Innovation, infrastructure, and reinvention. What does this mean for the future of banks? This episode on the payments podcast features Gareth Priest, VP of product strategy, discussing the changes banks are being forced to make to keep up with the changing landscape and the top 5 takeaways from EBAday 2019.
Rich Williams: Hello, thanks for joining us. I’m Rich Williams, host of the Payments Podcast. Following the Euro Banking Association event, held in Stockholm this week, this episode will explore the major topics which were uncovered from talking with subject matter experts who joined us there. Together, I have with me Gareth Priest, Vice President of Product Strategy at Bottomline Technologies.
Now Gareth, innovation, infrastructure, and reinvention were promoted as the three key themes at the EBA day this year. How do you think these things represent the wider industry at the moment?
Gareth Priest: Well I think they actually do represent the mood music that’s around the industry at the moment. There’s a… probably, for the first time in maybe 15/20 years, there are some pretty major tectonic movements that are happening in and around the world of banking, and I think they’re driving these sort of themes.
There’s all these open banking movements, PSD2 and what not. There’s challenges to the current payments model, with distributed ledger and new entrants and so on, and so forth. I think these three topics that they picked, or three themes, are very much the kind of bank’s reaction to that, that the infrastructure that they work around.
So, the world of payments, which frankly hasn’t changed that much, for quite a long time, that has changed underneath them, moving to real-time payments, moving to different types of cross border payments. So, they’re having to think about and look at the infrastructure that they work with, and their own infrastructure.
Innovation. I don’t think you can pick up a paper in or around our industry, or frankly even on social media now, where there’s some new kind of Fintech new app, some innovation that’s happening around banks, and banks realise that they have to react to that and they have to become more innovative.
That kind of goes to reinvention. I don’t think it’s just banks, I think we’re seeing some other major players, such as the Visas and the MasterCard’s, trying to reinvent themselves away from potentially just being an old card network, to being something different, in this new world. So, I think they’ve picked the right themes, and I think they’re fairly resonant, and probably will be, for a couple of years.
Rich Williams: Now if we just focus on banks specifically, I know you said it’s not just about them. With the central theme, or the messaging of helping these banks to thrive in this new open real-time world for payments, how well do you feel this comes across at EBA Day and within the industry in general?
Gareth Priest: I think banks have been kind of ready whipping boys for quite a while. Some of that, frankly, is a revolution with obviously 2007, 2008, but it has become easy to pick on banks and probably for them to feel a little bit like the world’s kind of moving in on them, whether it’s regulations that allow for new entrants, or challenges to how they make fees, and so on.
I think people have realised that if we want to have more financial inclusion, we want to have more offerings for customers, the banks have to be part of the solution to that. You can’t just work around them, for a variety of reasons, and that the industry, in particular, I think the financial technology industry, has to step up and help the banks.
The banks have to help themselves, but also the industry and those of us in financial technology, kind of have to help them with these innovations, infrastructures, and reinventions that they’re going on. They just can’t do it all themselves. So, I think it sounds odd to try and help a multibillion wildly profitable industry, but the reality is that all of our economies need banking, and they need it to work really well.
So, we can choose to kind of pick on it, or we can choose to kind of lean in and help take it through this revolution, but not necessarily overdependent on it. Allow new entrants and new things to thrive, but banking is part of that solution as well.
Rich Williams: Sure. So, it sounds quite a collaborative strategy that they need to adopt? How would organisations, or corporates fit into this landscape?
Gareth Priest: Well I think collaborations is a great word, and it’s easy to say, and really difficult to do, in regulated industries, for a whole raft of reasons. I think banks themselves are trying to make themselves and become more collaborative. I think if you follow this industry, and you follow the press around that, I mentioned earlier on, there’s always new Fintech start-ups, new kind of apps, new things that are coming along.
Well some of those don’t last very long, and some of those realise that part of the way to survive and thrive is to actually partner with banks, to kind of bring innovation to the banks, and banks are realising that perhaps they don’t have to do all the innovation themselves. So, I think that collaboration, as a theme, is important.
I think also within banking, they’ve realised that it’s not a zero sum game, to kind of calibrate. I think EBA Day is a good example of the types of conferences where people are starting to see less of, perhaps, the chest-beating by banks versus each other. They’re still competitive, but they’ve also realised that you don’t need to compete on how you connect to a payment scheme, for example. You need to compete on other areas around customer experience, and whatnot.
Rich Williams: Considering the amount of innovation that’s required and not leaving all the heavy lifting to the banks themselves, how do you feel a company such as Bottom Line, fits into this agenda?
