What are the biggest challenges of payment system innovation for banks?

From a customer experience perspective, driving payment system solutions for Banks should look beyond solving customer problems. We are at a stage where Banks now need to create customer experiences the customer never thought was possible. The innovation should however improve overall customer experience. An example is transaction authorisation via face recognition. Customers would have not thought this was possible some years back. Two of the biggest challenges however are ensuring customer funds security and data privacy as we continue to innovate. Not all security challenges can be addressed with technology. Many require customer education or even influencing cultural behaviours to ensure safety in the new normal.

Enhancing customer experience is pivotal in payment system innovation. Banks must balance user expectations for speed and convenience with security and trust. Investing in digital interfaces and data analytics while collaborating with fintechs is key for seamless, diverse payment options.

The evolution of payment systems, driven by customer demands for speed, cost-efficiency, and convenience, presents a remarkable opportunity. Banks, by investing in advanced digital platforms and data analytics, can offer seamless and personalized experiences, enhancing value for customers. Collaboration with fintechs and other stakeholders is a strategic move, broadening the spectrum of choices and flexibility for consumers. This synergy not only meets but exceeds customer expectations, fostering trust and advancing the financial ecosystem into a more dynamic, secure, and customer-centric future.

Mainstream banks face the challenge of being process-focused as opposed to being customer-focused. Sometimes this is necessitated by regulatory frameworks put in place by central banks but other times this orientation comes as a result of sunk cost biases, short-term profitability pressures, and/or cultural divides. To bypass regulatory hurdles, mainstream banks could utilize SPVs to establish fintech wings or hubs that would allow them to collaborate with existing fintech or engage in more agile and disruptive product development without carrying any of the risks on their official books.

Any business that is not driven by customer experience is deemed to fail. The payments industry is no different. And like in other industries, the challenges involving customer experience are twofold: finding out what customers want and finding an innovative feature that customers will embrace. Before partnering with Fintechs we saw banks spending incredible budgets on features that failed to grab customers' interest. Collaboration between payments providers, banks, and fintechs, is spreading the risks and costs of innovation while increasing its evolutionary speed.

For banks, upgrading technology and infrastructure is essential yet challenging. They must transition from legacy systems to agile, cloud-based solutions for effective payment methods. Integrating AI, blockchain, and biometrics is crucial for security and operational efficiency in payment systems.

A lot of banks out there are still using outdated legacy or in-house systems and it's affecting their ability to adapt to the rapidly changing payments world. Costs and lack of resources can be off-putting for such large scale projects but they have to think of the potential business they could be losing as a result of their inability to adapt. Working with Fintech would be a good starting point and can prove to be cost effective in the long run. Being customer focused is essential, and that should include the ability to adapt to their needs in the ever changing world of payment.

Legacy systems, siloed processes, and fragmented data pose hurdles, impacting innovation and increasing operational costs and risks. The proposed solution emphasizes adopting agile, cloud-based, and modular solutions for quicker integration, scalability, and interoperability. Furthermore, leveraging emerging technologies like artificial intelligence, blockchain, and biometrics is recommended to enhance both payment capabilities and security. This aligns with the broader trend of technology-driven evolution in the financial sector.

My perspective about technology and infrastructure is that it is a vital factor for payment system innovation. Technology and infrastructure can enable or constrain the ability of banks to offer new payment solutions, to improve their efficiency and security, and to comply with regulatory standards. Banks have to deal with the challenges of legacy systems, siloed processes, and fragmented data that can limit their innovation potential and increase their costs and risks. To overcome this challenge, banks need to adopt agile, cloud-based, and modular solutions that can enable faster integration, scalability, and interoperability.

Outdated technologies in the market are a given in the corporate sphere, which one has to come to terms with. The players that will thrive in the market are those who can build a platform that quickly and efficiently adapts to all the peculiarities and limitations of legacy systems.

Navigating complex regulations is a major challenge in payment system innovation. Banks must proactively engage with regulatory compliance, adopting robust governance and risk management frameworks to ensure alignment with varying international standards.

The proposed CFPB’s Section 1033 rule-making regulation will introduce new protections for consumers to help ensure safe and secure data sharing. It will help consumers make better-informed decisions about sharing their financial data and put them in control of that data. However, these protections also mean new compliance obligations for everyone in the ecosystem. As demand for data connectivity grows, financial organizations, aggregators, and industry groups need to continue to make it easier for consumers to safely share their financial data via open banking APIs and comply with updated regulations such as Section 1033 of the Dodd-Frank Act.

Banks and financial service providers (PSP) should work hand in hand with regulatory entities to shape the regulations and compliance factors that allow innovation yet complaint ideas to be applied considering the customer and market needs.

