05 June 2018

Europe: Open Banking and Regulation

Driving change and innovation

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Joanne Towers

Head of Payments Product, Europe

Michele Zaquine

Head of Payments Advisory, Europe

Europe’s dynamic digital environment, with the rise of Fintech companies, PSD2 and Brexit, is a theatre of change. Innovative payment solutions and adjacent propositions will be servicing customers business models that themselves are adapting to this changing environment. Europe the digital 'sandbox'!

Working Better Together

The changes and accessibility of technology, notably with API (Application Program Interface) technology will open the way to greater collaboration between banks and Fintechs. HSBC expects to offer multiple services through APIs in the near future, including but not limited to, payments and account information (HSBC and third-party banks) as both a provider and a receiver of information and instructions. The advent of open banking is also bringing an industry-wide shift to the adoption of APIs across the various channels that banks use to interact with customers. In the near future, APIs will enable an opportunity to seamlessly integrate with different banks, third-party payment providers and merchant service providers.

Banks no longer view Fintech as a disruptor, but instead as an enabler and HSBC is partnering with Fintech to allow us to strengthen our solutions with more integrated propositions.

HSBC has a multi-faceted Fintech Strategy that utilises a mix of collaborations, strategic partnerships and venture investments, along with a global Strategic Investment Fund that has invested in Fintech across Data and Artificial Intelligence, Open Banking, Client Networks, Security, Crime Prevention and Identity Protection. HSBC committed to spending over USD2 billion on Digital Transformation between 2015-2020 to enhance customer propositions, improve operational efficiencies and maximise value for their clients across all lines of business.

Open Banking – Real or Illusion?

Open Banking is a global trend with different initiatives across the globe. In Europe, there is both the Open Banking Regulation in the UK and PSD2 (Second Payment Service Directive). These initiatives and regulations, as the case may be, are emphasising security, innovation and open market competition.

New entrants can now focus on offering just a single proposition and connect to other service providers through APIs to offer additional services. With both the consumer becoming more digital and mobile in their approach to commerce and corporates now demanding the same, banks and non-banks will need to follow the trend. Tech-savvy customers are asking for financial services that are faster, more personalised, easily accessible and less costly. They are getting used to using non-banks for financial tasks that complement their broader payment experience or processes. Competition for the customer touchpoints and secure access to customer data is fiercer than ever, and players in this space will be required to not only think of specific transactions but to look more broadly at the full customer journey. For consumers, this might mean providing services that support their buying decisions. For corporates, this could mean a robust, integrated view of their full supply-chain management program, or how banks support them in their integrated payments experience for their customers.

Banks no longer view Fintech as a disruptor, but instead as an enabler and HSBC is partnering with Fintech to allow us to strengthen our solutions with more integrated propositions.

The rise of Real-Time Payments

Not only will the rise of open banking and APIs transform the payments experience, further adoption of real-time payments, for example, SEPA Instant Credit Transfer (SCT Inst) in Europe, will take us further in meeting the needs and demands of consumers and corporates alike.

Often seen as a solution for consumers only in Peer-to-Peer (P2P) payments, increasingly, with real-time payments taking centre stage, corporates are looking to see if the existing systems can be re used to enable real-time payments and faster, cheaper, more effective Accounts Payable and Accounts Receivable with Request for Pay solutions (pull payments).

Corporates have expressed how real-time payments are useful in several scenarios, for example emergency payout payment salary payments e.g. for contingency or seasonal workers, and emergency payroll; and in supplier payments where certainty of goods received is required before payment. With the growth seen in the adoption of real-time payments in the UK, and further afield in Singapore, India and China, real time will become the norm.

Over time, the introduction of Request for Pay services, as a means to collect funds instantly with customer authority at point of payment, is also expected to further drive customer behaviour and new innovative ecosystems will evolve.

Security and fraud remain high on the agenda for all stakeholders, and since real-time payments are irrevocable and the fact that there is little or no recourse if a payment is sent in error or fraudulently, the security around real-time payments must be robust to ensure adoption of these solutions.

Let’s Go Virtual

With Real-Time Payments becoming more acceptable, the need for instant clearing and availability of funds will require an instant reconciliation mechanism, which virtual account solutions are well positioned to address. Virtual accounts are seen as a complement to the digital agenda for transaction banking and in enabling corporates to achieve their objectives around real time, visibility and working capital optimisation. It is in this perspective that there is an increased demand for virtual accounts in the marketplace.

A virtual account is fundamentally a ledger record linked to a physical bank account that can be used by treasurers to more effectively manage working capital, while at the same time significantly reducing bank account fees. A virtual account offers similar functionalities as a traditional bank account but without the associated administrative burden and costs.

Many believe virtual account structures will be a convenient solution to address some of the pressures currently in the market, for example, as an alternative solution to notional pooling. Virtual accounts could provide a viable alternative to notional pooling and allow banks to save on regulatory capital costs. Virtual accounts also facilitate a variety of POBO and ROBO structures.

Example of a Virtual Account Structure

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