Gareth Priest: I think forever Bottom Line has been a strong partner to banks, you know? We’ve got our corporate division that works directly with corporates, but even then, that has often been in collaboration with banks. We see that in the US frankly, with our digital banking group and our Paymode-X Group. We see it obviously very strongly here in Europe, working with our financial messaging, and also our PTX.
So, I think, for a long time, Bottom Line has been in that kind of collaborative mode with banks. So, I think it actually works really well for us, and in fact, it’s part of our strategy to lean in even further and to work with the banks to help them deal with the changing payments landscape, to help them with solutions, particularly where we can add value to them, where we add real expertise in the kind of corporate and small, medium enterprise solutions world that they’ve got lots of customers, we’ve got lots of great innovation and technology, it’s a great collaboration.
Also, I think, for banks, they know how to work with us, and we know how to work with them, and that’s kind of important, in this world of collaboration, it can’t just be on paper, it actually has to really work from a company to company perspective.
Rich Williams: Now we spoke with the team that attended the event, and they came back with five primary takeaways that everyone should probably keep at the forefront of their mind. Would you mind doing a bit of a deeper dive onto each of these points for us please, Gareth?
Gareth Priest: Sure. So, the team kind of fed back, terribly excited, great event, I think a great dynamic. They kind of summarised it as five kind of key things, or themes or points that they thought. The first one would be that regulation does not mean you cannot innovate. If I go through all five and then perhaps we can talk about each one?
Regulation doesn’t mean you can’t innovate. That collaboration, banks need to collaborate to survive. If you want to become a digital player, you really do have to change your stripes. Correspondent banking which has been under some pressure, has become even more competitive, but still is a great business, and still has a part to play.
The customer-centricity will be part of… when we think about innovation for banks, customer-centricity needs to be part of the central part of their value proposition moving forward. So, they were the five themes which candidly, apart from the correspondent banking, if you went to a technology-based, or user experience based conference, six years ago, these would have been the things that you talk about, you know?
Collaboration, so, mashups in the tech world, customer experience and user-centric experience, and so on, and so forth, these are all things that are things… they’re not new to the world, they’re relatively new to banking. So, I feel that banking is kind of coming of age, in that side of it.
Rich Williams: Great. So, let’s talk about regulation first then please, and why barriers shouldn’t put people off from trying to be competitive in this landscape?
Gareth Priest: So, I think there has been, for a long time, it’s an excuse. Banks can’t be innovative, because the regulations preclude it. I think that’s a lens issue rather than an actual fact issue. Now some of it is facts. So, banks are regulated. Actually, that gives them a leg up. They’re a trusted entity, they’re an insured entity, they’re allowed to hold funds, they’re allowed to be a payments provider.
So, there’s a series of benefits that come with that, but there’s also a significant series of overheads that come with that. An example would be, we recently had the payments barometer, and one of the questions we asked corporates, so, not banks, we asked corporates was, who’s responsible for sanction screening? Who’s responsible for making sure that the payment that the business is sending, doesn’t arrive into a terrorist or a criminal organisation?
I think it was something like 78% of businesses feel that’s the bank’s job to take care of that. So, not even as consumers, businesses feel banks have just got to take care of that stuff. So, there’s a responsibility, but there’s a privilege in that as well.
Back to the innovation. I think some of this is, there’s all these things I have to do, they have groups of people in banks, in compliance, in legal and whatnot, who try and enforce those things, and if they become the primary, they can become reasons not to innovate, or they can become barriers to innovate. That could be a really horrible user experience, because you can’t open an account or on board, or do something interesting.
Or it could be something more to do with the types of services they can offer, and their risk appetite. I think if they look at it, and I think one of the benefits of these new Fintech’s coming is, they’re showing that you can actually, especially with newer technology, you can work round that. So, you don’t have to turn up at a bank with sheaves and sheaves of paper to open an account, you can take a picture of your passport, your driver’s licence and what not, and send it across.
So, I think banks are starting to see that the regulation is a protective thing for them, and actually gives them a privileged position. If they look at it through the right lens and use the right technologies and the right partnerships and focus in the right areas, actually they can still create a very innovative, and actually probably a very important experience, which is it’s innovative, it’s enjoyable for the customers, but it’s trusted.
I think that’s probably the secret source for them ultimately, in the world of… there’s going to be a start-up every five minutes who can do something that’s cooler and sexier, but can they do it in a way that consumers and businesses feel that our money is safe there, and that it’s not illegal, and that it’s going to pass through all the various things that a government would expect.
I think you see a lot of new, even big entrants, Facebook would be an example, who are going to be surfing right on the line, and it’s part of the reason things like Bitcoin have struggled, because they’re not quite mainstream, so, it’s hard for mass adoption.
