The retail banking industry is changing faster than ever. As banks continued to get to grips with online and digital solutions, new technologies such as biometrics and blockchain reared their heads. However, what will take the finance world by storm next year? Some experts in the field give their opinion
Anthony Duffy (Director of Retail Banking at Fujitsu)
In the fast changing world of retail banking, what might customers of, investors in and commentators on retail banks expect to see in 2016? I expect developments to be particularly noticeable in five key areas:
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2016 is the year where we’ll see an obvious change in the choice of bank available to customers. New names are starting to appear, with entrants such as Atom and Starling gaining lots of publicity but being beaten for customer numbers – at least initially – by "spin-off" banks such as Williams & Glyn.
The emergence of digital-only banks may appeal to the tech-savvy who wish to bank remotely using mobile and internet apps. Those who want to change banks yet still value the branch will be able to find other new entrants which cater for their need. But I suspect that all new suppliers will have to work hard to woo customers from traditional suppliers, given increased competition being reflected in generous (current account switching) offers which are available in the market.
There will be continued growth in new payment methods. I expect the use of contactless payments to continue to blossom, driven by increasing levels of customer confidence and growing comfort in using this payment option. I also expect to see further mobile ‘phone-based wallets being launched in coming months, in competition to Apple Pay. And I expect to see further new entrants targeting payments, given the high returns that are still to be found here.
One area in particular to watch is the impending arrival of PSD2, which will be formally adopted by the EU Council of Ministers shortly. Implementing it over the two year permitted timescale will require investment, it will reduce revenue streams and introduce further competition – particularly by authorising the use of Application Programming Interfaces (APIs) and Account Information Service Providers (AISPs).
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By GlobalDataWith many established retail banks looking to rebuild trust after the scandals of recent years, developments which potentially open up existing relationships to other organisations will be unpopular – while being welcomed by many new competitors already stalking the sector.
I also anticipate continued focus around security; I fully expect this to remain a hot topic throughout the New Year.
Recent data breaches have highlighted how vulnerable some organisations are to cyber-crime. The consequences of such breaches can be significant for customers and institutions alike – financial loss, reputational damage and an adverse impact on the company share price might all be expected. The fact that hackers only have to get lucky once, while banks have to remain vigilant and ahead of the criminals all of the time, means that this will remain a key area of management focus in 2016 (and for years to come).
Finally, expect to hear further talk about when interest rates will rise (although it may be 2017 before rises actually occur). Commentators have spoken about the timing of expected interest rate rises for some years now; it is clear that the most likely next movement will be upwards. While this could be in the final months of 2016, any slowing in economic growth could yet push a rise in 2017. But, nevertheless, households will need to ensure that they are fully prepared for when the upswing in rates finally arrives.
Christoph Tutsh (Founder and CEO of ONPEX)
If one thing is certain in the world of payments, it is that it is fast moving and ever changing. This means that predictions are both difficult but critical.
As an industry, we are still searching for unifying standards in payments, in security and in authentication. This means that the pressures and challenges that one company might face will be the same for multiple others.
What we saw in 2015
- Bitcoin/cryptocurrency: At the beginning of 2015 cryptocurrencies started moving into the mainstream. It was in the latter half of the year that the legal status of bitcoin and other cryptocurrencies was confirmed and more and more payments providers are accepting cryptocurrency payments;
- Mobile payments: Mobile commerce is booming. Figures from earlier this year suggested a 77.8% growth on mobile commerce on 2014. To put this into perspective, retail from desktop computers grew only 2%, according to MyCustomer.com. Mobile is now the consumer platform of choice;
- EMV liability shift: 1 October 2015 saw the EMV liability shift in the US and this, ironically, was one of the predictions that many might not have, if not wrong, certainly mistimed. The predicted wave of CNP fraud has yet to materialise and this, is largely, because despite the fanfare of publicity, the US wasn’t ready for the liability shift. It could be years before the US is fully EMV compliant;
- Fraud prevention: 2015 saw data breaches like never before. High profile data breaches, some by hackers others, it would seem, by governments, focused the minds of the industry, and consumers in general on security and fraud prevention. What went from being a something we took for granted in our financial technology became something that new technology is being built around;
- Markets of interest: China and Brazil – I put focus on China and Brazil this year. China is, of course, a booming market; indeed, it is the booming market for payments. Yet, at the other side of the world, so are Brazil and the wider Latin America, and
- The global growth of mobile has democratised e-commerce as never before. So, in markets such as China and Brazil, consumers who might not have the resources to access a laptop or Wi-Fi certainly have the resources to access 3G and a smartphone – putting commerce in the palm of their hands.
