Arnaud Crouzet, VP Security & Consulting at FIME
Two major trends stand out in today’s payments acceptance ecosystem: globalization and digitalization. We’re all transacting, operating and trading on an increasingly global stage, while new payment types and form factors are delivering better, more seamless services to consumers. For payments stakeholders however, navigating budgetary restraints and technical and compliance challenges is making innovation complex.
Global payment standards, and their widespread adoption, offer an empowering platform to help the industry keep pace. Yet, despite the existence of global payment standards such as ISO 8583, differing interpretations across markets has stood in the way of true interoperability across borders, creating a complex and pertinent issue.
It is this problem that nexo standards exists to address, creating true global standardization for the card payment acceptance world.
Established in 2014, nexo standards is a not-for-profit member association chartered to create a unified global card payments acceptance ecosystem. Formed by merging three historical contributors of card payment specifications – EPASOrg + the OSCar consortium + the CIR SEPA-Fast Technical Working Group – its mission is to support all card payment acceptance stakeholders through a portfolio of implementation specifications and messaging protocols that harness the power and interoperability potential of the ISO 20022 standard.
We can consider ISO 20022 as the ‘lingua franca’ of the whole financial ecosystem – a universal messaging language for all kinds of transactions with scope to form the basis of a number of future applications, including open banking APIs and real-time payment clearance. nexo’s specifications can be thought of as the card payments acceptance arm of this language.
The card payments domain of ISO 20022 has defined ‘a single standardization approach, including methodology, process and repository’. Success of the standard, however, relies upon a universal interpretation and consistent mode of implementation and testing, all agreed upon by actors in the payment ecosystem. This has been the goal of nexo standards since its inception.
Today, nexo standards’ messaging protocols and specifications deliver just that: fast, interoperable and borderless payment acceptance by standardizing the exchange of payment acceptance data between merchants, acquirers, payment service providers and other payment stakeholders.
The building blocks for all stakeholders
nexo’s work directly tackles the incompatibility of existing proprietary and domestic interpretations of past ISO standards – such as ISO 8583 – to create a single, streamlined cross-border payment acceptance infrastructure.
These specifications and protocols are developed, maintained and advanced by an open forum comprised of stakeholders from the entire card payments acceptance ecosystem. From payment schemes and banks, right through to retailers, terminal vendors and processors.
Bringing together key players from across the payment sector is no mean feat. Nevertheless, this fruitful sharing of experiences is also part of the richness of nexo standards. Moreover, it illustrates the true goal of this standardization effort to level the playing field and deliver rewards to all. As each stakeholder re-evaluates its strategy and approach to digital transformation, we can consider the use of ISO 20022 as providing the “building blocks” for each stakeholder to build better services, unrestrained by technical dependency on their partners or domestic integration costs and complexities.
Simplicity, efficiency, agility
As all nexo-compliant systems interoperate seamlessly, players can adopt a genuinely ‘plug and play’ approach, simplifying expansion into new markets and enabling truly universal offerings that can be tweaked and deployed cost-effectively, and on a global scale.
Becoming nexo-compliant enables seamless integration with other nexo-compliant stakeholders and the consolidation of global payment requests. Not only does this realize huge efficiencies and reduce the domestic costs of implementation, it also opens up the market, eradicating the age-old challenge of vendor lock-in. By harmonizing multi-country solutions, merchants are empowered to strike better, volume-based deals with banks across borders.
Already gathering momentum across Europe and beyond, nexo standards is well on the way to realizing its vision. For all stakeholders, the time to get ahead is now; championing migration to nexo standards will fast-track innovation and help realize greater efficiencies sooner rather than later.
OPEN BANKING: ARE CONSUMERS KEEPING AN OPEN MIND?
Last September, the European Union’s regulatory requirement for banks to open up their payment accounts via application programming interfaces (APIs) came into effect. Since then, open banking has taken centre stage within European retail banking and payments. In this blog, Elina Mattila, Executive Director at Mobey Forum, shares insight into how emerging consumer attitudes may impact open banking services in the coming months.
