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How Will a Facebook Bank Impact the Payments Industry?

The recent news that Facebook is seeking regulatory approval in the UK to offer mobile payments through its platform is just another example of the rapid evolution in mobile payments; it is happening right across Europe.  In June, Denmark announced two cashless initiatives: the ability to pay with mobile phones in shops nationwide and the agreement to run a pilot in which only mobile payments are allowed where shops could refuse to accept cash payments. In the UK, Visa Europe reported that more than 37.8 million contactless cards have now been issued by UK banks, a 35% increase on the same period last year. But what does this mean for consumers and the established industry?

 

Over the years, we have transitioned from bartering to tender and cash, moving into cheque and card payments, with many countries now also embracing online and mobile payments. In fact, the value of goods and services purchased with a mobile device is expected to almost triple from £4.8bn in 2013 to £14.2bn in 2018, according to the Centre for Economic and Business Research.

 

In our recent report published  in conjunction with the Financial Services Club and VocaLink, we explored the state of the world’s largest payment infrastructures and how market conditions are changing the game. Overwhelmingly, the evolution of technology and in particular, the rise of online and digital channels, is having a significant impact. As cheque payments move towards possible extinction, the importance of mobile and smartphone usage, social networking and collaboration to facilitate payments is increasing. At the same time, security concerns around the cloud infrastructure used to underpin these services is diminishing – according to our research, security has been replaced as the top priority by mobile, with 79% of respondents.

 

While these mobile, digital and social changes are mostly impacting the front end of retail payments, to optimise customer experience, it is the back end integration of new payment channels that proves the most challenging. Co-operation between the many parties is central to the success of any new services. From banks to merchants, card issuers to payment processors, mobile operators to handset manufacturers, working together to develop a multi-channel payments process that is user-friendly is vital.

 

In addition, the report highlights that regulatory change remains at the top of the agenda; this is currently the biggest focus for the world’s largest payment processing infrastructures. Over 50% of banks consider this a priority as Basel III, the Banking Union, the Bank Reform Bill, Dodd-Frank and more are all hitting the banks hard this year. This is also true for the wider industry. The spotlight on payments resilience, the implications of ring-fencing on bank payment systems and the potential for account number portability are all pertinent issues in this market.

 

When it comes to providing payment methods through social media, security and regulatory compliance will be a big challenge that needs to be addressed. While many people will no doubt recognise the convenience of paying for goods and services through Facebook, such providers will really need to work hard to gain trust and ensure they have the right infrastructure in place to support it. Central to this is making sure that sensitive bank information is safely handled and stored, while reassuring customers that this is the case. Above all, making the entire customer experience as similar and seamless as possible to other, alternative and already tried and tested financial services providers such as PayPal will encourage consumers to adopt this new method.

 

If a Facebook bank became a reality, it is very likely that other big players such as Twitter will also muscle in on the action and in addition to the various cryptocurrencies that already exist, such as Bitcoin, it looks like the payments market is getting even more muddled not simpler.  While the emergence of new payments methods give more options to the consumer, it can become a nightmare for banks, third parties and investors to manage. For example, digital money like Bitcoin opens up possibilities for banking without central planners or a lender of last resort, where interest rates and reserve requirements are driven purely by the market. The transformation required to adapt to all these new players would be vast. It requires all parties and supporting systems to be more transparent, even more integrated, and work closer together to best meet the needs of customers.

 

There is a huge opportunity for the payments ecosystem to adapt and evolve in line with the digital transformation that is changing the rest of the world. Such change helps organisations to run differently and be able to compete in a market that is not exclusive to the banking sector alone anymore. But for this to work, those involved in the industry must build strong partnerships and act in the interests of consumers. At the same time, all payment providers must ensure that the customer experience is enhanced without compromising on security requirements and regulations that protect our money in the first place.

 

 

Tony Virdi is head of UK banking and financial services at Cognizant

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