Technology Record - Issue 22: Autumn 2021

128 www. t e c h n o l o g y r e c o r d . c om A s the payments landscape continues to evolve, banks face growing competitive pressure from non-bank providers and challenger banks. With customers increasingly expecting speed, agility and flexibility from their payments, it has never been more important for banks to embrace innovation and differentiate themselves – and the possibilities presented by technology and open platforms can help banks gain the speed and transparency they need in order to compete effectively in this market. There is significant opportunity for banks to differentiate themselves using payments to create new value propositions and attract new customers – customers that increasingly expect speed, agility and flexibility at every opportunity. At the same time, banks face numerous threats in the payments landscape, from the obstacles presented by legacy infrastructure and a lack of data connectivity to competitive threats from new players in the market. The role of payments is fundamentally shifting. In today’s open economy, the way in which pay- ments are embedded into commerce, and into people’s lives, has changed significantly. And while the Covid-19 crisis has certainly played an important role in accelerating the shift to online commerce, this is a change that has been in pro- gress for many years. An important driver of change is, of course, increasing competitive pressure coming from outside the traditional banking sphere. Non- bank competitors and challenger banks are com- peting intensely in areas such as data, insights, customer experience and minimising friction. When talking about payments, it is helpful to dis- tinguish between the two functions of distribution and manufacturing. Financial institutions that focus on the manufacturing aspect of payments need to achieve a certain scale in their payments processing – but this is difficult in practice, given the high number of financial institutions in the market. At the same time, challenger banks and non-bank competitors that focus purely on distri- bution tend to be less heavily regulated, and also tend to have a much lower cost-to-income ratio compared to traditional banks. Moving forward, it is likely that the industry will see greater separation of manufacturing and distribution within payments, with some organ- isations likely to focus solely on distribution. It is also likely that the manufacturing side of payments could see greater consolidation in the future, not least due to the cost pressures associ- ated with payment processing, as well as the high regulatory burden they face. For traditional banks, it’s clear that a differ- ent approach is needed if they are to compete Levelling up payment innovation The payments landscape is evolving and traditional banking providers must embrace the changes to continue providing the experiences that customers want ANDE R S OLOF S SON : F I NA S T RA V I EWPO I NT “Traditional banks must revisit their existing technology and processes in order to differentiate themselves in this space and attract new customers”