PSE will be discussing Open Banking along with a topical payment issues at our November Conference.
Tony will also be talking about Open banking at Sibos in London next week!
There are some very smart fintechs solving for problems that only exist because of the way that regulators have set up the game. For example, there are fintechs trying to jury-rig a payment system from Open Banking payment initiation APIs. Open banking APIs may not be the best way to build what we call a ‘Request to Pay’ scheme. It does not make sense for a merchant or fintech to have to plug into thousands of APIs across Europe, many of variable quality and build according to different standards.
In India the Unified Payment Interface (UPI) provides the ability to instantaneously debit credit any bank account backed up by a good SCA. This is a much better way for countries to deliver the type of payment service that merchants are crying out for – a way to ask a customer to make an electronic payment safely and security, without asking for their bank details and secured by a good SCA. This is a very simple and universal recommendation – every country or territory needs its own version of UPI.
We need to take a step back and realise that Open Banking is only a layer in what we call the ‘Fiat currency stack’. What we need to do is bring that stack into the 21st century in a co-ordinated and rational way.
Modern fiat currency is made up of three layers: central bank money, commercial bank money and regulated E-money. We need to look at the whole system and think about what remedies to apply to the different layers, starting with the base layer, which is Digital ID.
When countries start by building faster payments systems or Open Banking in isolation, it is beginning a pyramid from the middle layers.
Let’s build up the pyramid from the base and begin with a federated Bank ID scheme for Europe. Now we have a way for people to provide strong consents for secure transactions – we will lower fraud and enable people to digitally sign documents and remove the burden of having to maintain so many different credentials.
Next we would want to make the Real Time Gross Settlement (RTGS) systems work 24*7*365 so that we do away with the concepts of ‘end of day’ and ‘cut off times’. The national currencies would be available at all times to effect settlement with finality.
All countries should have real time payment systems for credit transfers and proxy databases that enable payments to be initiated against mobile phone numbers or email addresses. In addition, there should be UPI-like layer that supports Request for Payment in Ecommerce and POS environments. These payments are authorised through the Bank ID layer.
My advice to regulators is to look at the fiat currency stack as a whole and seek to optimise the whole, scheduling work from the bottom to the top.
Every country should have real time retail payments, a UPI equivalent to deliver Request to Pay online and at POS. Banks should be open and available through APIs to deliver the lending other retail and wholesale banking services needed by the internet economy.
Fintechs shouldn’t be so obsessed on just one layer of the fiat currency stack. Personal Financial Management apps are proliferating because that is the only window that has been thrown open by Open Banking – but I wonder how many new services we need to tell us how much coffee we have been drinking in the previous month.
A good starting point is for fintechs to think about how they can provide the financial layer to the digital economy. Bank branches provided the financial layer in the physical high street, but their role on the digital superhighway shouldn’t be taken for granted. I really like the mission statement of Stripe to grow the GDP of the internet. Such a statement provides a much broader canvas on which to make a difference.
It means that they are also unlikely to fall into the trap of being a mono-line provider of one type of services where the economics might get crushed. That is why you see players like Stripe getting into other activities like ‘pay outs’ and their Stripe Connect solution for marketplaces. The whole toolkit of financial intermediation should be brought into play – what we need to think about are the financial needs on the supply and demand side of platforms, and of the financial needs of platforms themselves.
I wouldn’t want to bet my company on a future where merchants are paying 3% to collect electronic payments – that is just a point in time. You need to look at what local merchants pay in China, and the expectations laid down by the Reserve Bank of India in their recent 3 year plan. They say that there is no reason for ad valorem pricing because the cost of processing is not related to the value of the payment. This would be true everywhere if we could solve for fraud through good Digital ID.
My contention is that if the EU wants to complete the Single Market for payments then they should stimulate the emergence of federated Bank ID for the continent. We now have the implementation of TIPS and SCT Inst to provide the real time credit transfers. We also need a Pan-European equivalent to UPI to provide Request to Pay. This is something that EBA Clearing has started to work on, but it must be fit for purpose for retail Ecommerce and POS. It cannot only be for bill payments or B2B transactions. If we do these things in the right order, then digital payments is essentially solved as a societal problem, and huge innovation can take place on top of these platforms – innovation driven by banks, fintechs and bigtechs.
We can see that the authorities are keen for TIPS to be adopted and the pricing is certainly very compelling to help drive that growth. Part of the puzzle is certainly low cost instant credit transfers. Another part of the puzzle is a well-functioning Request to Pay scheme. But these things cannot work well unless you can gather an SCA in a frictionless way, which is why all roads lead to Digital ID. The best way to achieve this in Europe is to take what works in Sweden and apply it across the EU.
Look at what is happening with Open Banking – many merchants don’t get excited about it because of the customer journey driven by outdated SCA. If we have a Pan-European Bank ID then we can use all of the modern technologies like fingerprints, facial recognition, voice recognition to build really nice customer journeys.
There will come a point where banks realise that the Digital ID is something that they are uniquely positioned to provide as a societal good and that the best way to provide this is through a federated scheme. In this world of platforms there will be bigtechs with their own ID schemes and banks will not want to cede this territory because the consequences could be a much greater level of disintermediation than they envision. In Sweden the Bank ID has added to GDP and provides the authentication layer for Swish. The horses can see where the water is, they just need to drink.
As we enter this world of platforms we need to realise that financial services will be embedded into customer journeys, sometimes quite invisibly. Yes it is bad news that the customer will not always be re-directed to the bank and go through the bank’s branded experience… but there are worse outcomes. Much worse would be for banks to lose the race to provide the financial layer of the digital economy.
Banks really need to ‘show up’ in the digital economy and the only way to do that is by providing the retail and wholesale banking services required by the participants in digital ecosystems. Banks shouldn’t show up with their own version of what they think works, but develop the full suite of standardised APIs. Federated Bank ID, standardised APIs, upgraded national rails – these are the ways for the future to be ‘bank friendly’ with the bank account maintaining its dominance as the primary store of value, and the bank balance sheet being the primary vehicle for maturity transformation.