The more things change, the more they stay the same. Looking back at 2021 – which promised to be the year that the industry realised the full potential of data-driven transactions, instant payments and cryptocurrencies – it is clear that although there is consensus on the direction of travel and the opportunities, progress continues to be hamstrung by familiar challenges.
Banks remain constrained by existing infrastructure and technology, demonstrating that the time for waiting has passed. Now is the time to prioritise the long-term revenue opportunities and build the capabilities needed to realise them safely and quickly.
As we look to 2022 and beyond, seven key trends mean that potential is starting to be translated into action.
1) The rise of agency banking and Banking-as-a-Service (BaaS). Strategy Director – Toine van Beusekom
In 2022, we’ll see the agency banking industry start to catch up with the embedded finance market, and the realisation that payments as a service requires a banking license. At Icon Solutions, we don’t believe that technology is the answer to every question. Hiring a Silicon Valley hotshot seldom solves the root cause of why change is so slow, as tactics without strategy is the noise before defeat. To effectively transform, the right technology must be coupled with a profound understanding of the business process that translates into a pragmatic, navigable roadmap for change.
2) Banks are working out the actual cost of transactions.
Banks don’t know their actual cost per payment transaction. 2022 will be the year they find out. And when they do, it will be too high by at least a factor of two. This means scrutiny will shift from change cost to run cost. Consequently, banks will need to understand their payments estate and build a target and transition roadmap to immediately address these unsustainable cost challenges and deliver wider value.
3) The beginning of the end for core banking.
Any bank that’s been around for 10 years or more (i.e., most) invariably has some form of legacy core banking platform that is no longer fit for purpose. Yes, transitioning to something more suitable for today’s real-time, always-on world is a marathon not a sprint, but banks have been stood pondering on the start line for many years already.
Yet, banks are finally reacting to the starting gun and it’s clear that one size doesn’t fit all. Some banks are spinning up new world architectures, often leveraging cloud-based BaaS platforms and proving it in discrete parts of the business first. Others are de-composing their existing core banking estates, breaking the ‘elephant’ into bitesize chunks to either re-create in new, domain-focussed, micro-services built in-house, or to enable third party BaaS components into a heterogeneous, API-enabled, plug-and-play architecture.
For most banks, these are long, hard, yards of change. But this could be the year that core banking as we know it really begins to change, or good.
4) Impending card-mageddon.
Request to Pay has quickly become one of the most talked about initiatives in the payments industry. From Icon’s recent research, it is clear it has the potential to reduce costs, provide real alternatives to traditional payment options and increase visibility and transparency. This promises to change the way we pay.
Take merchants, who have been trying unsuccessfully for years to circumvent card rails to lower costs. Many in the industry see Request to Pay as an opportunity for merchant’s to finally reduce their dependency on payment cards, as the combination of instant payments rails, open banking APIs and Request to Pay services converge to drive consumers towards cheaper account-to-account (A2A) based payment options at the point-of-sale.
Could this be the sign that card-mageddon is heading our way? For banks, aligning technology with a clear strategy will be critical for Request to Pay services to realise their huge potential.
5) Time for some action on leveraging payments data.
For UK and EU banks, 2022 will see the go-live of ISO 20022 upgrades for the Bank of England’s RTGS, the Eurosystem’s Target2 RTGS, and SWIFT’s platform for cross-border payments. While critically keeping focus on the infrastructure programmes, banks also now need to raise their sights to consider how they can achieve valuable business benefits by making use of the richer and more timely data, alongside open banking opportunities.
Inaction is not an option, with investment is urgently needed just to retain existing business and relevance, let alone generate new revenues or cost savings. The potential use cases for the data are many and varied, spanning improvements to a bank’s own operations and processing, as well as new or enhanced products and services for corporate, SME and consumer customers.
Banks will need to create prioritised plans for developing and launching data-enabled services, supported by an effective operating model, new skill sets, and secure availability of the clean data sources to feed the analytics.
6) Money launderers actually getting caught.
The inconvenient truth is that banks are losing the war on financial crime. Criminals are exploiting increasingly sophisticated tactics, customer behaviours are more complex and demanding, regulatory scrutiny is increasing. With the threat of huge fines and reputational damage looming, banks must work smarter to keep up, let alone get ahead.
There are advancements that we expect to see making a significant difference in 2022 enabling banks to find more criminals, faster. For example, machine learning detection algorithms alongside rule-based controls across both fraud and AML have huge potential to cut down on noise and facilitate better identification of potentially suspicious activity. Sourcing and continued management of data will continue to be a key area of focus to drive a more joined-up approach across ‘FRAML’. Cloud deployment architecture and the ability to leverage cross functional data stores will be an enabler for better data management. Improving data quality and currency moving from a periodic batch model to an event-driven approach will support the detection of suspicious behaviour closer to real-time.
This will not only reduce losses and meet compliance obligations, but also better protect end customers and the wider public from the terrible effects of financial crime.
7) Banks embracing low code approach as middle ground.
Banks have become increasingly frustrated with the inflexibility of change and the constrictions that heavy-code platforms put on them, stifling their ability to innovate and serve their customers properly. This is exacerbated by the war for engineering talent which has reached boiling point.
The advent of the ‘low-code’ approach offers an alternative, wherein deployables (such as payment flows, business functions, rules, you name it…!) can be defined and moulded in a highly intuitive, non-code language, often coupled with dynamic graphical representation, and where the code itself is automatically generated, reducing the reliance on engineer resources. This approach has been catalysed by the adoption of domain specific languages (low-code languages that pertain to a specific domain, such as payments).
What does this mean in practice? Well, change is simplified and accelerated. Banks are less dependent on engineering resource. There is increased alignment and transparency between business and IT in what is being built. And banks have the right tools at their disposal as well as the time to focus on differentiating their offering.