Rich Williams: That leads us quite nicely into the next key takeaway Gareth was that there needs to be more collaboration. So, what can they do? When I say they, I mean banks, what can they do to collaborate with other organisations to survive?
Gareth Priest: I think there’s so many conferences that I’ve been to, where that question comes up, or somebody presents something about kind of almost lecturing banks about needing to become more collaborative. I’m not blind to the fact, most of the bankers I have talked to and dealt with, they’re all incredibly smart people. So, they know this stuff. It’s less to do with they know it, and it’s more to do with just getting culturally attuned to doing that.
I think that is turning really quickly, and I think it’s like that kind of… the snowball that rolls down the hill. It was pretty slow to get going, but now, banks that traditionally people might not have thought of, real tier-one banks, are looking at things, and essentially they’re doing the kind of good to great, which is, what is the thing that we need to be… we are best at, and need to be really good at, and drives most of our economic engine, and what do we partner with, to help us to do that?
So, increasingly we’re seeing that, I think, across the board, and there’s loads of examples. There’s examples like Capital One, which is a pretty sizeable US bank, have effectively decided they’re not going to run and host any of their own systems. They’re putting it all onto Amazon web services. Now, for a small bank, that’s pretty much par for the course, that’s what they do. For a big, over $100b asset bank, to pick to do something like that, is a huge change.
So, I think they’re realising, and I think that’s one example, and it’s a big one. There’s loads more, I think, of banks saying, “We need to decide what it is that we need to own, and we need to be good at”, you know? Whether it’s the customer experience, the balances, the transactions, those types of things, and then, who do we partner with, to give a brilliant overall customer experience, where we can be the trusted provider, but we can use others to either take care of things we don’t want to do anymore, or add things that we’re not particularly specialist at.
Rich Williams: I think that example there of moving of banks such as Capital One onto AWS, was really good, in the sense that it picked out the cultural shift that needs to be made here. I’m going to move on to this next point and say it verbatim, you can’t become a digital player without changing the fabric of the organisation. Would you agree with this fully, or is there more to it than it might seem?
Gareth Priest: There’s more to it than it might seem. So, I agree with it on the face. I think you can’t pay lip service to doing this. I think lots of industries, not just banking, have done that, which is, you know, if we stick a kind of shiny website up, employee a couple of UX designers, and now we’re digital kiddies, that doesn’t really pass muster.
On the other hand, I don’t think banks suddenly need to turn themselves into Fintechs, and all the people who wore suits suddenly start coming in in jeans and brown shoes. I think somewhere in between. I think a really good example, both an inspiration, and a good example, would be the government digital service in the UK. So, for most people using the gov.uk website, that was seven years ago, they set that up, and it was an awful [experience 0:14:39] and you can’t imagine anything more bureaucratic, or led by compliance and whatnot than a government.
They came up, they set up a digital service, and they put it in the heart. It wasn’t a kind of little innovation hub on the outside, it was Martha Lane Fox who was the founder of Lastminute.com, was asked by the government to come up with this, and she came up with four pages about what they needed to do. Part of that was that you need to get specialists in, but they can’t be an adjunct, they have to be right in the heart of what you do.
So, for example, now, if you’re going to renew your British passport, you can take a picture with your Smartphone, you can do it all online. You don’t send anything in, apart from maybe your old passport, and ten days, two weeks later on, your new passport arrives. That’s a fundamentally different experience, and it’s not just because they got the website sexy, it’s because they aligned all the processes behind that.
So, I think when you talk about changing your stripes as a bank, it doesn’t mean you turn everything upside down, but it does mean that you have to look end to end for the customer process, start with that and say, “Okay, what’s that experience going to be like?” and make sure that all of it… there’s no point in having a great website, if when somebody uploads something, your compliance department then sends a letter out.
That’s the sort of thing that… so, you do have to think more… it’s not just a digital player, it’s more about a customer experience player that you have to become, to be able to operate truly in that world, if you’re going to compete with, or collaborate with, these kind of start-ups that don’t have physical space. They don’t have branches, they don’t have all that infrastructure, they don’t have places for people to go and hand stuff in.
So, by definition they design these amazing digital experiences, that are completely aligned end to end. I think banks have to pick which ones they’re going to do and do that, but line it up end to end. It isn’t just about what you do on the cover.
Rich Williams: We also learned that correspondent banking is set to become even more competitive than it is today, and reduce the margins involved in it, but it’s still going to be a great business to be in. What would your take on that be?
