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Many merchants were hamstrung in 2020 by their legacy, siloed payment systems, which stood in the way of the integrated and seamless shopping experiences their customers desire. The hyper-connected future of tomorrow could see us enabling seamless cross-border payment experience via domestic real-time systems, without the need for beneficiary bank account information. Open banking, which will play a big role in this experience, is something SWIFT https://www.xcritical.com/ is building capabilities around.
Everyone benefits from a mature digital economy, but how do we get there?
For financial regulators, this raises a range of questions, with the imperative to spur fintech innovation being balanced against the responsibility to manage risks. Innovations in fields like big data analytics, digital identity and biometrics have ushered in new ways to assess brokers payment system creditworthiness and onboard new customers. “There are instances where merchants are taking advantage of solutions to turn any device into a point of sale. So, tablets, phones or the traditional point-of-sale infrastructure are now bringing the point of sale to the customer rather than making it a physical step that you have to take before you exit the experience,” McCarthy said.
- Interoperability is often needed to reduce the risk of fragmentation in the payment services markets.
- Digital wallet providers will look to adopt “open-loop” technologies and seek interoperability in order to benefit from (and not fall behind on) the ongoing globalisation of payment rails.
- Existing integration capabilities can make it difficult for organizations to quickly implement changes in message formats.
- In response to the entry of large technology firms into banking, some authorities have followed the basic principle of “same activity, same regulation”, where existing banking regulations have been extended to Big Techs (BIS, 2019).
- This question is often raised with the entry of new players in the payments space, including the possibility from fintech firms and Big Techs.
What Europe Can Learn About Open Banking From The UK
And there’s the question of whether you’ll be paying in dollars, Smart contract Euros, yen, Bitcoin, Ethereum, or some other alternative currency. Revolut is one of the fastest-growing “money apps” in the world, gaining 15 million active users and incorporating up to 50 apps on its platform since launching in the UK in 2015. But it became obvious its initial cloud infrastructure would eventually be overwhelmed, underscoring the need to build a new environment that could deliver the scalability, reliability, and security to support its rapid growth.
A new way to think about the future of your business
Nonetheless, several jurisdictions have developed specific national guidelines to address such concerns. Singapore has implemented cyber hygiene regulations and technology risk management guidelines that apply to all licensees that rely on technology to supply payment services. Under the EU PSD2, the European Commission has conferred mandates on the European Banking Authority, which includes security measures for electronic payments. Financial technology (Fintech) has prompted authorities to consider their potential financial stability benefits, risks, and effective regulation.1 Payments, clearing and settlements is one area where material fintech developments and experimentations have rapidly evolved. Motivations have been varied, including promoting cashlessness, competition, financial inclusion, financial integration, and innovation to addressing correspondent banking relationship (CBR) withdrawals (IMF, 2017).
APIs Perspective: Analysis of the PSD2 and Open Banking in Europe
As can be observed, many new non-banking players are entering the payments industry with the purpose of solving customer needs in a fast-paced, technologically advanced environment. Red Hat helps payment organizations across the globe adopt cloud technology to become more efficient and competitive. Learn more about how Red Hat can help you successfully modernize your payments infrastructure. Whether it is ISO or the revised Payment Services Directive (PSD2), adopting new standards and complying with mandates are part of the ongoing demand put on payment organizations.
For example, interoperability was one of the key components in the Single Euro Payments Area (SEPA)—a project that integrated the pan-European retail payment markets. In SEPA, the technical interoperability was achieved by standardization (ISO 20022, International Bank Account Number, SEPA Credit Transfer scheme, SEPA Direct Debit scheme) that aimed to prevent market fragmentation. The Singapore PS Act sought to reduce the risk of a fragmented payment ecosystem and enhance confidence in acceptance of e-payments. This gives the central bank formal powers to ensure interoperability of payment solutions, in the interests of consumers and market development. Managing such risk is important not only as a safeguard against fraud and operational disruptions, but also for maintaining data privacy.
To make the process as smooth as possible, banks need to understand the scope of changes required, secure resources and plan their implementation projects, according to Saqib Sheikh, global head of the ISO programme at Swift. In simplified legacy payment systems, organisations can adopt an aggressive SaaS-based model coupled with robotics and AI-based automation for better performance. The recurring change in legacy financial services burdens incumbents with a huge IT operating cost. Also, legacy systems and integrated architecture of FIs are very complex, hard to manage, and continue with the change. The payments that take place in the background follow a streamlined process, without any contact to finalise the payment. This process is similar to the ones used by cab aggregators to receive payments from their customers.
