BEST OF TRUSTECH # 3: Payments and Secure Transactions

This third BEST OF TRUSTECH article addresses the central role of identification and authentication in the evolution of transactions and payments.

The questions Guy de FELCOURT reflects on in this article make reference to the conference track dedicated to Payments and Secure Transactions which was hosted by Grégoire TOUSSAINT, Director at Edgar, Dunn & Company on the 27th of November 2019.

Will banks remain relevant in consumer payment services?

The consumer payment market is characterised by huge transaction volumes, increasing fragmentation and, above all, rapid evolution. During the last edition of TRUSTECH, we highlighted two reports that offer key insights into the emerging trends of this fast-moving market.[1] Here, we revisit a much-discussed question: can banks remain relevant in consumer payment services?

The impact of Open Banking

Driven by new legislation (including PSD2 in Europe), Open Banking promotes APIs for the opening of banks' information systems to enable customers’ data to be shared with authorised third parties such as payment service providers. This allows developers to integrate data and third-party services into applications that connect to these information systems.

Use cases include customer credit analysis for obtaining credit at the time of payment, and for payment initiation for mobile wallets or Instant Payment.

Open Banking practices now cover more than 50 countries around the world. In some ways, this enthusiastic adoption, and users’ clear willingness to share data, marks the end of the customer relationship monopoly held by traditional high street banks.

However, there are also opportunities for these established players to market structured API services to third parties, or to better exploit additional customer data.

Certainly, Open Banking requires that the traditional institutions rethink their strategies in terms of how they use customer data and payments, and how they respond to a more agile and competitive environment.

Payment and the business of data

The ability to share data quickly, efficiently and securely is critical, and a common theme across the Open Banking universe and the payment world at large. Virtual wallets and mobile payments via messaging, QR code or applications involve the structuring and use of relevant data. Online payment transactions and contactless payments typically do so too. In fact, the entire payment value chain is now realigning around data and customer experience.

While simplicity, efficiency and security remain the watchwords, data management is now central. Critically however, this unity of the payment value chain around data control, also implies an ability to keep pace with the wide variety of technological innovations such as blockchain or mobile payment (mobile app, API, etc.,).

Fintechs and Internet giants adding more pressure

As Grégoire Toussaint, Director[1] at strategy consultancy Edgar, Dunn & Company specialised in payments, pointed out, "the payment methods sector is changing with the development of a 'coopetition' between different payment players: co-operation in some parts of the value chain and competition in other parts."

This suggests that payment players, particularly banks, must make business model choices between outsourcing, using shared platforms, creating partnerships, or buying agile fintechs – all while continuing internal transformation plans.

With the processes of identification, strong authentication and authorisation being based on the targeted transaction types, the weight of compliance costs needs to adjust accordingly as it becomes a significant competitive factor.

With the powerful international card schemes of Amex, MasterCard and Visa already fiercely competing, the entrance of fintechs and the Internet giants of Apple, Google, Facebook, Alipay and We Chat[2], adds further pressure.

All these newer players are striving to become the user’s preferred means of payment, and each are increasingly leveraging emerging biometric fingerprint authentication and/or facial recognition to increase convenience and promote the best possible customer experience.

Fintechs, of course, benefit from their agility and ability to specialise in niche markets, while the Internet giants are able to capitalise on the ‘network effect’ – using their ubiquitous presence across multiple online and mobile touchpoint to capture the hearts and wallets of the consumer.

The value of digital identity in payment

Faced with these seismic shifts in technology and business models, and with the arrival of agile new entrants, the traditional role of the bank is under threat. Those institutions that wish to remain relevant in this ultra-competitive space have decisive choices to make.

Here, the ability to verify the ownership of an account, to validate the number of assets, to recognise the initiator of a transaction and/or to corroborate identity offer a range of promising routes to differentiation.

As a critical intermediary able to solve today’s digital identity challenges, banks have a valuable ‘enabling’ role to play in driving frictionless payment. However, opportunities to exploit application areas such as Request to Pay, Instant Payments and shared KYC are yet to be fully realised.