KPMG: 2018 Was The Year of Democratization

Daniel Houseman, partner at KPMG, contributed the following piece as part of the PYMNTS 2018 year-end eBook. 

Payments innovation in 2018 has leveled the playing field, with new entrants, the rise of the customer and cross-border connectivity all enabling real-time payments almost anywhere and at virtually any time.

New Entrants

2018 has seen a plethora of new providers and innovative services launched in the market, and the continued growth of some nimble and innovative players.

This year has shown that a “one-size-fits-all” approach no longer works for banks — or their customers. While traditionally, banks have controlled the infrastructure, hardware and operating systems for financial services, new entrants may have the agile infrastructure and innovative propositions to personalize to meet individual consumer needs. New entrants may not have the need for any on-premise infrastructure, instead leveraging cloud infrastructure/third-party service providers and partners to rapidly deliver new products and services at scale.

This has caught many incumbents off guard — lack of insight into customer behavioral data to provide targeted offerings, as well as a lack of innovation to create new customer experiences, has opened the payments landscape for new entrants. To better compete with new industry entrants, traditional banks or payments providers need to capitalize immediately on new technology capabilities and offer payment methods that provide the best customer experience, enrich existing data sets and minimize friction, facilitating seamless economic transactions.

Existing giants such as SWIFT and Mastercard are all focused on the impact of heightened customer expectations and technological innovation on their businesses, launching ancillary services such as digital ID, and looking to play a deeper role through control and ownership of payments infrastructure. And on the other side, players such as Verrency are hoping to provide banks with new capabilities and solutions, without expensive changes to existing payment rails, hardware or connections through their white-label, open-API platform.

Incumbent banks that understand and accept their legacy infrastructure and process constraints are now increasingly looking at FinTech partnerships as a capital-efficient and expedited way to bring new capabilities and experiences to market. BBVA, for example, has invested $1B in FinTech M&A and is a major shareholder in Atom Bank and solarisBank.

The Rise of the Customer

The democratization of data through technology innovation and regulation has created the perfect conditions for technology-savvy consumers and future-looking businesses to demand a fully tailored, digital experience in their daily transactions.

A wave of neo-banks such as Revolut have well and truly captured the attention of consumers globally, with digital-only offerings that support the cross-border needs of global citizens. There’s also been a race to remove payments in retail, with 7/11 and Alibaba all trialing checkout-free in-store shopping experiences.

With greater transparency comes greater freedom and choice for customers, and various open banking regulations around the world have accelerated this trend. For example, the implementation of PSD2 across Europe is opening up financial data to FinTech firms and developers across all sectors, revolutionizing the way these entities work. By using account aggregation and payment initiation technology, banks and FinTechs alike can now offer users the ability to view their balances, make payments and receive tailored advice through their chosen channel or app, even if their actual accounts are held by another bank. This provides visibility of the financial products that are suited to customers’ actual needs and behaviors, placing customers rightly at the heart of the payments revolution.

Small to medium-size enterprises in particular have much to gain from open banking. They tend to have complex financial arrangements and lack tools to fully extract benefits of the data they generate from customers. In fact, KPMG spoke to 1,000 SMEs in the U.K. as part of their “Is Open Banking Open for Business?” report, and found that SMEs continue to trust high street banks over startups with their financial data. However, almost a year since open banking went live in the U.K., SMEs still need some convincing of the benefits and use cases that it will bring for them, with almost half saying they would not share their data under open banking.

Cross-Border Connectivity

Innovation in international payments, once considered highly inefficient, expensive and opaque to both the sender and receiver, has been a significant step forward in 2018 — democratizing access to payments in the B2B, C2C and government space. There is clearly a huge demand for access to affordable and secure international payments in the market, with Transferwise, a C2C global money transfer service, reporting in the black for the second year running and valued at over $1B USD.

With 40 countries around the world now operating faster payment schemes successfully, the next step is enabling cross-border payments – spreading innovation globally and accelerating the access to financial services for all, from corporates to small businesses to under-banked populations. There is growing ambition to link up domestic systems to deliver cross-border, real-time payments. From smoothing the path for tourist spending to designing better remittance systems for foreign workers, cross-border RTP offers greater access and choice to consumers, businesses and governments on both sides.

SWIFT gpi has been a breakthrough in 2018, enabling settlement of fast, cross-border transactions, with the exchange of valuable data and full traceability. For businesses and governments, the ability to connect goods and services to real-time, affordable payments anywhere and at any time promises to be hugely transformative for trade and reducing friction in supply chains. For example, in the not-too-distant future, SWIFT gpi could facilitate an Australian miner raising an invoice  and requesting a payment from a steel manufacturer in China, and for settlement to occur within minutes.

Our view is that each of these three models for cross-border payments will need to be assessed on a range of criteria. These include network usage and acceptability, inter-operability with payment networks, real-time processing capability, payment transmission mechanism, regulation, the cost of implementation and operation and inclusivity.

Looking ahead to 2019, these trends will continue as technology, innovation and regulation continue to level the playing field. The lack of standardization that still exists between financial institutions and jurisdictions increases cost and complexity for everyone in the ecosystem. In our view, increased competition and collaboration between financial institutions, development of common standards in areas such as data models and message structures, and greater cross-border connectivity and patterns of interaction would accelerate the democratization of payments.