All for one?

Allforone?

Banks are striving to solve an increasingly urgent payments revenue challenge. Gavin Maclean of Lloyds Bank Commercial Banking told us collaboration will help

The famous rallying cry of literary history’s three bearded swashbucklers has never rung truer than during the fight against the unseen enemy that is COVID-19.

During the most volatile almost-two years in recent economic history, financial services players of all shapes and sizes collaborated in unprecedented ways to survive.

One of the starkest examples was that of players working together to meet their customers’ increasing demands f or payments ease amidst an explosion of e-commerce and the consequent acceleration of digitisation.

However, having risen to that occasion, banks now face the twofold challenge of continuing to innovate in order to compete, and attract and retain customers, while deriving the necessary value from the hugely-increased volume of low-value payments to ensure their own sustainability.

In fact, a new The Future of Competitive Advantage In Banking And Payments report from payment, invoice and document automation solutions provider, Bottomline Technologies, estimates that 10-to-15 per cent of banks’ retail payments revenue is now at risk, equating to between $100billion and $150billion globally, based on figures from contributor Aite-Novarica Group.

The report asked 311 financial industry representatives – from C-suite executives to those working in treasury, fraud and operations teams, across diverse geographies including the UK, Europe, the United States and parts of Asia – how they ‘measured up in meeting customer expectations and their progress toward a payments modernisation strategy’.

The report cites author and financial analyst Nassim Nicholas Taleb, who summed up the imperative organisations now face when it comes to payments: “If you are in banking and lending, surprisingly, outcomes are likely to be negative for you. This report is aimed at removing those surprises, because they are competitive killers.

“The rapid evolution of payments has seen financial institutions having to juggle their strategies in the face of a flurry of new industry and regulatory deadlines. Among them, overhauls of messaging standardisation, a drive towards real time and the need for product roadmap fulfilment within tight deadlines.

“COVID-19 has accelerated the transition to the digitalisation of payments and raised customer expectations for speed, agility and fraud protection from providers. PSD2 (the Revised Payment Services Directive) and open banking have encouraged competition, opened up the market to challengers and focussed more on interoperability for access to global markets.

“All of the above is good news if it means banks and FIs can improve their operational efficiency and develop new revenue streams. However, with competition comes the need to ensure that you are keeping up and providing your customers with what they demand in order to retain the current ones and acquire new ones.”

Continuing this theme, Ron van Wezel, strategic advisor, retail banking and payments, Aite-Novarica Group, is quoted saying: “The profitability of the payments business stands at a crossroads. The combined forces of fierce competition, regulatory interventions and necessary investments in infrastructure and compliance put operating margins under pressure. At the same time, the pandemic has boosted the adoption of digital payments, creating new opportunities for banks and other payment companies.

“Banks clearly recognise the importance of investment in the modernisation of their payments platforms to meet the increasing competition in the payments value chain.”

“Banks foresee a significant impact on revenue if they do not adapt and invest in payments modernisation [and] clear benefits of payments modernisation projects, with greater flexibility in future product offerings cited as the most prominent benefit.”

Lloyds Bank Commercial Banking is among the organisations responding to this not-insignificant cluster of challenges, and its head of payment products, Gavin Maclean, says the new openness to joint working that has emerged from the pandemic, is its answer.

Citing Lloyds’ own, latest Lloyds Bank Financial Institutions Sentiment Survey report, he says: “COVID has definitely supercharged digital adoption and there’s a growing appetite in the financial services world for partnerships.

“We found that nearly half – 46 per cent – of UK financial institutions planned to grow investment in their fintech capability, through acquisition and partnering, in the next year. That’s up from around about a third – 32 per cent – in 2020, so there’s been a very notable increase in the number of firms planning to partner and develop new products and services that way, to improve client experience and drive growth. During the pandemic, partnerships and collaboration helped many businesses make the necessary adjustments to continue trading during the crisis, and it seems that trend is going to continue, as a lasting effect.”

He describes what Lloyds sees as some innovation imperatives: “The demand for online and remote commerce, and e-commerce, has really come to the fore during the crisis,” he says.

“On the proposition side, things like pre-order, click and collect, home delivery and QR codes have become much more prominent.

“On the business management side, for merchants, things like quicker settlement to benefit cashflow and working capital, or currency conversion to support purchases in other currencies, have really come to the fore.

“The need to innovate at pace and deliver resilient solutions for our customers, became even more critical during the pandemic, and the lockdowns we experienced in the UK, which meant that a lot of businesses either had to transact online for the first time or significantly beef up their online offerings. They were turning to payment service providers (PSPs) and banks for solutions.

“We’re now finding that, as businesses emerge into the new normal, whatever that might be, they’re trying to take a lot of the improvements they were forced to make during the pandemic, and their benefits, forward into their businesses and client propositions.

“As a result, I see more of a need from merchants and businesses to get ever more professional and slick about how they take payments, which means banks and PSPs of all shapes and sizes have got to step up, rise to the challenge and make sure we are there to help businesses recover, then help them thrive in the post-pandemic period.”

He continues: “To address business’ needs, the answer, in our case, has been collaboration and partnership. Whether that’s working with e-commerce experts or shopping carts, that need is only growing.

“In fact, we’re actually growing our team of specialists who find and manage the partnerships we need, to deliver the services for our customers.

“So, for the rest of this year, and into 2022,

During the pandemic, partnerships and collaboration helped many businesses make the necessary adjustments to continue trading

I’d expect a further acceleration of that innovation, through partnerships and collaboration, particularly in e-commerce and remote commerce.”

So, where will such changes take Lloyds?

“I think more and more of the changes happening in the payments ecosystem are now visible to end-users and consumers of payment services,” says Maclean, “because so many of them are now enabled through digital technology and smartphones.

“Ten or 15 years ago, when banks and PSPs were making significant infrastructural change to the payment rails, that wasn’t the case. But now, as new innovations happen, new services launch and new competitors enter the market, we are made almost instantly aware of them through those digital devices. That’s a good thing because it keeps everybody on their toes and promotes competition and innovation.

“In terms of what’s next for us, many of our clients have been through big challenges with COVID, so our immediate focus is fully on helping them to recover and retain as many of the positive things that have come out of the pandemic as they can.

“That will again mean collaborating to make sure our customers can benefit from the exciting developments taking place, including some significant enhancements to our merchant-acquiring proposition.

“Called Cardnet, it’s our cards business and we’re looking forward to bringing the benefits of those improvements to our clients, now and in 2022.

“We’ll be looking for yet more opportunities to work with fintechs, partner with bright people in this space, to deliver those benefits to bring the best-inbreed, hybrid solutions from fintech organisations. They can help us with the speed of adoption and deployment of new technologies, allow us to trial and pilot things and then refine them, until we find the right combinations for our clients. “They can also bring things like a diversity of thinking, and new ideas, to challenges we’re trying to solve.

And if we can play a role in bringing those capabilities from different organisations into our business, to improve the proposition we provide to our clients, then that’s a big win for everybody concerned.”