Actually, the title of this is not strictly true... While Celent was well represented at SIBOS with several of our colleagues attending this week, I wasn't there in person to talk payments or any other topics. I do, however, plan to be at Money2020 in Las Vegas, so if you are going to be there as well, do drop me a note, and we'll arrange to meet.
And yet, I was talking about payments convergence at SIBOS - not in person, but rather on video, courtesy of a recording I did with FIS a little earlier this year. A friend even snapped a picture!
So, what is "payments convergence", what does it really mean?
In the past, there was a relatively limited number of ways money could be moved around – you could give someone cash, write a cheque, pay by card, or arrange a bank transfer. All these payment methods were supported by separate interbank networks, and the customers typically knew well which payment instrument was being used, either because of distinct use cases and experiences – cards for shopping, cheques for paying bills – or fees, with RTGS being more expensive than ACH.
Now, at the customer level, it might seem like what’s happening is the opposite of convergence, as customer payment experiences are proliferating – from NFC and QR codes at the POS, to digital wallets and browser pre-fills online, to in-app payments and “shop and walk out”-type experiences. Today, many of these are built on top of card rails, but if one day they switched to Account-to-Account payments, for example, the customer would likely barely notice – the payment experience is being abstracted away from the underlying payment method and can feel the same or similar, irrespective of how the payment is actually made.
At the other end of the spectrum – payment infrastructures or rails – there are certainly conversations about consolidation. For example, while the project has been hit by delays, the vision of the UK’s New Payments Architecture is a single ISO 20022-based central infrastructure that could be used to clear and settle all types of retail payments.
Others see the evidence of payments convergence in how Visa and Mastercard have evolved from strictly card networks to payment networks – both companies acquired and developed assets that take them beyond just cards. Having said that, arguably it’s more of the sign that Mastercard and Visa are becoming multi-network or network-of-networks companies, rather than any convergence of rails. If anything, with CBDCs and other innovations emerging, it is likely that there will be more interbank payment infrastructures going forward, not fewer.
The big question is whether we will see a convergence of payments at the bank level, i.e., how banks manage payments internally. With Payment Hubs, banks can already process and orchestrate multiple non-card payment types, although the card infrastructures have remained stubbornly separate from those. Moreover, cards sometimes suffer from even more internal silos: credit cards are often managed separately from debit or commercial cards, and if the bank is doing both, the issuing infrastructure is often separate from acquiring.
That is starting to change with visionary banks beginning to take more of an enterprise approach to managing payments and “connecting the dots” between different siloed organizational units and technology infrastructures. In many ways, they have little choice – with customer expectations driving the need for agility and flexibility, banks with old monolithic approach to payments are being challenged on the economics of payment processing. For example, Celent recently surveyed Tier 1 banks across Europe, and 85% agreed with the statement that “margins on our payments business are becoming challenging to maintain.”
Thankfully, the changing technology landscape is giving banks options and a path forward: many established payments technology players have built or acquired capabilities across the payments stack, some of the next-gen providers are blurring the lines between core banking and cards management, and the trend towards micro-services- and API-first cloud-based SaaS platforms is accelerating the pace of change further. The cards industry is even debating if cards should migrate from ISO8583 to ISO20022, which has become an accepted standard for non-cards payments.
It is unlikely that many banks will get to one single technology platform capable of managing any type of payment any time soon. It may not even be desirable. However, being able to rapidly innovate, adapt, and offer customers a range of seamless payments experiences in a cost-efficient way is non-negotiable, and that requires strong enterprise-level vision, new thinking, and partners that can help connect the dots.
Thank you to FIS for recording this video with me, you can watch it in full here.