In today’s fast-paced digital world, traditional financial institutions have a problem on their hands.
Mobile-driven consumers increasingly want access to digital services, from online and contactless payments, the ability to create one-time cards or load a card in Apple Pay or Google Pay — all of which banks’ legacy systems are ill-equipped to deliver, let alone in a timely fashion. The pandemic didn’t help matters.
“There was a COVID effect that drove digital transactions, whether contactless or online, and that had a push effect on traditional banks to say, ‘Now we have to support all these transaction types and give customers ways to manage them,’” Rowan Brewer, CEO at U.K.-based payment processing tech provider Paymentology, told PYMNTS in an interview.
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Traditional financial institutions are also under intense external pressure from the 500+ digital banks that are currently waiting for a license globally and are attracting market share with claims of offering consumers a better banking solution, Brewer added.
Regulation has also played a role in increasing the pressure conventional banks face today.
“There’s been a move by central banks to license at least two to five digital banks per country and that’s poured a huge amount of innovation [into the system], forcing traditional banks to up their game,” he explained.
It is a situation which Brewer refers to as a “perfect storm,” one that established financial institutions can come out of by either replacing their legacy platforms, partnering with FinTech firms to provide joint products or, in some cases, launching a challenger bank of their own.
“That [third option] is actually quite weird,” Brewer remarked, but it’s one that institutions like Standard Chartered Hong Kong have adopted, launching a virtual bank, Mox, in September 2020 that is powered by Paymentology.
“[These banks would] rather compete with themselves than with someone else and there are a number of those that are coming up in Africa at the moment, so it may actually be the dominant model in the future,” he said.
Real-Time Data Analytics
When it comes to data, Brewer was of the view that the large amounts of data held by traditional banks can be an extremely powerful asset when used correctly, but incumbents are not equipped to get the most value from the data they possess.
For example, a bank may know a lot about a customer — such as where they live, work and what purchases they usually make — based on their internal data. However, there’s a significant amount of external data like consumers’ credit card data from Mastercard or Visa, for example, that is left untapped.
And by untapped, he meant the difficulty in not only getting all that data in real-time — and not just snippets of it, as has been the custom in the past — but knowing how to analyze the data to make informed decisions.
See also: PYMNTS Intelligence: Leveraging Behavioral Analytics to Complement Other Fraud Prevention Measures
For example, a bank that is on top of real-time analytics can immediately detect when a customer makes a transaction and there happens to be other fraudulent transactions going on in the same store that other banks have picked up on. At that moment, the bank can phone the customer immediately to verify their identity, approve the transaction below a certain amount or even block the transaction from going through.
“That’s the sort of actual data element that is really the challenge for the future,” Brewer said.
Open Banking Headwinds and Tailwinds
Elsewhere, he said while the open banking scheme has had positive implications on the financial ecosystem, it has not been without its limitations.
On the upside, the regulatory scheme has made it possible for clients of a FinTech firm or a digital bank to query bank accounts and gain access to a consumer’s statement via an application programming interface (API) — an extremely useful strategy for credit scoring and customer acquisition decisions, he noted.
However, consumer confidence in the initiative’s security is yet to fully mature.
“You’d be quite comfortable in the U.S. using a mobile app or Venmo to send money to a friend, but open banking payments are fairly messy right now, even in the U.K., which is perceived to be ahead of many countries,” he explained.
Overall, Brewer said that whether it’s a traditional legacy bank or digital bank, the biggest change will be on the issuing side — the one part of the payments market that has been lagging.
“We’re looking for where all the action is going to occur in the next few years, [and] we think it will be here on the issuing side,” he said.
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