​The payments industry is experiencing significant disruption. Customer expectations are changing, and financial institutions (FIs) are facing pressure, not just from fintechs, but also from non-traditional entrants into the payments ecosystem, including tech giants, retailers, utilities, and communications providers, who are all looking for ways to make payments easier, faster, and more convenient. At the same time, Canada is moving towards open banking, which will see third-party financial service providers use application programming interfaces (APIs) to access consumer data, including banking and transaction data.

Payments modernization is a critical priority

A key factor driving change in the space is the revenue associated with processing payments. Historically, much of this revenue has gone to the major banks, as well as to the core infrastructure providers of which the banks are often, though not always, shareholders. Now, digitization is making it easier for fintech players to enter that space, and they're creating and innovating in payments to gain a greater share of the revenue: buy now pay later (BNPL) is just one example of how these new players are developing innovative retail payment services that meet customer needs and provide a different short-term credit option in the payments process. As a result, FIs face strong pressure to modernize their payments infrastructure, products, and services in order to stay competitive and defend their existing revenue streams.

In addition, as Canada moves towards open banking and open data sharing, payments modernization will be essential. It will work in tandem with open banking to bring greater efficiency, lower costs, and more integration and innovation to the financial services ecosystem. This will make it easier for customers to purchase and receive offers from the ecosystem for products and services that are valuable to them, including the ability to move funds around in ways that make their lives easier. The use of data-rich transactions will also enable improvements to the sell side and related commercial processes, such as reconciliations.

Why is payments modernization essential? The volume of payments is growing steadily with subscriptions and pay-as-you-go services. In addition, real-time payments and being able to access funds owed in real time can make an enormous difference, not just to consumers, but also to businesses. With other countries having already taken significant steps along this path, modernizing the payments infrastructure will ensure that Canada can remain competitive in the global economy.

To succeed in the future, business models must include payments modernization

Efforts to reduce friction and increase availability have driven innovation in payments, such as real-time payment processing. But because real-time payment processing requires different information and moves money instantly, these types of payments pose a real risk of fraud. Ironically, in some jurisdictions, the security regulation changes that have been imposed have led to new friction points. As they work to implement these services, payments service providers will need to balance the need for trust with the need to remove friction.

The need for trust when making and processing real-time payments is leading to new rules for monitoring the movement of funds, and concerns about fraud are pushing consumers towards trusted brands. There is also a demographic link between trust and which payment providers people use: younger users – especially Millennials and Gen Z – often have a high degree of trust in large non-traditional payment brands. This also poses a demographic challenge for FIs, since these users often have closer relationships with these brands than they do with traditional banks.

Organizations need to transition core infrastructures, adopt digital channels, and innovate

The payment ecosystem of the future will be integrated much more deeply in the traditional business processes of organizations than it is today. Until now, organizations have tended to see payments as an ancillary capability. But today's payments aren't just data rich, they're data rich across elements of information that haven't traditionally been considered as part of the payment space. In addition to pushing payments front and centre, this will eventually make it easier for FIs to solve long-standing business problems, such as reconciliations.

It is critical that payments service providers determine where they want to go, whether from the infrastructure perspective, from the digital channel experience perspective or from the new and enhanced business and customer service perspective. They need to understand their immediate business needs and priorities. They must assess how they can become more competitive, increase their customer focus, and remain compliant. And they must determine what they want to do, and how they will transform.

With open banking gaining traction in markets around the world, Canada is working to determine what model to adopt, and how to balance legislative requirements and market forces. Open banking isn't just about payments: it represents a fundamental change to the way organizations view their data assets, and it forces payments service providers to address how they expose their data and functionalities to entities that lie beyond their traditional perimeter.

Digital identity is another emerging trend. By potentially helping reduce some of the newer friction points, such as fraud, digital identity plays a key role in enabling open banking and ensuring it works smoothly. Gaining access to this future ecosystem will depend on accreditation, and while it will start with banking, it will eventually include other sectors including utilities, telecommunications, and retailers. Successful players in this ecosystem will be those who can identify not only the insights they will gather from customer data, but also the value propositions they can offer to the customer. Innovation is thus a natural by-product of the push to offer better services or offers for the end consumer.

Strategies for a successful payments modernization journey

As FIs focus on payments modernization and look to adopt new international data standards and open banking, they will need to build the groundwork, perform extensive testing, ensure compliance, and meet customer needs. Here are some critical questions to consider:

  • Has your organization identified the key drivers for the strategic needs and priorities of the business? Are you looking to be more consumer-centric? More competitive with non-traditional players? Improve your ability to comply with new and emerging regulations? All the above, and more?
  • How will your new digital channels transform your customer services and interactions?
  • Will your core infrastructure transition happen in-house, or will you partner with one or more outside organizations?

Using a connected operating model can help organizations support this level of significant transformation. In addition to experience working with banks, service providers and infrastructure providers across many industries and markets, KPMG has the broad, global perspective that Canadian clients need.

By connecting strategy to innovative technologies and customer needs, KPMG helps clients modernize their payments and find success in an open-data world.

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