Gareth Priest: Oh, I think there’s a fairly big change happening in the world of cross border payments, which is traditionally met perhaps where you might see correspondent banking, to the fore. Who knows where it ends up, is the honest truth? I think this is a good example of one where if you think of correspondent banking as a supply chain, it has been traditionally relatively inefficient, fairly slow, relatively costly, not very transparent.
I think it’s a good thing that it has become more competitive and margins reduced, because that shows that we’re actually starting to move towards a better customer experience. Why should it take four days, or three days, or whatever it happens to be, for a cross border payment to arrive? Why shouldn’t you know how much it will cost you to send that?
You should have reasonable confidence that the money you think you’re going to send, arrives where you think you’re going to send it and for the appropriate amount and at the appropriate time. That, I think, is what has compressed correspondent banking.
I think those that do that well, and those that, if we go back to our previous conversation about sort of that digital, rather than digital, think about the kind of customer experience. Those that say, “I’m going to offer correspondent banking services to others” but they’re not going to be the old fashioned ones, they’re going to be… a silly example could be that I’m going to use more of an API type interface, that I’m going to work to line up the supply chains much better.
So, actually, when you send me a payment, we can pass it straight through really quickly, pass all the information back, which may compress the price they can charge, but if they do it well, it will actually reduce the cost of them doing it. So, they’ll still actually be a profitable business, and actually they’ll grab more market share by doing that.
So, I think this is more of a shakeup of it, frankly. So, it’s not that the business itself is going out, it’s the… you have to be pretty good at it now, to do it well, and I don’t think that’s a bad thing.
Rich Williams: Whilst highlighted as a key theme and we are going to go onto that in a moment, it has been throughout every question that we’ve been through today, and that’s the nature to have a sort of customer-centric, or a customer-first philosophy. Customers really should be at the centre of the value proposition. Speaking specifically about that, what can you tell us about the findings from EBA?
Gareth Priest: I think this has been around as a concept in banking for quite some time. It’s another one of those, like collaborate, easy to say, actually quite difficult to do. I’ll give you an example. A lot of banks, certainly in the corporate banking world, probably up until about five or six years ago, the experience that a corporate would get, would actually be your really actually experience what it means to be inside the bank.
So, what I mean by that would be, if you’re sending a payment to a bank, they expect you to hit a certain format and do things in a certain way, because that’s what their systems internally do. So, that’s not really customer centricity, that’s bank system centricity.
Or if you want to have a loan or you want to open an account, then you’re put through the mill of what their internal compliance process is, which would mean you have more of a compliance centricity, not a customer-centricity. So, I think they’ve all realised that that’s not going to pass muster for the long term.
Again, I think that’s the benefit, in some ways, of these new entrants, who come in and say, “We don’t have any of that legacy, what we care about is, making it really easy if you were to open an account. So, whether it’s a Revolut, or any of those other styling and whatnot, they’ve kind of… they’ve just torn the paper up and said, “This is how you open an account, and it’s really quick and it’s easy, and you never come off your mobile phone.” That’s customer-centricity, and it proves it can be done.
I think banks have said it, I think they’ve done that thing, a bit like innovation, “We’ll set up a customer-centric team or an innovation.” Kind of, we’ll almost outsource it over here, and put it in this… put baby in the corner kind of thing. I think the realisation is, this is a bit like that digital question, it’s an alignment of the whole bank.
So, that it’s not that you can’t do… it’s not that your compliance isn’t important, it’s not that operational risk is not important, it’s just that it has to line up with a customer-centric view, which also means… which is… this is a real tough one for the banks. If you’re a new entrant, you can decide, I just want to be really good at banking millennials. Or, I want to be really good at dealing with certain types of SME, or really good with certain markets.
I think if you’re a big bank, a high street bank in particular, you’ve been providing a plethora of services to everybody from students to retirees to large corporates. So, it’s really hard actually to now say, “Okay, wait a second, I actually now…” if you’re going to be customer-centric, you can’t genericise. You have to say, “What’s the experience going to be like for my small businesses?” That can’t be the same as the experience for my students and my retail customers and my high net worth.
It can’t be the same as my experience I might offer to my institutional customers, like other banks, and that’s quite different, for the banks to think through that, and make sure that they line their processes and systems and experiences up. I think they’re all moving along that way pretty quickly, frankly.
So, I’m reasonably confident for the industry that we’ll get there. It might take a bit longer for some of the bigger banks, but they’ve got the deeper pockets to invest in it as well.
Rich Williams: Gareth, really great feedback there, and thanks once again for joining us today.
Gareth Priest: Thank you.
Rich Williams: If you’d like to know more about the themes discussed during EBA Day, then please do get in touch via the usual channels. In the meantime, you can listen to more episodes on all things payments at the touch of a button, using your preferred provider. See you all next time.
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