Eimear O’Connor, Chief Product Officer, Form3
We’ve seen significant improvements in payment services over the course of 2023 as many financial institutions continue with their journey of digital transformation. As we move into 2024, there are some big shifts coming in the payments marketplace both in the UK and globally as banks and payment service providers (PSPs) prepare for new central infrastructure.
As new payment infrastructures are rolled out globally banks and PSPs are considering what kind of services will be enabled and how they can update and upgrade their own product sets accordingly. They’ll be looking at the use cases that their customers want and need, whether these are based on request to pay, for example, direct debit pull payments or real-time payments, to bring better security and functionality.
So, the focus for banks and PSPs over the next 12 months will be on understanding how the central markets and infrastructure is changing, and how this plays back into their own innovation agendas. To that end, here’s three of the key trends they’ll need to keep an eye on.
Increased payments digitalisation
While the recent COVID-19 pandemic and lockdowns acted as a catalyst to shift a large volume of payments away from paper – cash or cheque – to electronic payments, banks must do a better job of communicating how the economics of this works for all players involved. There are hidden costs typically associated with cash and cheque payments, but with electronic payments the costs incurred by those sending or receiving the payment are much clearer. There is a real need for educating society on the costs of paper-based transactions. Digital payments enable greater transparency that will help everyone to understand where payments go; bring clarity to issues like taxation; and even make it easier to spot potential fraud.
Banks and PSPs must look at the payment products they haven’t yet digitalised and ask themselves why they haven’t yet done so. Have they possibly been stuck in outdated modes of thinking that lead them to believe that customers, particularly of the older generation, will be resistant to a digital transition? Is there the potential to do better job of articulating the benefits of making payments digital to their customer base?
If banks and PSPs truly believe in the benefits of digitalisation then they must find new ways they can make this shift work. They’ll also need to be aware of their own internal limitations in terms of whether they have the infrastructure to develop new payment packages for customers, thinking about how they connect to external architecture and handle the volumes and peaks in demand.
The acceleration of real-time payment methods in 2024
Relatively speaking, real-time payments have been around in the UK for a long time, but in 2024 we are likely to see them grow further, with banks and PSPs looking at how they can use central infrastructure to package up and create new real-time payment products. For example, we will see more experimentation with account-to-account and real-time payments at the point of sale; and it’s highly likely that we will see more propositions that allow account-to-account payments online.
Banks in different jurisdictions will be seeing different dynamics when it comes to levels of demand in real-time payments. In the UK, there’s more emphasis on banks understanding what customers want and how they can offer these services in a beneficial way, while in the US, with TCH and the recently launched FedNow, it’s more about an increased desire to move payments away from batch services into real time.
Ultimately, this means banks have to focus on their back offices. In the past, when banks had three days to process a payment, what happened in the back office was somewhat opaque to the customer. With the shift to real-time, these processes immediately become transparent. It’s essential the banks have the right processes in place to support real-time payments, so the money arrives where it should at the right time. Customers have banking apps that let them see the status of payments instantly, so that information flow is important to get right.
The rise of fraud driven by digitalisation
The digitalisation of banking and move to real-time payments is inevitably going to lead to an increase in fraud attempts. If banks want to drive customers on a digital journey, then fraud must be at the top of their agenda. The speed at which fraud can be committed in a real-time payment environment is frightening, so banks and PSPs will need to work hard on building consumer confidence if they want them to move away from legacy payment methods.
This could lead to some payments shifting away from cards to account-to-account based payments. Managing expectations on the level of protection they get on their cards, and from account-to-account payments will also be something banks need to think about to ensure they get their value proposition right for both customers and merchants.
Though it is hugely challenging, the best way of tackling fraud is to use multiple sources of data. Banks need to think holistically about what these sources of information are and how they get access to them in real time. They’ll need to consider all of the different payment types and the different data sources that would be appropriate for these purposes. Then they have to bring all of these sources together, still in as near real-time as possible, so they can spot patterns of attempted fraud and shut them down as soon as they happen.
Takeaway: Making the best of the expanding real-time payments environment
There’s plenty for banks and PSPs to think about as they move into 2024. Providing the best possible payment services for customers revolves around making good use of the existing central architecture, while making sure that back end systems are in a fit state to handle an increasing number of real-time payments. It’s crucial, too, that they also prepare for the inevitable rise in fraud attempts that will come hand-in-hand with the expanding real-time payments environment. Building consumer confidence must be at the core of banks’ and PSPs’ strategies in 2024, as they lead their customers into the brave new world of seamless payments.
