Topic: Payments

I recently returned from a study tour to the world’s largest fintech event, the Money 20/20 conference in Copenhagen. We also met with major banks in Poland, which has one of the fastest growing economies in Europe and a payments industry with similar challenges to those in Australia. I was joined on the trip by my colleagues Bianca Bates, Head of Client Services and Rob Bell, General Manager, Product & Service.

Here are my reflections on how financial institutions are responding to the changing payments sector in Europe.

The dual threats to European payments: global tech giants & fintechs
Traditional banks are facing significant challenges in Europe. On the one side, global tech giants such as Alibaba, Amazon, Apple, Google and Facebook are capitalising on their significant scale and consumer trust to grow their share of the finance value chain, particularly the relationship with the customer. On the other side, small fintechs are able to innovate much more quickly than banks.

The threat posed by global tech giants and small fintechs is growing with Payments Service Directive 2 (PSD2) coming into force in 2018. PSD2 mandates for financial institutions to make cardholder data accessible to third-parties. It will mean that the end-user will own their transaction data and be able to choose who sees and uses the information. This open data directive will promote competition and innovation in the payments sector, meaning it will be much easier for tech giants and fintechs to take market share from traditional banks.

The threats to large financial institutions presented by PSD2 in Europe could soon be seen in Australia, with the Australian Productivity Commission’s recent report on data availability and use favouring open data, and the resulting transformation of our financial system and economy. This makes the insights on how European banks are responding to the directive particularly pertinent to Australian banks.
European financial institutions are responding to these threats in four main ways:

1. Collaborate to fend off competition
We saw examples of strong collaboration in both Poland and Denmark in response to these emerging competitors.

Danish banks, through aggregator company Nets, launched a very successful real time payments system, RealTime24/7, in the domestic market in 2014. This is the equivalent of the New Payments Platform (NPP), launching in Australia later this year.

The faster payments platform implementation in Denmark saw strong collaboration across the industry – they did not compete on their front end applications or by customising the solution for each bank. All Danish banks share the real time payments app, MobilePay, which uses its faster payments platform. The system has 4 million users (out of a population of 5.5 million), and 7 out of 8 transactions are originated by the app, largely replacing cash transactions.

Danish banks have also enabled Bluetooth at POS terminals so customers can use their mobile to pay via the faster payments platform.

Collaborating to make the most of the faster payments platform and making its use easy for consumers has helped financial institutions in Denmark to retain market share.

2. Invest in innovation hubs outside of financial institutions
Many banks have responded to the threat posed by fintech innovation by creating their own ‘incubators’, but generally they are still unable to move as quickly as nimbler, smaller fintech companies. Many speakers at Money 20/20 believe that partnering with smaller fintechs, or buying them, is a more successful strategy for innovation than trying to replicate them within a financial institution.

We saw a different approach in Poland, where a group of Visa clients from across Europe established an innovation hub with €20m budget in order to drive innovation across the payments ecosystem.

3. Innovate fast to compete directly with tech giants
PKO Bank Polski, the market-leading bank in Poland, developed an app to allow POS and P2P payments. The app lets customers generate a code for paying at POS terminals, or withdrawing cash at ATMs (similar to cardless cash in Australia). They sold the app into a joint venture with some of their competitors to get 60-70% of the market share. This is an example of a financial institution seizing an opportunity for technology to disrupt the payments market before the entrance of international competitors.

4. Focus on customer experience
A major theme emerging from our meetings and the Money 20/20 conference was the importance of the customer journey experience. This is an area that the global tech giants excel at, and something that financial institutions are increasingly concentrating on.

We heard that removing friction from the customer experience was critical for engagement. The slightest friction in a transaction can result in it being abandoned. Tech giants like Apple and Alibaba are very good at reducing friction for consumers, and banks are playing catch up to stay competitive.

Overall it was a valuable trip to learn about the challenges facing European financial institutions and the varying success of strategies to respond to those challenges, with many learnings for the Australian payments industry.

By Lauren McCormack, Senior Manager, EFT & rediATMs

We recently took some of our clients on a whirlwind payments tour of London, Dublin, Stockholm and Edinburgh. Accompanying me were my colleagues Rachael Brigham and Zac Andrew and we also took some of our clients Matt Lobdell (Head of Strategy, CUA), Craig McMahon (COO, Teachers Mutual Bank), Chris Thornton (GM Product & Marketing, My State) and Kevin Kehoe (CFO, QTMB) along for the ride.

