Technology has altered every industry, but there are few sectors that have experienced as much change as the payments and financial services market. From both a technological perspective and as a result of an increase in competition, the services available are growing fast and customer expectations are also on the increase as a consequence.
The types of payment services now available are prolific; from online payments, mobile payments, to contactless cards, phone wallets and more. In terms of the providers, they too are plentiful, and there has been a diversification of the ‘traditional’ industry leaders – bank and card issuers – to more innovative, disruptive companies that are finding and exploiting niches in the industry, stealing ground from the stalwarts. More often than not, it seems to be the providers and solutions that put the customer first which win out; and it’s this which will define 2017.
With a steady stream of profits and the existing financial system playing directly into the hands of their business model, banks have had little monetary incentive to innovative and update practices in line with technological advancements. This apathy will be costly, however, as customers now expect far more than their banks are offering.
While it’s difficult to compare newer, smaller financial services providers with the larger banks, one thing is clear, there is a significant amount of discontent with the big banks. The Financial Conduct Authority (FCA) found that in 2015 Barclays Bank Plc took the most complaints (279,561), followed by Lloyds Bank Plc (230,041), Bank of Scotland Plc (182,702), National Westminster Bank Plc (135,262), and then HSBC Plc (120,986). If this data shows anything, it’s that there is just cause for consumers to take a chance on a fresh approach.
The industry is changing as new faces drive different ideas and generate funding. Indeed, funding of fintech businesses rose from $5.4 billion in 2014 to $12.2 billion in 2015. Just a glance at City AM’s top 100 fintech influencers in 2016 shows the sheer number of companies entering the ecosystem and offering a slightly different proposition. From mobile apps, to contactless payments, biometric authentication to countless other innovations, the public are already embracing these technological changes.
The banks on the other hand, well they are still waving around a plastic card.
PSD2 – the game changer
While the banks own inaction may be the nail in the coffin, the Second Payment Service Directive (PSD2) is the catalyst. As well as additional security requirements, such as two-factor authentication, the fundamental element of this legislation is that it forces banks to open their data to third party providers. The data that previously was held only by the banks themselves and enabled the current financial services monopoly to continue.
In technical terms, this means that banks are being forced to invest money into building a standardised platform of data to enable customers to see clearly where they can get financial services that best suit their needs. For the banks, this opens up the market to competitors, where smaller but more appropriate providers can potentially pull the rug from under their feet.
For many startups the legislation will be pivotal to their business plan in 2017 and beyond, indeed, many will have set up their business with this legislation in mind. With more agile, up-to-date systems and a new, less bureaucratic way of approaching financial services’ customers, these companies can establish a competitive edge in 2017 where banks have struggled.
A prime example of this is Metro Bank, self-dubbed as a ‘challenger’ bank. Among other factors, its seven-day service, late night opening and even pet-friendly policy complete with water bowls and micro-chipping, is a world away from the 9-5pm Monday-Friday rigid banking culture. The company’s success is evident not least in the fact it plans to open 12 new branches next year and more than 50 by 2020. This stands in comparison to the thousands of traditional bank branches that have closed their doors across the UK in the past two years.
Not only offering traditional services in a better way, many of these startups will offer additional ‘add-on’ services for banking customers, such as authentication, contactless payments, biometric integration and the capabilities required to transact emoney. Banks will be forced to re-engineer systems and processes to integrate with companies and technologies they’ve never needed to before, potentially causing innumerable technological and efficiency problems. Meanwhile, the disruptors to the market are designed to deliver these services and, with many being founded by those who know the traditional system and its frustrations like the back of their hands, they can take full advantage of where banks are struggling.
A new financial system
In a nutshell, the new financial system will offer more customer friendly alternatives, it also specialises in areas the banks simply can’t. With scores of companies entering the market, offering more and better services than in the existing system, it won’t take long for consumers to be inundated with options which fit their lives better and seem incomparable to those on offer under the old guard. Given banking frustrations are running high and wallets are stretched in a UK of austerity, it is just a matter of time until the tech-savvy disruptors win over the consumer and banks forfeit their monopoly for good; indeed if this isn’t already in process.
For the banks, their role is likely to constrict. While people will always hold money in a bank, this may become the extent of their function. The banks will, in essence, become a B2B service provider to fintech companies. Leaving the fintechs – and not least payment providers – with endless possibilities of integrations, experimentations and innovations. It’s this which will be the new face of payments.
Jens Bader, Chief Commercial Officer, Secure Trading
Image Credit: Investment Zen / Flickr