It has been over six months since the revised Payment Services Directive (PSD2) came into full effect and with it, required banks to allow third party providers to access payment initiation and account information. While the regulation was designed to facilitate open banking, the market demand was uncertain. Would we, as consumers, choose to embrace the new services enabled by open banking? And if so, under which conditions?
To understand consumer attitudes, Mobey Forum and Aite Group partnered on a pan-European study to determine the appetite for open banking services amongst 1000 consumers in Finland, France, Germany, Spain, and the United Kingdom. The study, launched in November 2019, revealed many important consumer trends and attitudes, including key priorities and potential barriers for adoption.
Consumer appetite for change
The consumer benefits of open banking are largely perceived to be compelling, yet this counts for little if the providers of those services are not deemed trustworthy. This is an observation reflected in the study, which highlighted consumer confidence in service providers as critical to open banking adoption. People want clear visibility of who is managing their finances, and the overwhelming majority (88%) would prefer their primary source of open banking services to be their main bank, as opposed to other banks or third-party providers (TPPs).
Consumers also indicated high levels of trust in their current bank of choice, reflected by 77% preferring to use a financial product comparison service offered by their main bank. By enabling customers to compare the pricing and conditions of a range of financial products on the market, they feel more comfortable that banks have their best interests at heart. This is a welcome trend, and one which should be celebrated in the aftermath of the 2008 financial crisis. For the banking industry to have rebuilt trust levels in this way bodes well for consumer adoption of future innovations.
With a trusted provider, one third of consumers were then either ‘very interested’ or ‘extremely interested’ in integrating open banking services into their financial routine. This applied to specific use cases: account information services (32%), pay by bank (33%), purchase financing (25%), product comparison (35%) and identity check services (35%). Unsurprisingly, consumer willingness to adopt these services relies heavily on providers continuing to prove that they can be trustworthy stewards of personal data.
For those unwilling to adopt open banking, concerns largely focused on reservations around security and privacy. As open banking becomes more sophisticated, it will be interesting to analyse the nuances around how consumers engage with third parties. Established brands are perhaps more likely to be trusted by consumers than lesser-known online retailers. For this reason, consumers may hesitate to engage newer companies than brands they are already familiar with. In an industry as varied as finance, this creates additional intrigue in the ongoing battle for market share between the newer ‘challenger’ banks and the older, more established European banks.
Consumers might, however, be willing to deprioritise trust and, instead, favour convenience and usability. When questioned over their willingness to adopt a new payment method, for example, 91% of respondents indicated that they could be tempted to switch either by financial incentives or the promise of greater convenience.
The path forward
While open banking is still in the relatively early stages of development, it has made significant progress in a very short period of time. Not only is it allowing consumers to share financial data with authorised providers as they wish, but it is set to spark more competition and innovation within the market.
From a business perspective, open banking is expected to create lucrative new revenue streams, particularly for companies which are able to innovate quickly and react to consumer demand. It is prompting consumers to reconsider how they manage their finances and – most excitingly – it’s not even close to reaching its full potential. It should bring a whole new era of service partnerships between banks and TPPs, which will enable a new generation of innovative financial services.
For the industry to truly fulfil its potential, it is vital that stakeholders are able to explore new business models, innovations and changing customer expectations for open banking in a commercially neutral environment. Mobey Forum’s open banking expert group provides exactly this, and we look forward to supporting our members as they shape the future of digital financial services.
Where to find out more
The opportunity for open banking is explored in more detail in a report by Mobey Forum and Aite Group, entitled Open Banking: Open Minds? Consumer Appetites for New Banking Services. It provides banks and other financial services stakeholders with a market view on consumer appetites toward new open banking services and explores the possible roadblocks to consumer adoption. It is also discussed in a podcast featuring key representatives from Interac, Erste Group Bank and Strands Finance.
HOW CAN PLATFORM AS A SERVICE UNLEASH COMPETITIVE ADVANTAGE FOR BANKS?
By Paul Jones, Head of Technology, SAS UK & Ireland
Due to both regulation and practical realities, banks spend much of their time, effort and money on activities that make zero difference to their competitive position. Processing transactions, booking trades and managing compliance for anti-money laundering (AML) and know your customer (KYC) efforts are vital tasks for any bank, but they make almost no contribution to differentiating a bank from its competitors.