What we can expect in 2016
- Blockchain: As cryptocurrencies were hyped in 2015, 2016 will see the growth of blockchain technology to regulate and assure cryptocurrencies. More than this, though, the potential of blockchain to work with other payment methods and currencies is significant;
- Omni-channel conversion: E-commerce and, latterly, mobile commerce has made consumers more demanding. And rightly so. Part of this means that customers are increasingly demanding to pay on the platform they want, with the payment method they want and in the currency they want. In 2016, more and more merchants will start to offer omni-channel payments as they keep up with demand;
- Data Security, Identity and Authentication: The fear of data breaches means that there is more demand for secure, identity based authentication. From ID scanning to biometrics, we will see more development and more products coming to market. But, will they be able to offer the unobtrusive authentication that consumers want?
- Banks vs. Fintech or Banks and Fintech: Just like 2015, next year will see a vast increase in fintech companies that are popping out of the group. However, the majority of fintech companies see banks as old dinosaurs and their aim is to replace them. However, fintechs fail to realise that they cannot survive without banks.
- Fintech faces regulation: As just stated above, fintech start-ups are increasing rapidly. The majority are not recognising the massive regulations that they have to face. Regulation is simply a must.
- Go east!: Asia, Australia and New Zealand are fertile grounds for Fintech and fertile grounds for commerce. I predict great things for these regions.
Ralf Ohlhausen (Business development director of the PPRO Group)
Mobile Payments
2016 is set to be a defining year for mobile payment providers. It looks as though Apple Pay is planning a major European launch in 2016, an event which could turn the fragmented mobile payment world upside down.
While setting up a unified payment system overnight would be virtually impossible, Apple Pay will endeavour to push this forward, especially as its competitor, Google is also pushing for the first place in the mobile payment space.
In 2016, we will also see mobile payments become less smartphone-dependent. Instead, new technologies including smartwatches, bracelets and even rings will give us the ability to provide payment options.
Security
In 2016, tokenisation and biometric authentication will have a strong influence on the payment industry. Tokenisation is an extremely interesting method of securing credit card data, as the credit card numbers are substituted by tokens. While the original number is stored securely on a tokenisation server, only the tokens are used throughout the payment process. This means that no harm can be done if the tokens are stolen, and therefore makes it a secure process.
Due to the lack of widespread tokenisation standards, this technology is still in its infancy, but despite this, I anticipate a shift in the market throughout 2016.
When it comes to authenticating payment processes, there are several new inventions in the pipeline for 2016. The most recently used methods include password, PIN, and fingerprint, and these all have one thing in common; they are weak so two-factor authentication is increasingly used to improve security.
User-friendly methods — including, for example, new biometric processes like voice recognition, keystroke detection, finger vein scanners and pulse recognition — are set to become increasingly significant and set to increase both security and convenience.
International E-Commerce
Merchants who are looking for e-commerce success will need to create an international strategy. Expanding e-commerce activity across borders involves more than translating websites and establishing efficient logistics.
It’s also vital that merchants offer shoppers their preferred local payment method. Asia, Eastern Europe and Latin America are currently the most interesting markets for European online retailers, and as card penetration tends to be lower there, it’s important that providers know their way around alternative payment methods in these regions.
Merchants should consider which markets are particularly suited to international strategies and simulate potential market launch models with partners such as payment service providers.
Regulatory Changes
The first Payment Services Directive (PSD) from 2007 is still in force, and defines the rules for payment services within the EU single market. It stipulates, for example, that payments must be completed no more than one day after a payment order is processed. After a tough two-year negotiation period, the EU has now, finally, agreed on a second payment services directive (PSD2).
The proposed revision defines several priorities, one of which involves strengthening the security requirements for online payments by improving customer authentication in order to combat fraud. PSD2 will also provide a legal framework to stimulate competition.
This framework will facilitate market entry for new providers and allow the development of innovative mobile and Internet payment methods. It will also force banks to grant such providers access to their crown jewels: the accounts.
