Innovation was on display last week in Barcelona at the Mobile World Congress where recurrent themes from last year, including connectivity and the Internet of Things, wearables, driverless connected cars, and of course, breathtaking virtual reality demos, were at the forefront. This year, there was added emphasis on artificial intelligence and machine learning. Exhibitors showcased the latest connected wizardry from intelligent platforms and data flow management systems to contextual conversational chat bots to all types of robots, from app-controlled drones to cute and cuddly petbots.
For payments, the positive power of disruption was among the main themes. Visa, Mastercard and other payment services providers were present in full force, and though the interest in payment services from mobile network operators has waned a bit, the handset manufacturers have redoubled their efforts to take a lead in mobile digital wallets by leveraging tokenization technology. But even as new gadgets and wearables point to the future of payments, consumers still cling to their plastic cards.
Disruption in Digital Finance
So, where will the disruption come from when it comes to digital finance? I moderated a packed panel discussion on this topic and the panelists talked about their own efforts to innovate and stay relevant in an environment with more nonbanks entering the space. The financial services industry has been more resilient than other industries and the process of disruptive innovation has been slow to take root for three reasons:
- Regulatory Protection: The banking sector has been protected by regulation and quite rightly so because regulators must look after consumer interests so they don’t allow just anyone to set up shop as a bank and start accepting customer deposits.
- Ownership of Infrastructure: Banks traditionally have owned the core assets that facilitate both local and international payments such as domestic Automated Clearing House (ACH) systems, international clearing and settlement operations, and the global payment card networks. Access to these networks was traditionally restricted to the financial sector only.
- Information Access: Banks never shared customer data nor have they ever allowed anyone to make transactions on behalf of customers directly from accounts held by them.
Those industry advantages have acted as barriers to entry for nonbank players. These barriers now are being eroded by regulatory measures emanating out of Europe and being adopted elsewhere. Open banking APIs—standardized and interoperable connectivity interfaces—that make it easier for other providers to connect and exchange data with banks, and the Second European Payment Services Directive or PSD2, are allowing registered and regulated third parties to access customer bank accounts (with their permission) and then use the data for making credit decisions and initiating payments on behalf of consumers.
Those measures are likely to relegate the banks to infrastructure providers, but it’s not all gloom and doom for the banking industry. In fact, banks are looking at these changes from a positive perspective and as drivers toward innovation that could help traditional financial institutions evolve to the next level of technological excellence. Banks are rethinking their business models and the value they provide their end customers and are developing new ways to serve their customers. Infrastructure ownership and access is also opening up. After all, both Visa and Mastercard are publicly traded companies.
Allure of Young Consumers
During my session, Rocky Sopelitti, global industry executive at Australian mobile network operator Telstra, discussed details of his research on key global trends relating to millennials, mobiles and money, three forces reinventing financial services. He highlighted some important results from Telstra’s extensive survey, including: Millennials—those consumers ages 18-34—now constitute one of every three consumers and are projected to own 28 percent of global wealth by 2030.
Millennials are comfortable with using mobile devices to meet all their financial needs. Significant investment is being channeled into new technology-based “fintech” startups in payments and financial services. In general, the fintech industry—the challengers and disrupters—have invested billions in new ventures. But despite 90 percent of the bankers believing that fintechs will have significant impact on the industry, only 50 percent report their institutions have created value through digital partnerships with fintechs, he said.
Meanwhile, Pere Nebot, chief information officer of CaixaBank, one of Spain’s largest and most respected financial institutions, talked about disruptive innovation from a bank’s perspective. CaixaBank calls its new model branches “stores” and always takes a customer-oriented view of change. In 2004, only 18 percent of the bank’s customers accessed the bank via the Web, but today a majority, 53 percent, access their accounts via digital channels, he said. CaixaBank also has rolled out a digital-only bank called “imagin” that’s designed for the millennial consumer and does not charge any fees. Nebot also spoke about how the bank uses data to analyze customer behavior and identify needs and is now implementing artificial intelligence tools to help it better understand its customers.
Gulru Atak, the newly appointed head of Citi’s Dublin-based digital labs, said her company has developed open APIs that enable its corporate customers to connect with its platform and directly integrate their treasury applications with back-end systems. Atak also stressed the importance of partnerships between fintechs and banks even as disruption spreads.
PayPal, which could be called the original payments disrupter, discussed how its strategy is fundamentally linked to enabling fintechs and payments innovators, according to Anuj Nayar, head of global initiatives for PayPal. That enabling strategy has played out through a series of significant acquisitions.
For example, through its Braintree subsidiary, PayPal provides the platform and the necessary APIs over which some of today’s key innovators, such as airbnb and Uber, have developed their services. PayPal-owned Venmo has been a phenomenon in person-to-person payments in the U.S., while PayPal’s acquisition of Xoom signaled the company’s participation in the international remittances industry.
And its latest acquisition of TIO Networks for $233 million demonstrates PayPal’s commitment to enabling bill payments. TIO is a bill-payment processing service for those who don’t necessarily use bank accounts for their financial transactions. Users can pay utility and telecom bills from their phones, computers, or a self-service kiosk without having to go through a bank. TIO will also enable consumers without bank accounts or payment cards to fund and make payments using PayPal.
The panel also discussed how person-to-person messaging and payment platforms in China such as WeChat and Alipay have become platforms for social commerce. Customers can order food or taxis paving the way for much more automated applications relating to conversational commerce that use tools built on natural language interfaces (NLI) and artificial intelligence (AI).
A Better Payments Language
Artificial intelligence has the potential to be a positive disruption in the delivery of customer service in banking and payments. Dror Oren, co-founder and CEO of Kasisto, a San Francisco-based startup originating from the same group that developed Siri and later sold it to Apple, said his company has developed a platform that provides a natural language interface that helps banks, mobile network operators and other companies automate many of the services through conversational interaction via a mobile device. It goes beyond voice recognition and voice-activated commands, such as those offered by Siri or Amazon’s Alexa, providing a contextual interface that’s very nearly like talking to a human being on the other end of the digital conversation, he contended. A natural language interface will automate many of the tasks that collectively cost banks and other providers billions of dollars each year in customer service and call center staff.
All panelists agreed that fintechs and disruptive innovation in financial services and payments will benefit all players. While some incumbents will fade away or struggle to provide value, the process of experimentation and innovation will contribute fresh ideas and help to propel the industry forward. Interestingly, there promises to be significant collaboration between incumbents and startups. Many startups are financed by banks or other financial services providers, after all, and oftentimes it makes more sense to team to team up rather than go it alone into the payments frontier.
Samee Zafar is a director in Edgar, Dunn & Company, a consulting firm focusing on financial services and payments. He is based in London and has advised some of the largest financial services organizations in Europe and North America on competitive strategy, operations and technology. He leads the firm’s Digital Advisory Practice. He can be reached at email@example.com.
In Viewpoints, payments professionals share their perspectives on the industry. Paybefore presents many points of view to offer readers new insights and information. The opinions expressed in Viewpoints are not necessarily those of Paybefore.