We learnt a lot about payments and about ourselves on the six-day tour (more than I can share in one blog!) but here are some of our highlights:

1.Incentivising customers to switch
While Australian FIs work to entice new customers, UK institutions are aggressively grabbing customers. Nationwide is attracting new customers by offering a GBP200 bonus payment to bank with them as well as high interest rates (5% on balances up to GBP 2500). Nationwide isn’t the only one snagging customers – Spanish-owned Santander not only offers high interest rates but gives 3% cashback to customers on household bills.

2. Europe’s open data laws could come to Australia
Australia’s recent Productivity Commission report on data access shows that we could be heading down the same path as Europe where 2018 will see the introduction of the Payments Service Directive 2 (PSD2). PSD2 mandates financial institutions to make cardholder data accessible to third-parties. It will mean that the end-user will own their own data and be able to choose who sees and uses this information. This move could be the first in a global shift.

3. Sweden’s cashless society is the way of the future
Sweden is incredibly ahead of the game when it comes to being cashless. Sweden’s average card usage per person puts them ahead of the rest of the world (with an average of 269 transactions per annum per person). A reflection of this shift is Sweden’s minimum age for debit card holders at just seven years of age! With cash payments making up just 20% of retail payments in Sweden compared to the European average of 71% this trend is only likely to continue. Visa Europe’s contactless payments trial at this year’s Eurovision Contest in Stockholm is definitely a sign of things to come.
Nordea, one of Sweden’s big four banks, is using an app-based loyalty program called Wrapp which has an impressive number of registered customers. Sweden also has its own answer to our New Payments Platform (NPP) called Swish. As of May 2016 half the Swedish population were ‘Swishers’. It’s a very useful case study for real-time payments in Australia.

4. Open loop’s potential to reduce cash usage
While the use of contactless is low in the UK compared to Australia, figures for commuters with an Oyster card on Transport for London’s (TfL) Underground paint a different picture. When 33% of Oyster PAYG users have already switched to contactless and over 1 million Visa journeys are conducted every weekday on TfL services, the potential for increasing contactless (and therefore cashless) travel is definitely there. In Australia, as cities move to open loop transport, opportunities for FIs to tap into this pool of contactless commuters means the possibilities to continue to reduce cash usage is huge. For example, could NSW’s Opal card become the next Octopus in Hong Kong? Watch this space.

5. Charities go cashless for spare change
If you’re anything like me you get this creeping sense of guilt when you see a charity collector shaking their tin and you don’t have any change. That’s now been solved. Visa, in conjunction with Save the Children, has developed a contactless handheld donation ‘tin’ in various forms including a face-to-face handheld terminal, a semi-attended desktop terminal and an unattended donation switch.

In Sweden Swish users can ‘swish’ a payment to their preferred charity all without reaching into their pockets.

6. Would you like a home loan with that?
Starting as a joint venture with the Royal Bank of Scotland (RBS) in 1997, Tesco Group bought out RBS in 2008 and today serves more than 7 million customer accounts and had an operating profit of over GBP 160M for 2015-2016.

As of August this year, Tesco Bank now offers its own mobile wallet – PayQwiq. It’s available in London and Edinburgh (so far) and enables users to earn loyalty points with their purchases (5 points for every GBP 4 spent). PayQwiq is in direct competition with leading mobile wallets by allowing shoppers to store their Tesco Clubcard and debit card information and pay up to GBP 250 in a single transaction (AUD$420). Tesco Bank’s formula is clearly working so keep an eye out for Coles and Woolworths replicating its model!

This trip was a whirlwind of four countries and eight flights, and it provided an enormous wealth of information.

It showed me that the Australian market can learn a lot from our European and British counterparts. It also taught me that while our population may be smaller, Australia definitely punches above its weight in terms of payments and should be proud of having one of the largest contactless markets in the world.

The idea that we must be willing to embrace change and payments technology was also reinforced during the trip. While the NPP may not happen overnight it will fundamentally change the way we make payments so we should be ready for it. Also using Sweden’s cashless model as an example we need to take technology in our stride. Change is, after all, as good as a holiday.

By Aaron Blackwell, Account Manager