Think about banking, and you might think Tom Cruise or Michael Douglas in Wall Street – or, more recent movies like The Big Short.
Either way, your mental image will be easily distinguished from transaction processing or the decidedly unsexy world of data standards.
However, as banks struggle with rising costs and volatility, it may be that the unglamorous world of transactions and APIs could prove the saviour of high street banking – provided they’re ready to make some tough choices.
For some time, high street banking has been in systemic decline.
Branch numbers continue to drop across Europe and North America as the business switches to an online-first model.
On the face of it, that might look like a huge cost saving – were it not for the “low for long” period of interest rates over the last twenty years that has stymied bank margins, plus the huge competitive threat from digital-native fintechs promising both retail and corporate clients faster, cheaper and less clunky services.
Tailwinds offer a reprieve
Over the last eighteen months this situation has changed in favour of established banks. Interest rates are at last starting to rise, offering banks the opportunity for some margin gains.
Meanwhile – as covered elsewhere on these pages – fintech competitors face a funding cliff and are struggling to grow revenue through the client accounts they have acquired.
Such tailwinds may give banks some breathing room – but there’s no reason for them to think a return to their previous complacency will work.
For instance, most major banks now spend three-quarters of their technology budget patching and updating their existing legacy payment systems when, in reality, these should be replaced to cope with new payment types such as Instant Payments, Account-to-Account transactions and, of course, Open Banking.
“Banks have lost huge market share to fintechs in money transfer and other segments. To avoid this happening elsewhere, they should prepare.”
Recalcitrant bankers will claim the costs and potential risks of failure make wholesale replacement of their legacy systems unattractive, and that their prevailing “mend and make do” stance is less risky and expensive.
However, such claims ignore the upsides of wholesale replacement for banks, including faster and easier integration of new payment options, much lower maintenance costs and the capacity to offer better services at a lower price.
While A2A and Instant Payments have been growing fast, new features such as the ability to vary recurring payments and “pull” refunds and/or payments are next on the horizon.
To avoid a repeat of what happened in the money transfer business, where banks lost two-thirds of their market share in the last ten years, action should be taken now.
Acquiring: key action area
More modern systems also offer banks the chance to overhaul their acquiring businesses.
A new survey from Cashflows reports that a third of merchants are unhappy with slow settlement, while four in ten find their acceptance systems unreliable – at a time when, according to the British Retail Consortium, the average cost of accepting electronic payments rose by 12%.
Clearly, this situation is unsustainable.
From a technical perspective, Open Banking payments can be up to 20 times cheaper for merchants than card payments as no intermediaries are required for domestic transactions between merchants and banks.
However, at the time of writing fewer than half of the UK’s banks offer Open Banking payments as an acquiring option, though a further third say they plan to introduce them this year.
Meanwhile, the high costs and slow settlement times for cross-border transactions (which make up a growing proportion of overall volume) continue unabated.
All of these issues could be solved by a decisive investment strategy on the part of banks over the next three to five years.
Banks have the opportunity to create distinct competitive advantage over the fintechs that threaten them before those fintechs return to the fray, charged with fresh investor capital.
Payments could move from being seen as a costly must-have to a source of profit and net positive customer experience.
However, it will take boldness and vision from bank leadership to achieve this – maybe the C-suite should make a new year’s resolution?