FastForward 2022: The major payments trends impacting financial institutions

Financial institutions (FIs) have been at the forefront of the payments’ revolution, and we believe this is going to accelerate in the coming years. COVID-19, which shut down large parts of the world, coupled with current geopolitical uncertainty, has reinforced the need for greater digitalization and transparency in global payments. At the same time, the financial industry is being impacted by a wave of regulatory requirements. Open banking frameworks, and a renewed drive to enable real-time, international transactions are fundamentally changing the landscape.

Below, we examine some of the implications for financial institutions, and how they are responding with greater innovation and collaboration.
 

Digitalization and automation

From creating digital banks, to making frictionless wholesale payments and facilitating cross-border transactions, FIs have been early adopters in the development of digital technology to meet customer needs. The Asia-Pacific (APAC) region has been particularly innovative in this area. Countries like China have jumped straight from cash-based financial systems to contactless and digital payments, bypassing the credit/debit card phase.¹ APAC now leads the world in adopting real-time payments,² with India’s Unified Payments Interface (UPI) and Singapore’s Fast and Secure Transfers (FAST) system being notable examples.

One of the major themes driving this change is automation. The growth of instantaneous payments for retail consumers is now bleeding into wholesale payments, with banks, broker-dealers and other institutions expecting the same levels of convenience and functionality. Forward-looking companies are increasingly collaborating to build connected ecosystems, which often includes banks, merchants, suppliers and intermediaries in one seamless network. This is being enabled by ‘hyper-automation’, or the deployment of multiple integrated technologies – such as robotic process automation, artificial intelligence and blockchain – to improve speed and efficiency.

Gartner predicts that the market for hyper-automation will be worth $600 billion by the end of 2022, growing by 24%.³

As well as the recent technological advances, another reason for the growth of connected ecosystems has been open banking regulations, which have facilitated much greater sharing of data between banks and non-financial entities via application programming interfaces (APIs). Imagine a major card processor that wants precise information on where its payments are and when they will be credited. By integrating with the API of its banking partner, it will be able to access the relevant data automatically. Importantly, it can then also make the information available to its merchant customers.

The migration to ISO 20022, will accelerate this process further. ISO 20022 is an international messaging standard, which allows structured, standardized and detailed data to be included alongside each transaction. This means that with each payment you also get clear information on the purpose of the payment. Not only will this support straight-through-processing and faster payments, but it also improves payment processing such as removing falls positives during Sanctions screening. 

Blockchain is another transformative technology. By creating permissioned, peer-to-peer blockchain networks, we have the potential to  exchange information  and settle transactions instantaneously on a 24/7 basis. Smart contracts and programmable payments  can also be set up, which execute transactions automatically, creating automated workflows.
 

Fraud and cybersecurity

As digital payments increase, the potential for fraud is also growing. FIs are having to continually innovate to stay one step ahead. The key is to not only block fraudulent transactions, but to proactivelyprevent them from happening in the first place. For example, J.P. Morgan’s fraud management system is constantly tracking for fake phishing websites, so we can warn our customers ahead of time. We have also built a solution called Wire Positive Pay, which allows clients to set criteria on their payments. If a payment comes at an irregular time or is above a certain threshold then, it will be stopped for review, helping to prevent bad actors from compromising the system.
 

Creating new revenue streams

There are is a significant opportunity to capture new revenue streams, for example:  

• C2C cross-border payment solutions such as PayDirect help FIs offer cheaper, faster, cross-border payments to their retail customers with minimal integration or technology uplift to settle payments via Realtime rails where possible. Blockchain applications, like J.P Morgan’s Confirm, which allows banks to pre-validate a payment before it is sent, can help reduce friction in payments

Meanwhile, the wealth of data produced by the ISO 20022 migration will create opportunities for value-added services. For example, by analyzing a transaction, it could be possible to offer a more efficient way to route the payment, saving time and fees.
 

The future of payments

In the coming years, we believe the different payment rails will begin to blur. Clients need to make any payment, anywhere, in any currency’ and it will be job of the financial institution to work out the fastest and cheapest way to make it happen. At the same time, as instant, 24/7 payments become the norm, executing the transaction will no longer be enough. FIs will need to be able to leverage data and analytics to offer a wide range of value-added solutions around the transaction, from dashboards to fraud and FX services. A key element will be visibility – giving businesses and consumers the information to manage their payments and finances better.

The international banking system has often been criticized for being opaque and convoluted. Digitalization provides an opportunity to create, a faster, cheaper and more transparent payments network. We believe this will have wide-ranging benefits for consumers, businesses and the global economy, as well as increasing trust in the global financial system.
 

Interested in trends? Explore the insights in the rest of the FastForward series