The day is coming when waiting in line to pay will become obsolete and payments will be completely seamless. Imagine pulling into a gas station and the transaction for you will be filling up the tank. In this new reality, you’ll be able to go to a store, grab what you want, and walk back out without even carrying your wallet out of the house. Your smart fridge already allows you to reorder groceries or even recognize that you need new milk every five days—and order it for you.
Providing everyone with a transaction account to send and receive money electronically is widely considered the first step towards financial inclusion. For the unbanked, such accounts are seen as the gateway to savings, credit, insurance and a host of other financial activities and services. “The payments sector will continue to experience growth in digital payments, and there will be opportunities in a couple of different areas. First, consumers will continue to demand a frictionless experience, so those firms that can bring the best of the online experience into the retail setting, the restaurant setting, the service setting will gain traction. Second, consumers will want frictionless payment experiences no matter what kind of payment instrument they want to use.
Broader implications include investor protection, consumer protection, data and privacy, systemic risk, monetary policy, and national security.11 A few jurisdictions have initiated regulatory reforms to address digital payment tokens as a means of payment (Box 2). A scaling business can’t afford to maintain a small and inflexible payments infrastructure. An erratic purchasing process can cause customers to become disillusioned and completely abandon the transaction. Managing growth properly means ensuring that your customers are confident and happy to hand over their money, and a secure, convenient, frictionless payment experience is an essential part of this.
These examples also serve as a reminder that it’s not just traditional financial services institutions operating on legacy systems who benefit from embracing new technologies like cloud. Even fintech companies who have grown up in physical data centers or newcomers operating partially in the cloud are at risk of falling behind the pace of the payment journey if they don’t take steps now. During the past several years, financial services have become embedded into a wide variety of software and applications peddled by non-bank providers. It is reshaping the distribution model for financial services while creating a new role for technology companies in the financial lives of consumers and enterprises.
These licenses empower financial institutions and fintech companies to offer a spectrum of digital payment solutions, from online purchases to peer-to-peer transfers, without the need for a banking license. Specifically, EMI and PI licenses obtained in the EEA/UK are well-suited for companies catering to customers in the EEA/UK region. While the role of regulators, governments, and central banks in virtual currency remains uncertain and evolving, collectively they have expressed concern about the array of risks cryptoassets may pose to both consumers and financial institutions. Improvements in technology, coupled with growing demand for digital payment methods, are increasingly reshaping the way payments are made. Financial authorities now face the task of deciding whether the risk profile of different payment services are appropriately reflected in their regulatory frameworks.
2 CVV—card verification value—is the code on a payment card in addition to the standard account number used as an extra layer of security. Central banks and supervisors will need to improve their knowledge in order to provide effective supervision of increasingly global players that are not banks. Understanding these trends is crucial for banks, card companies, fintechs and others to be able to map a new path to 2025 and beyond. Mule accounts (those set up by a real customer but with fraudulent papers or identity to enable criminal use) can be targeted using modelling tools that find behaviour patterns in anonymous crowdsourced intelligence from millions of daily consumer activities. This trend started with Mastercard acquiring UK’s Vocalink in 2016, and then purchasing another account-to-account business in 2020, the year which also saw Visa’s attempt to buy Plaid, the open banking aggregator.
However, advancements in cloud technology and artificial intelligence are enabling organizations to provide differentiated features at a lower price point. To help national authorities apply PAFI guidance, the project provides guidance for diagnostic studies to track transaction account access and use. The toolkit allows comparisons against international benchmarks or within each jurisdiction over time as countries strive for more inclusive payment systems. Inclusive payment systems depend on close coordination between regulatory authorities and industry players, both to harmonize oversight and establish resilient infrastructure for electronic payments.
Other new forms of payment services have included third party initiation, tokenization, payment gateways, payment aggregators, and white label ATM/POS providers, which are not in the scope of this paper. Digital payment token services are included based on recent market and regulatory developments. The Bali Fintech Agenda proposed a framework that focused on 12 relevant elements, including financial sector resilience, risks, and international cooperation (IMF/World Bank, 2018).