Embedded and invisible payments with reduced friction is on the horizon for retail payments, but players across the chain must not forget why there is friction. Santander’s Chief Payments Officer Paul Horlock dives into what’s next.
With over 20 years of expertise, Paul Horlock has worked as the chief executive of Pay.UK at a crucial time for faster payments, BACS and cheques in the UK retail and commercial banking market and delivering key market innovations such as Confirmation of Payee.
He talks to Anjana Haines, The Payment Association’s editorial director, about the future of banking and retail payments.
What will the future of retail transactions look like over the next five to 10 years?
If experience has anything to go by, retail transactions are becoming more embedded and invisible to the customer. There’s a definite drive to reducing the friction and giving customers added value in the way that they transact, because the transaction itself can be a bit of a benign process.
And, if you’ve got loyalty opportunities built into the transaction, like a customer experience or gamification that could be interesting or exciting, or it’s just in the background and we won’t have to worry about it, then that’s where we’re going.
The challenge for me, though, is for that to happen, there needs to be good alignment between the players in the end-to-end chain. And let’s be frank, not one person can answer all those questions, despite some of the mega brands in the world thinking they can create their own currencies.
There are a number of different players here in terms of funding the transaction, fulfilling the order, being able to identify the customer, and being able to move the money from A to B, safely.
We need to coordinate the strategic development across those different players. As we get into the fulfilment of a customer requirement to be invisible and embedded, then we’ve got to get better at doing it – we tend to trip ourselves up in the process.
Where do you see the opportunities in retail payments and transactions?
We’re seeing a 15% rise month-by-month in faster payments, because there’s a demand for that. Account-to-account activity is efficient and effective.
From a merchant point of view, there’s a better price point, often no price point. But we have to be careful that we do it in the right place, that’s right for customers with the right protections around it, for the right type of activity.
Personally, for important purchases I’ll defer to my credit card, because I’ve got section 75 cover that I don’t get with account-to-account payments. But if I’m buying groceries or small items online, I’d be very happy to do account-to-account.
Now, the question is, why do we need a card if your fridge is going to start to order your milk, and if your washing machine is going to work out when it needs washing powder? That’s a great opportunity for machine-to-machine payments on an account-to-account basis; with the appropriate consents of course.
So, the clearing is real time, liquidity is real time, and we do it in the most cost effective and efficient route possible. We can see some real growth in that activity, it just means we have to start to develop the right products for that kind of capability.
At the moment, I think we’re still light in that. As a bank, we provide single payments via a banking app. We’ve not – as an industry – really worked with our corporate customers on how we can provide account-to-account in some of those niche more effective areas for those kinds of machine-to-machine business transactions.
What do you see as the biggest risks, particularly for banks, as retail transactions evolve?
Data is king, and visibility of data allows us to provide security and protection to customers. There’s a danger the more we embed, the more we try and make them invisible, the harder it is to deal with that data or understand exactly what behaviours are being undertaken and our ability to model customer behaviour. Customer intent is crucial for us to understand whether we are supporting them, whether we should help them by questioning their activity or interceding in that process.
APP has been a great example of where banks are working incredibly hard to help customers in monitoring activity and stepping in if they think it is wrong. Now, on a more automated basis, and a higher level of frequency, the level of liability and potential and downside for banks can be huge.
; banks have an obligation to provide the services at the cost point that we’ve agreed with the way that we deal with the schemes, with the regulators, and within open banking, and we do have an obligation to protect our customers and to protect our franchises in a way that we don’t introduce more risk into the system.
We have to be very careful that we manage systemic risk end-to-end. It’s not just about increasing the opportunity and customer experience; we have to balance that out between risk and customer opportunity.
What about the global perspective? Many retail transactions and payments are cross-border. How do you see innovation and collaboration working on an international scale?
We are talking internationally as individual firms on how to evolve. I’ve been talking to The Clearinghouse in the US about their IXP activity that they’re undertaking. We talk to our European partners within the Santander group and to our South American partners, about things that are going on internationally.
There was a speech [recently] from the Bank of International Settlements, talking about the opportunities that banks have around developing their own tokenised issuance capability – that actually aligns with the work the UK is doing in looking at the opportunity for a ‘Regulated Liability Network’, and a number of banks in the UK are exploring that right now. It supports the view that we can create a distributed network that could allow us to then issue our own coins.
That’s happening firm-by-firm and internationally and joining up with the institutions that are guiding policy around the world, but from a firm basis, not necessarily from a regulator basis.
Do you think the G20 is the right platform for that global collaboration, or do you think it’s the FSB?
Well, it’s funny, isn’t it? There’s a few of us who could quote what the G20’s ambitions are. But again, you’ve already said there’s another one, the FSB is looking at this, who else is? So, there’s a point at which it’s difficult to reconcile the breadth of expectation and then look at what you’re doing across your own desk and get on with it.
Although not intentional there’s a lack of international coordination which sows the seeds of people ignoring it, and just getting back to their domestic agenda. We’ve got to agree between us what we’re going to look at and how we’re going to support those institutions.
If we don’t talk to each other about how we’re going to coordinate, we’re going to make our own minds up rather than coming up with a joined-up partnership approach.
In terms of retailers getting on board with CBDC payments, do you expect retailers to be reluctant?
We don’t know what the business case is for CBDCs – it’s not clear.
If you look at some of the wording in the consultation, it talks about the banks and other providers having to work out how they can cover the cost of providing wallets and to cover the cost of those services, we’d have to work that out with retailers.
What’s the commercial model to provide equitable customer protection against what we do in the card model today? We must look at the lessons we’re learning from APP because there’s no customer protection in faster payments that would equal the card model.
That starts to add a whole layer of cost and complexity on top of an already potentially difficult to deliver brand new way of doing business; people may question why?
If you look at Project Rosalind; I went to global showcasing event, where a number of participants were asked to illustrate the use cases to demonstrate the benefits of CBDC. From my view, the majority of the use cases you could do with what we have available to us today.
The challenge is how do we get the right API capabilities, the right connectivity, especially leveraging the things we have today, and build the right customer protections. There are certainly some interesting opportunities in the field of ‘programmable payments’ and I’m sure that’s where exploration can focus to find value.
In the response we gave to the bank on the initial consultation we raised, as an industry through UK Finance, a big question about customer protection. I can’t see that this has really been answered in the consultation. So, we’ve got a long way to go to understand how any of that could compete with a really mature card model that works very well for customers.
What’s the next big step in making progress?
We’ve got to work out how we get better at partnerships between the banks, the fintechs, and the regulators to understand what is the customer outcome we’re looking for? We can all get some benefit out of that; we can all build commercial models if we find ways to give the right answer, and outcome, to a concern.
What we can’t do is come up with solutions and then go hunting a problem. We’ve got to be going to the customer and ask what they need. What do we need to fix for you? Then, look at how we leverage what we’ve got available in front of us.
That means making better use of the investment we’ve already made today, better use of the technologies that are available to us, and really thinking hard about how we build a narrative and iterate improvement over the coming years.
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