a scalable, flexible architecture that is agile enough to adapt to tomorrow’s demands. Australia and the UK are working toward this by creating a payment system with a layered architecture.

Each stack in the architecture can be isolated from the others, making it possible to carry out discrete changes without compromising other components of the system. The actual transfer of funds is carried out in a separate layer as an overlay service. These overlay services allow PSPs to develop distinct propositions without changing the underlying message.

Summary

Incumbent payment services providers can remain central to the payments industry, but only if they keep pace and understand how key trends will affect their businesses and customers. They must become more adaptable, innovative and technologically astute in order to thrive in the coming competitive landscape.

About this article

By

Hamish Thomas

EY EMEIA Payments Leader and UK Advisory Banking Technology Leader

Transformation leader in payments and open banking. Passionate about technology’s potential to create opportunity and manage risk. Optimistic runner. Film enthusiast.