The pandemic has made users impatient. Older users are forced to navigate the digital world for their daily needs, while younger users are shopping online and expecting same-day delivery, thanks to e-commerce giants like Amazon.
That same expectation for speed now extends to the banking world, a sector marked by legacy institutions and a slow — but growing — effort to modernise.
Today, people expect things to be much more efficient, says Mick Fennell, business line director of payments at Temenos. “When you’re doing things online, we have very little patience. That means all of our [banking] infrastructures, all of the schemes and the processing, [need to] be much more instant and designed for real time, while at the same time become much more scalable.”
This requirement has pushed established banks to software providers like Temenos for software-as-a-service (SaaS) solutions.
Speaking to DigitalEdge Singapore at the Temenos Community Forum 2022 in London in May, Fennell says the Geneva-headquartered company has seen over 200% growth y-o-y in delivering SaaS solutions.
SaaS has become the larger part of Temenos’s revenue over the past five years, a proportion that Fennell thinks will continue to grow.
As such, Temenos partnered Mastercard earlier this year in a push for request-to-pay (RTP) — a secure messaging framework that lets billers request and manage bill payments instead of sending an invoice.
An invoice process typically involves up to eight steps, says Fennell, ranging from the biller grouping invoices into a batch, contacting their bank, which then contacts the payer’s bank to notify the payer through a mobile app, before repeating vice versa.
RTP simplifies this process by facilitating a “conversation” between the two parties, says Fennell. “What RTP does is create an additional standard process where the biller and the payer can communicate before the payment order is given to the bank.”
It puts the banks into the conversation... It gives insight to the bank beyond what they normally see.
As the payer has already confirmed the payment before the bank is involved, this reduces the number of errors and minimises the risk of fraud, he adds.
For banks, RTP offers a rich set of data points, says Fennell. “It puts the banks into the conversation where they are managing a secure communication between the biller and the payer, which could both be their customers. It gives insight to the bank beyond what they normally see.”
Banks can then use this new layer of data to offer other products and services. “If the payer rejects the payment or chooses partial payment, the bank could start to offer them products like credit services or a buy now, pay later [BNPL] service,” says Fennell.
The payments process is not an island, says Fennell. “When banks are modernising their payments capabilities, suddenly they realise that they’re going to have to modernise the rest of their [operations]. They’re actually starting on a journey, and I think most banks realise that. That’s why they need to pick a partner who can take them on that journey.”
‘Flavour of the day’
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In January, Temenos launched its BNPL service as an independent module in its Banking Cloud suite of products. This lets client banks plug-and-play BNPL services without having to build new IT infrastructure from scratch.
Any financial institution worth its salt knows that [BNPL] is not just a competitive advantage; it’s becoming table stakes just to be in the game.
“We’re pitching so hard for it because it’s the flavour of the day,” says Fennell. “It’s the thing that banks want to provide to their customers. Any financial institution worth its salt knows that it’s not just a competitive advantage; it’s becoming table stakes just to be in the game, to be able to offer those kinds of services to their merchants.”
The 2022 Global Payments Report by US Fortune 500 company FIS found that although BNPL accounted for only 0.6% of Asia Pacific e-commerce transaction value in 2021, it is projected to grow its transaction value share to 1.8% or US$78 billion ($108.94 billion) of regional e-commerce by 2025.
Singapore’s preferred payment methods (Infographic: FIS Global Payments Report)
Banks are taking note of shifts in payment trends, too. McKinsey estimates fintechs have diverted up to US$10 billion in annual revenue away from banks between mid-2019 and mid-2021 with BNPL offerings.
Historically, banks have been a little bit slow to the game.
BNPL will soon become a “very standard” offering by banks, says Fennell. “Historically, banks have been a little bit slow to the game. As BNPL fintechs jumped in, they’re perceived to be more agile. Certainly, the banks are looking to catch up now.”
But BNPL is an “expensive game”, says Dimitris Tsirikos, senior product manager at Temenos. “The BNPL providers that have high volumes of customers are still posting losses.”
Australian-listed BNPL provider Zip Co reported last August a A$652 million ($620.09 million) loss for FY2021 ended June 2021, a whopping 3,000% increase y-o-y from a A$20 million deficit in the previous year.
Tsirikos tells DigitalEdge Singapore: “At the same time, BNPL companies’ margins are shrinking because merchants are demanding lower fees.”
According to him, credit card fees of about 1.5% are still much lower than BNPL merchant fees of close to 5%.
The future of BNPL
With recent consolidation among BNPL’s biggest players in this part of the world, could anxious banks mount takeovers of the hottest fintechs? Though costly, that is certainly something that banks can do, says Tsirikos.
“When you buy a company, you buy them for two things: their technology and the customers that they bring,” he adds.
But the customers of BNPL providers are not mutually exclusive with those of traditional banks. BNPL is not a perfect substitute for a credit card, for example.
I can pay for my taxi using a credit card. The taxi driver doesn’t yet support BNPL. So, I don’t see a full replacement.
“It is more convenient for a customer to use a credit card as a payment instrument versus BNPL simply because there are more merchants,” explains Tsirikos. “I can pay for my taxi using a credit card. The taxi driver doesn’t yet support BNPL. So, I don’t see a full replacement.”
Instead of mounting acquisitions, Tsirikos touts Temenos’ BNPL offering instead. “The fintech’s technology is probably very good. But the banks are given other options by companies such as Temenos. Not only do we provide technology, but we also provide a solution that they can bring quite quickly to market.”
Temenos’ foray into BNPL was accompanied by a patented Explainable AI (XAI), which lets banks toggle a set of criteria with “soft and hard credit scoring”, while providing transparency into how decisions are made.
“When you give out a BNPL loan, it is an unsecured loan. It is important that these loans get repaid on time so you don’t face problems like the high delinquency rates faced by Klarna and Afterpay,” says Tsirikos.
What XAI does is find the right credit limits for each customer. “The nice thing is we’re not just quoting a number, saying a user can only spend 500 euros, for example. We’re also providing that information in plain language, such as: ‘We believe that number is 500 euros because your debtto-income ratio is high.’ It helps build trust with the customer and in this way, the bank promotes responsible spending,” says Tsirikos.