Five Ways Digital Payments will Change Financial Services in 2023
The last three years have seen considerable change in how the UK financial services sector operates. The expectations of consumers have shifted, prompted by the pandemic and a need for better digital financial tools for a smoother customer experience. The inventiveness of fraudsters has also put another pressure on financial institutions. There are probably more than five ways digital payments will alter the way financial services operate in 2023 – but these are what we believe are some of the key changes to expect this year.
- Responding to the APP ‘scamdemic’
Fraudsters have already demonstrated their ingenuity, creativity and determination in 2023. Early in February, a consumer in Bristol reported losses of £8,000 in a banking app scam. He was convinced he was speaking to his bank, ushered through security measures on his app and gave the fraudster a one-time pass code to his account. His bank said he was wrong to give out the code, but eventually reimbursed his money.
It’s clear, therefore, that financial institutions and the regulators still have work to do to tackle fraudsters and ensure that customers are protected. The Payment Systems Regulator (PSR) is compiling a regulatory response to the current “scamdemic” of APP fraud across the UK. It will focus on the use of statistical fraud data, data sharing, and a host of prevention methods designed to ensure safety and innovation.
- Being clearer about liability and reimbursement
There’s another important facet of the case highlighted above. Where did the liability lie? In a case from December 2022, a woman in North Yorkshire also lost £8,000 to fraudsters claiming to be from her bank’s fraud department. In this incident she was not reimbursed.
Regulators are proposing different reimbursement models, with 50-50 liability gaining traction. Under these stipulations, the financial organizations responsible for sending and receiving the transaction will split the reimbursement costs evenly and make sure the customer is not left ‘out of pocket’.
But that does put the onus on identifying that there wasn’t gross negligence by the customer — where the injured party is deemed to have been careless in their actions with a failure to take care of their own funds.
In cases where the victim acts in good faith, it is likely they will be reimbursed with the split liability model. But when there are question marks over their behaviour or they do not follow explicit instructions from their bank, further investigation may be required. Setting out clear guidelines on what constitutes gross negligence will be an important task for regulators in 2023.
- Stepping up the pace on data access to realize the true benefits of Open Banking
London’s tube network was once a global leader in public transport. An efficient form of travel that linked commuters to all corners of the city was respected but has now lost momentum and is outdated, overcrowded, and lags behind the modern systems we see in other cities and countries.
The same applies to Open Banking: the UK was among the first to offer a framework, whereby financial institutions could share customer data directly with regulated third-party providers. Initially we saw traction with examples such as customers being able to view multiple bank accounts from a single app or website. However, the scope was limited and now the UK has fallen behind countries such as Brazil, where innovation is guiding decisions.
By falling off the pace, the UK has yet to see the true benefits of Open Banking, with many institutions holding back from offering full API access to third-party providers. While other countries are moving to a wider Open Finance model where data from a large pool of providers such as insurers, pension providers, cards, mortgages, telcos and others can all be aggregated for a customer to view and manage, through a single app or website, the UK is a way off this.
There has also been little progress in offering truly innovative services based on Open Banking. For example, services where access and analysis of bank account data enables customized insurance policies, greater access to other products or even promotes better healthcare decisions. Given the limited number of data sources available this is not surprising – it’s a chicken and egg situation, without the access to data the innovation cannot happen. The possibilities that Open Banking enables are vast, untapped and in many cases, currently beyond our imagination. To realize the benefits the UK needs to put the building blocks in place and step up the pace on access to data from a wider set of financial services providers.
- Ensuring the decline in cash doesn’t leave disadvantaged groups behind
Cash use is in decline across the country; ATMs are being removed; bank branches are closing. Generally businesses are more comfortable accepting card payments. Figures from UK Finance show a continuous decline in cash as a percentage of transactions. In 2006, cash accounted for 62% of transactions, in 2021 it made up 15%, and forecasts show just 6% of transactions to be made with cash in ten years.
Part of this switch to digital transactions is attributed to costs associated with cash. Using cash means businesses require a float, safe, and UV lights to check notes for authenticity. They must spend time acquiring the float, cashing up at the end of the shift as well as facing the risk of theft. Compared to this the transaction fees charged for card usage seems minor. Covid also put the dampener on the use of cash.
There is, however, an element of nostalgia that persists with cash usage and it’s important that the decline in cash is not seen as an attack on those without access to or the ability to use other forms of finance. In every corner of the UK, it’s clear that the biggest indicator of cash reliance is income, with older citizens also less likely to go fully digital. Currently industry discussions are focused not on the headline grabbing ‘banning cash’ but rather the effective management of a decline that is happening anyway, so that groups in society are not disadvantaged.
- Smoothing the customer experience through Request to Pay
Request to Pay provides a further tool for organizations to use within their collections journeys; the key benefit is the convenience to the customer of being able to pay without having to speak to an agent.
However, those organizations who benefit most from this emerging technology will seek to integrate this into a broader digital collections approach, as opposed to another stand-alone offering. In doing so, they will look to bring the capabilities that Request to Pay provides into an omni-channel, scalable and flexible collections approach that is now recognized as best practice.
Further to this, the ability for banks to see data from both sides of the transaction will provide important detail regarding customer behaviours and needs, which can develop their own decision making in line with Consumer Duty expectations.
Matt Cox, VP for EMEA at FICO