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From contactless to compliance: preparation is crucial for the next stage of the payments revolution

It’s incredible how quickly new technologies change consumer habits. Looking back, the arrival of the ATM clearly meant consumers could get access to cash 24/7 but what it really changed was their expectation around service availability.

Today, smartphones are the driving force behind a lot of innovation and changing consumer habits. For example, they are playing an increasingly important role in contactless payments, which are booming around the world. In the UK, the amount spent by shoppers using contactless soared by 166% in 2016, with half of Britons now using contactless payments at least once a month.

As payment technologies evolve, so too will the way we secure payments. Given the change of pace over the last five years, banks may feel they need to decide between complying or competing, as they explore new technologies that meet the challenges of digitalisation and changing consumer behaviour.

Security, regulation and compliance

By January 2018 banks must comply with the EU’s second Payment Services Directive (PSD2), intended to improve online payment protection, encourage payment services innovation, and make cross-border payments safer. We’re finally entering the modern age of payments and it’s happening because the regulators are forcing digital transformation through changes such as PSD2, which affects every part of the payment value chain.

If banks choose to simply comply, significant investment will be needed to provide an open API framework. Operational costs will also increase to support API requests for each product of a client and banks will be exposed to revenue loss for interbank payments and customers who choose a more innovative option via an aggregator site.

However, if banks chose to invest their energies in competing, they could potentially offer new, innovative services, which could drive increased profitability in a changing world. Banks have a unique opportunity to play all three roles of bank, Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP).

Seizing the opportunity

Banks should view PSD2 as a value creation opportunity to unlock new business models rather than purely as a compliance responsibility.  If resources permit, banks have the opportunity to use PSD2 to their advantage and will need to seek partnerships to innovate quickly, and at a low cost, to compete with start-ups.

The reforms, combined with the advent of new technologies, are promising for the future of banking and getting the basics right will improve each customer's banking experience in the long run.  But, banks and financial institutions mustn’t rest on their laurels because the changes also mean increased opportunities for new market entrants.

Financial institutions need to be innovative and keep up with the speed of digitalisation, whilst continuing to be stable and resilient. For this to happen effectively, planning and preparation is key for the next stage of the payments revolution.


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