According to McKinsey’s 2019 Global Banking Review, outsourcing these activities presents a huge opportunity for optimisation: “By transferring non-differentiating activities to modular industry utilities, banks could potentially improve return on equity by 60 to 100 basis points.”
Besides the immediate financial benefits, if banks can optimise their resources to spend more time focusing on developing new digital services and delivering an outstanding customer experience, it’s a clear win-win in terms of both saving costs and growing the business.
Dissecting your differentiators
But how far can we stretch the idea of “non-differentiating activities”? Is risk management a differentiator for banks? How about fraud detection? Or even marketing? I think the answer is it depends. Within each of those three functions, there are areas where top banks can develop competencies that give them a real edge over the competition. If you have the best risk models, you’re likely to make more advantageous trades than your counterparties. If you’re the smartest at catching fraudsters, they’ll focus on weaker prey. And if you understand your customers better than your competitors do, you’re more likely to keep them.
In fact, McKinsey estimates that the opportunities to enhance capabilities such as risk, fraud detection and marketing through artificial intelligence and machine learning could deliver up to $250 billion in value across the banking sector.
In each case, the data scientists who devise your predictive models for calculating exposure, detecting anomalies and segmenting customers are the key to your success. Their skills put them at the pinnacle of all your employees in terms of creating real business value. But data science isn’t a standalone activity, and there are other elements of risk, fraud and marketing operations that don’t add much competitive value – what we might call the “platform” elements.
Data science as team sport
On the scale at which most banks operate, data science isn’t just about the individual brilliance of your PhDs. It becomes much more of a team sport – and like any professional sport, it quickly develops its own back-office requirements. You need software, databases, development tools, infrastructure, processes, data governance frameworks, monitoring and analytics, auditing and compliance capabilities, and business continuity/disaster recovery strategies. That’s what I mean by “platform” – all the basic components you need to run a successful enterprise-scale data science programme and get innovation into production.
The good news is that you can absolutely outsource your marketing, fraud and risk analytics platforms, just like any other non-differentiating activity. Running analytics and data science platforms at scale is known to be a tricky problem, even for tech giants like Google, but with the right combination of technology, processes and expertise, it’s perfectly possible to let an expert partner take care of the day-to-day operations.
What to look for in an outsourced platform
When you are assessing analytics Platform as a Service (PaaS) offerings, there are a few key things to look for. First, your partner should provide a fully managed cloud infrastructure that enables quick onboarding and makes it easy to ramp up new projects and close down old ones.
McKinsey estimates that the opportunities to enhance capabilities such as risk, fraud detection and marketing through artificial intelligence could deliver up to $250 billion in value across the banking sector.
Second, your partner should have the right expertise to take responsibility for handling all day-to-day system administration and model management duties, as well as batch analytics tasks such as regulatory calculations. Offloading this routine work will reduce costs for the bank and also slim down the risk profile because your partner will keep the platform fully up to date with the latest security updates and patches.
A good PaaS offering will also include process automation to increase throughput for the data science pipeline. This is a well-known issue in the industry. For example, Gartner estimates that over 50% of models don’t make it to production, and a recent survey by SAS showed that it takes organisations on average three months to deploy a new model.
Speed production with DevOps
You should look for a PaaS with built-in DevOps procedures that help to accelerate deployment to a fraction of that time while maintaining rigorous quality controls. The ability to put models into production more quickly will make you much more agile – so you can respond more quickly to emerging market risks, counter new types of fraud, and adopt the latest artificial intelligence and machine learning (AI/ML) techniques to support your marketing campaigns.
Critically, any PaaS contract should guarantee that your data and models remain your intellectual property and that you have complete control of where your data is stored and how it is used. With the right separation of duties between you and your PaaS provider, your data science team can focus on the valuable, exciting aspects of model design and training, while your partner handles all the mundane operational work around deployment, data processing and governance.
We’re working with banks across Europe to provide exactly this type of PaaS for marketing, fraud and risk analytics. If you’re interested in how to help banks drive digital transformation with cloud-based analytics, please read my previous blog post here.
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