The payments revolution: the biggest changes to the transaction industry in the last 20 years

Daniel Verbruggen, Michael Bellacosa, Fred DiCocco and Matt Wells from BNY Mellon Treasury Services, examine some of the key factors and developments that have – and are continuing to – shape the payments industry. Originally published on GTNews.

Heightened regulatory requirements

Regulation has had the single greatest impact on payments in the last 20 years, with heightened requirements driven by two key events. The first was the September 11 2001 attack, prompting increased monitoring for banks of AML and terrorist financing. The second is the global financial crisis of 2008, which saw regulations such as Basel III introduced to help restore the balance in perceived risk versus confidence in leveraged institutions. This “double whammy” of regulation triggers meant that banks have needed to adapt to new requirements and dedicate significant resources to compliance. Indeed, regulation is the largest driver of costs for many banks in terms of executing and supporting payment activity.

The upsurge in government interest in the oversite of payments has driven bank focus somewhat towards meeting government priorities as opposed to business priorities. Yet, while the increased regulations have presented challenges for banks, it is important to note that regulation is working in tandem with the evolving market, and is crucial for the health of the global economy. Importantly, it can also help to fuel innovation.

Post-economic crisis, due to the combination of the heightened regulatory expectation, increased client demands, and new competitive pressures, banks began to recognise the need to evolve their business and became more proactive in modernising how payments are made.

Increased transparency

The financial crisis fuelled the need for far greater transparency across the entire payments process, including with respect to payment status and fee disclosure. And there has been a big focus on the resilience of payments systems coming from central banks.

Regulators have introduced new requirements, such as Dodd Frank and PSD2, in order to protect consumers and help ensure that charges are not levied out of proportion – and that has led to an unbundling of prices as well.

Yet, this need for transparency has prompted new innovation, and an enhanced level of service for clients with respect to access channels and the enrichment of payment information, including how transactions are initiated and reported.

SWIFT gpi, for example, is an initiative that aims to transform cross-border transactions – and significantly enhance payment transparency and efficiency. Its objective is to establish new service level agreements and global standards that will improve the correspondent banking sector’s ability to provide interoperable and transparent services. The first phase of SWIFT gpi is already live, with customers now having the opportunity to fully track a global payment end-to-end. The next phase – which is currently in development – will include the ability to stop and recall a payment, the transfer of rich payment data, and a payment assistant to provide more intelligence at payment origination[1].

Market expectations

Client expectations have changed considerably during the past two decades, with new technology advancements acting not only as an enabler, but also helping to fuel increasing demands. Certainly, the rate of change that first occurred in the retail space opened corporate clients’ eyes to what might be possible for corporate payments. Alongside more convenient payment solutions, corporate clients are seeking improved efficiency, transparency and accessibility – with the end goal an overall enhanced transaction experience.

This has resulted in a shift in bank strategy – from more proprietary product-focused innovation to client solution-focused innovation. This client-centric approach has sparked greater collaboration between banks and clients. Banks have established innovation centres, for example, with the aim of working with clients on ideas and concepts that could enrich processes and add value to clients.

The rise of real-time payments

The adoption of real-time payment systems across the globe has been phenomenal in recent years, revolutionising payment cultures in their respective countries. Momentum shows no sign of abating, with the US Real-Time Payment (RTP) initiative launched at the end of 2017 and Australia’s New Payments Platform (NPP) set to launch in early 2018. What’s more, the SEPA Instant Credit Transfer (SCT Inst) scheme went live in November, with the aim to bring real-time transfers to much of Europe.

Regulation and market demand have driven the implementation of such schemes. For example, the UK’s Faster Payments initiative – implemented in 2008 – was introduced primarily due to regulatory pressure, while commercial factors (including competition from telecommunication companies) spurred developments in the Nordic countries[2].

The introduction of domestic systems is increasingly being viewed as the first step of the journey towards global real-time payments – a key priority for the industry.

Technology advancements

Financial technology, or “fintech”, has become a huge mobiliser of change in the transaction space, creating the opportunity for payments to be enhanced like never before. Increased automation and efficiency are key developments that are being introduced, as the industry leverages new digital capabilities.

Big data and advanced analytics are enabling banks to gain insights into client trends and behaviour, and a deeper understanding of client needs – subsequently enhancing relationships and helping to promote business growth.

Mobile technology has played a key role in transforming payments – and in turn is having a wider impact on society. The widespread adoption of mobile technology in lesser developed countries, where there is a high percentage of non-banked citizens, is helping to facilitate financial inclusion; with payments able to be made and received on mobile phones, without the need for a bank account. Kenya has been the poster-child for leveraging the increasing market penetration of mobile phones. The country’s Vodafone-developed money transfer service, M-Pesa, was implemented in 2007, and now serves over 30 million users across 10 countries, processing approximately 6 billion transactions in 2016 – reaching and empowering a whole new market of previously unbanked clientele.

Technology has also helped to promote a more collaborative approach within the industry in recent years, with banks now working more closely together with the aim of harnessing new innovations to deliver a more harmonised, interoperable and optimised global payments infrastructure.

New market entrants

The number of active fintech companies has soared in recent years, from roughly 1,000 in 2005 to over 8,000 in 2016[4]. This has meant that banks have not only needed to navigate an increasingly digital landscape; they have also had to adapt to a far more competitive market.

While these developments were initially viewed by many banks with a degree of uncertainty, banks are embracing fintech and the accompanying newcomers. Subsequently, we have seen banks and fintechs recognising the benefits of fusing their strengths – the exceptional digital know-how and affinity with the needs of millennials of fintechs, and the unrivalled grasp of the regulatory system, capital, market trust, and far-reaching client bases of banks – through bank-fintech partnerships.


The emergence of cryptocurrencies has been an intriguing development. A cryptocurrency is a digital currency that is issued independently of a central bank – and is therefore challenging the well-established, traditional infrastructure upon which payments have been built.

A great deal is still to be understood regarding the application of cryptocurrencies, and efforts are being made by the industry to explore their potential to add value to payments. BNY Mellon is currently involved in the Utility Settlement Coin (USC) initiative, working alongside partners including Deutsche Bank, Santander and UBS. USC is essentially a virtual money by which central banks can transfer money via blockchain.

By understanding emerging technologies such as cryptocurrencies, banks can look to build enhanced solutions to accommodate clients’ growing needs.

Open banking

While yet to come into full effect, a change is underway that is set to create a huge shift in market dynamics: open banking. PSD2 and the UK’s Open Banking Standard will require banks to share — with client approval, via application programming interfaces (APIs) — access to client accounts and account information with third party payment providers (TPPs), to support payment initiation services provided by those TPPs. The new measures will aim to ensure that all payment service providers are subject to supervision and appropriate rules. Open banking is designed to foster competition, and will make it easier for people to switch accounts and also likely lead to more fintechs entering the market.

Of course, it is impossible to say exactly how the payments landscape will unfold in the coming years as a result, but banks must be prepared for change. And while this fast-moving, competitive landscape could be viewed as a challenge for banks, there are also significant opportunities. For instance, open banking could create a platform for greater cooperation and collaboration between banks and TPPs to help enhance the digital payments space.

The last 20 years have seen considerable change in the payments industry and banks continue to face a number of different challenges to their existing operating models. The degree of change shows no sign of slowing down in the years to come, yet by embracing new developments and focusing on client centric, value added strategies, banks can ensure they are positioned to provide enhanced services – as client needs continue to evolve in the future.

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.

Related reading

Finance more evolution than revolutionary change