Payment Innovation – Temenos’ Mick Fennell: Five payments market drivers for the year ahead

In the first of 2023’s Payment Innovation pieces, we heard from Mick Fennell, Business Line Director at Temenos, as he highlighted five key trends, and challenges that will drive payments systems activity in the year ahead. 

These initiatives influence both the timing and nature of change in our industry, and more, specifically, drive system transformation and modernisation programs within payments processing organisations. 

Whether you are a brand-new start-up operation seeking to build a profile in payment processing, or a long-standing market incumbent needing to keep up with market initiatives and customer demands, no matter where you are on your journey, some or all of these initiatives will have an impact on your business.

  1. Focus on efficiency will drive further growth in Software-as-a-Service (SaaS) 

Whilst this has always been an important factor, in the current macroeconomic environment, it is taking on a renewed leadership role when it comes to prioritising change. If your business case for change in 2023 does not seek to reduce or, at the very least, strictly control operational and business costs, then it’s highly likely to fail at the first hurdle.

For some this may mark a major shift in priorities, the drive to reduce costs through the removal of complexity, the standardisation and harmonisation of processes, the centralization of operations, and the delivery of improved automation and higher STP rates, has been producing positive results across the payments industry for many years. 

In addition to the drive for operational efficiencies, we’re now also seeing a big shift away from on-premise delivery to the relatively new world of cloud based deployment and SaaS based deliveries. These new approaches strike at the heart of the issue by providing a resilient, scalable, long term, lower cost alternative to legacy on-premise approaches. 

  1. New instant payments initiatives

Another major driver of change in system capabilities over the last five years, has been the shift to instant payment clearing services in many domestic markets around the world. Whilst this is not brand new, there are some new high-profile programs that are set to focus the minds on certain markets over the short term. 

In Europe, we’re seeing new instant payment initiatives taking place in multiple markets, with various initial rollout milestones being set for 2023.

In the Single Euro Payments Area (SEPA) – the payment-integration initiative of the EU – the European Commission has set an expectation that they will mandate all payment institutions to support pan-European SEPA instant payment services. This means that every bank must provide support for either the TARGET instant payment settlement (TIPS) service (from the ECB) or RT1 (from the EBA) at a pan-European level, which can be through a local, connected instant payment service, or directly through the ECB or EBA.  This approach will enable payment service providers to offer funds transfers in real time across the entire SEPA zone. 

Meanwhile, the SIC5 service in Switzerland, and the P27 service in the Nordics’ pilots programmes are expected to begin in 2023, and the New Payments Architecture (NPA) programme in the UK is also continuing to gain momentum. As a result, we’re already seeing many banks seeking to modernise and elevate their capabilities in preparation for the change over the next couple of years.

  1.  Growth in embedded finance driving Payments-as-a-Service offerings

Already a hot topic in 2022, the role of embedded finance is positioned to become an even bigger driver of change in 2023. Embedded finance enables companies across industries to cater for their customer’s financial needs at the point of context.  

Most importantly, it equips technology companies and retailers with the ability to provide a payment experience in a seamless and convenient way by providing financial services naturally integrated into the customer experience.

We’ve seen the rise of new BaaS and PaaS players offering various elements of the processing chains, and these new players are leveraging technologies such as APIs and cloud services to cement their partnerships with their customers.

Woe betides the bank that is not investing in the same level of technical and product flexibility and quality required to compete successfully in this space.      

  1. ISO 20022 SWIFT & RTGS rollouts

This feels like a never-ending story, but 2023 will be the year of the initial go-live deadline for phase one of the SWIFT Cross Border Payments & Reporting (CBPR+) program, as well as the revamped TARGET2 RTGS service in the Eurozone. 

We will get to see how disruptive these migrations will be, and whilst these are probably the two highest profile migrations taking place during the year, they are by no means the only such initiatives on the go.

Markets such as Hong Kong, Singapore, the US, the UK, South Africa, and more have various ISO 20022 based programs on the go, and so banks should be continuing to invest in their ISO 20022 capabilities, especially for supporting services like reporting and analytics. 

  1. Proliferation of cross border payment services

I don’t think it will have escaped many people’s notice, but there continues to be an ever expanding list of cross border payment services entering the market. Whether it is the traditional banks providing liquidity services in specific markets, traditional remittance networks with long standing payment corridors and retail businesses in place, or newer Fintech service providers offering niche propositions, there is pressure on payment service providers to offer comprehensive market coverage at the lowest possible costs.

In both the retail and corporate space, volumes for these cross-border payment flows are projected to continually increase beyond pre-pandemic levels. Be prepared to see banks investing in expanding the options for customers through onboarding a range of new cross border service providers, especially those smaller financial institutions seeking to compete with the global market leaders. 

There are other topics with cases for inclusion in this top five, such as Central Bank Digital Currencies (CDBC), and whilst one expects to see them competing well to make the list in coming years, 2023 is not the year for mass engagement on such services, hence it is these five trends listed above that look set to be the higher prioritised demands of the next 12 months. 

Innovation within payments will be explored in greater detail at this year’s SBC Summit Barcelona, which takes place from the 19-21 of September, playing host to an unrivalled speaker line-up of 450 industry professionals. To find out more about the event, click the banner below.

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