I would like to add information risk and security to the list of regulations. Data protection has some intersection with those areas, but is an area for itself that focuses on data. Information risk focuses on sensible management of information security in an organization considering information, systems, infrastructures, networks, IT and business processes and people. With the evolution of cybercrime and complexity of our digital Infrastructures, these regulations are in fact the shields that keep the payment infrastructures in balance. I don't dare saying that they keep them safe, as there will always be successful attacks and other incidents.

In addition to the submission in the article, Banks and other players need to stay close to regulators and educate them on new and incoming innovations. This will give the regulators better understanding of where payments innovation is heading and they will be able to come up with or modify existing regulations to support the innovation while still protecting the consumer and economy. This educational collaboration is important.

In the face of fintech disruption, banks need to innovate while leveraging their strengths. Differentiating their offerings and collaborating within the ecosystem are strategic necessities for banks to remain competitive and relevant in payment innovations.

Banks have been and continue to be major players in the fintech market, and no startups in the next 5-10 years will be able to take on this role. The resilience of banks as businesses is partly achieved through their inertia. The most effective strategy for developing the fintech market, in my view, is not competition, but synergy between fintech startups and banks, where banks can take on the function of venture investors. This model has proven to be effective in the Russian market, allowing startups to harness expertise and financial resources from banks, while enabling banks to adapt innovations that have already been tested and proven effective.

O Brasil é um terreno desafiador para a competição bancária. Este cenário não se deve a uma suposta proteção do BACEN, mas também a insegurança jurídica, a vasta extensão territorial que exigia grande investimento em agências, e uma população que antes da pandemia, era de 60MM de pessoas fora do sistema. Isso levou a uma retirada gradual ou a uma presença reduzida de bancos internacionais. A abordagem inovadora do Banco Central (BACEN) para a questão da competitividade veio na forma de avanços regulatórios que facilitaram a operação de instituições de pagamento, como o Nubank, que hoje já é uma instituição financeira plena e explorou nichos que os bancões dificilmente atingiriam e apoiou a bancarização de milhões de pessoas.

The disruptive nature of Fintechs also entails substantial requirements in human skills, experience and expertise. This explains why related job markets are quickly evolving resulting in high movement between jobs as professionals and employers alike are constantly looking for that near perfect match.

The landscape of payment system innovation not only presents competition and collaboration challenges for banks but also prompts a fundamental shift in their role. Banks are compelled to transform from traditional service providers to ecosystem orchestrators. This entails not only differentiating through innovation but also strategically weaving partnerships and alliances to create a cohesive and interconnected payment ecosystem that benefits all stakeholders

Developing a coherent strategy and vision for payment innovation is vital. This involves aligning transformation goals with business objectives and customer needs, continuously monitoring performance, and adapting strategies as needed.

With the fast pace of changes and innovation in the world in general, Banks cannot afford to have a Static strategy. Strategy should be defined for a period e.g 5years strategy and reviewed at expiration of the time. This is to ensure company strategy continue to align with current realities and is able to take advantage of new technologies and innovation.

Tout dépend de l'ambition de ladite banque. Si elle se destine à générer de l'argent, il n'est pas forcément nécessaire d'innover dans ses systèmes de paiements. Toutes les banques ne souhaites pas forcément basculer dans ce qui n'est après tout qu'une fonctionnalité (le paiement). Cependant. Ces banques ne reposent que sur l'un des deux piliers qui donne du crédit à l'argent : En posséder. Tout simplement, sans autre besoin. En effet Posséder est ce qui anime concrètement une majorité. L'autre pilier sans qui l'argent est inutile c'est la transaction (le paiement est une forme de transaction de type commerciale). Et les banques qui oublient que l'argent à aussi pour fonction de circuler sont mal barrées pour les 5 ans à venir.

The strategy should be based on the company's mission, understanding the pains and needs of its consumers that the business aims to address. With a clearly formulated vision, it becomes possible to more accurately define Product and Market fit and, based on this, formulate an effective service development strategy. All communications, both internal and external, should align with the company's mission, and all participants in the process should share the company's values.

In the evolving payment landscape, banks should also consider the impacts of global economic changes, evolving customer behaviors, and the potential of emerging technologies like digital currencies, ensuring a holistic approach to payment system innovation.

While innovation has already transformed the payment experience of many users, it has not fully permeated to certain payment streams, like international remittances and other forms of cross-border payments. The Committee on Payments and Market Infrastructures (CPMI) has reported that cross-border payments lag behind domestic payments in terms of cost, speed, access, and transparency.

The biggest challenge in a bank payment system is ability to adapt to new payment methods and security around it. With emerging AI hacking is much more easier and that is one of the biggest issues.

Banks, while pursuing innovative payment products, must carefully manage risks to safeguard the stability of the financial system. The challenges include cybersecurity threats, data privacy concerns, and navigating complex regulatory compliance. Adopting a risk-based approach involves thorough risk assessment before product launches, implementing robust risk management frameworks, and fostering collaboration with stakeholders like technology companies and regulators to develop secure and compliant payment solutions.