The European Banking Authority (EBA) is set to develop more detailed guidelines and regulatory standards for applying the directive.
Although enshrining these in national legislation in all EU countries will take a further two years, payment industries should begin preparing themselves now for implementation and start taking steps by 2016.
Cash on the Retreat
Is the end of cash approaching? Some countries in Europe are certainly cutting down on the usage of cash.
In Sweden for example, it is now almost impossible to use cash to pay for bus tickets. Acceptable payment methods include customer cards, credit cards, and payments via smartphone apps.
Even traditional cash-based bakeries no longer exist in Sweden and instead, now display signs requesting that customers use cashless payment methods for even the smallest amounts.
The situation in Denmark is similar; there, the government is currently debating whether or not to release smaller retailers from the obligation of having to accept cash as a payment method.
The decline in cashless payments, however, is currently more of a theory among economists. In Germany, for example, around 80% of retail sales are still transacted in cash.
If, however, we look at sales revenue, cash makes up just 53.3%, a figure set to drop further in 2016. Cash is on the retreat, and alternative payment methods are advancing.
Among the multitude of technologies (like cards, apps, wearables) available today, cash is, however, still very high on the list. It’s an essential element in the mix and fears that cash is dying out any time soon are therefore (as yet) unfounded.
Marc Barach (Chief Marketing Officer at Jumio)
A few things will happen in 2016:
- Cyberattacks will continue to feature in the headlines and they will start to have a significant impact on consumer confidence in digital commerce. Data breaches will become more and more frequent and there will be a concerted effort to come up with universal standards to fight them;
- The shift to mobile platforms will grow as more merchants start to optimise browsing and purchasing for mobile, and
- P2P lenders will become more popular as a way of raising finance for business and start to challenge in personal finance too.
Some things certainly won’t happen:
- Wearable tech still won’t go mainstream;
- Facial recognition software won’t be able to deliver on promises, and
- No one will get excited about the iPhone 7.
Philip King (Founder and CEO of myPINpad)
Overall, I would be surprised if there were any major new trends in 2016.
Rather, I expect to see the continuation and consolidation of what we saw in 2015:
- Biometrics: vendors will continue to push their wares while they have the chance and banks will adopt almost all of them in order to look progressive and stay competitive in the face of the far more nimble ‘challenger’ banks.
- Regulation: PSD2 will open the doors to ‘money’ managers. With the ability to centralise every aspect of a person’s financial record into a single app, brand new services – for the EU market anyway – like instalment payments, instant credit, loyalty/reward consolidation and so on will begin to replace individual banking apps.
- Banks will struggle to keep up: Leading on from this point, banks will struggle to keep pace with innovation. Will they be able to take on challenger banks? More to the point, will they want to?
- The progress of the "Pays": GooglePay, ApplePay, PayPal and Samsung Pay will continue to ‘disintermediate’ and will gain footholds having achieved access to bank account information, enabling all sorts of propositions such as up-selling.
- Consolidation: With such a diverse and huge market of propositions and solutions, the consolidation of large scale and/or strategic domestic operators to produce a number of pan-European processors is inevitable.
- Identity Assurance: Authentication will continue its decentralisation down to the mobile device, and will slowly be seen as an important step in the right direction toward proper identity assurance. There will be a proliferation of services similar to miiCard. Software PIN will be implemented representing a major threat to hardware manufacturers and a huge opportunity for every other ecosystem player and the terminal manufacturers if they grasp the need to build alternative business models.
There could be a race to be first in market but it will be a marathon not a sprint and new use cases will emerge, some of which will assist PSD2 compliance. Authentication will slowly be recognised as key to the ‘glue’ that holds all together.
Identity and in particular federated identity will continue to be debated and sought at length but no single solution is possible so it will not emerge but debate will be consistent and building.
- Privacy Concerns: The vast increase in mobile device functionality naturally involves a vast increase in the requirement for identity assurance which has an equal and direct negative impact on privacy. The more functionality you want, the more of your privacy you have to be willing to surrender.
- Security: Both handset and mobile application development have primarily focused on either aesthetics, and/or functionality. The continuing decentralisation of authentication and payment functionality will demand stricter standards for security. Regulatory compliance will be far behind, but it is coming.
