The innovation and trust crossroads: Striking a balance in payments

Payments also sit at the intersection between banking and technology – making this one of the fastest-changing areas of finance. Tech giants and FinTechs are already significant players but, for now at least, they still rely on interoperability with established national banking systems.

This makes payments a highly innovative corner of banking, with digitisation accelerating the seamless embedding of payments into more transactions. The speed of change is further reinforced by regulatory and political initiatives aimed at fostering faster and cheaper payments.

In this competitive environment, incumbent banks face both threats and opportunities. On the upside, the critical importance of trust gives banks a potential advantage. Our Vision for Banking report suggests that banks enjoy stronger public trust than technology providers.

Even so, there is no room for complacency. Consumers aren’t only seeking reliability – they also value convenience. This is where new entrants from outside the banking industry typically focus their efforts, often outcompeting banks in their ability to provide seamless online experiences.

Looking ahead, incumbents face a growing risk that merchants and consumers will gravitate towards providers that offer the cheapest, easiest forms of payments. The challenge is heightened by Open Banking, which has lowered barriers to switching. In fact, many UK consumers are already using multiple payment providers.

Incumbent banks must address this threat head-on if they are to avoid being overtaken by technology specialists. They need to develop a pro-active, innovative approach to payments, delivering solutions that make in-person and online purchasing as convenient as possible for users.

Fundamentally, when payments do fail, banks are at high risk of reputation damage.

Progress will require a change of mindset for banks, which are often more accustomed to focusing their payments spend on regulatory compliance rather than on maximising commercial opportunities. This shift is illustrated by the EU’s regulation on Euro Instant Credit Transfers, which requires EU and EEA payment services providers to offer Instant Payments within the Single Euro Payments Area (SEPA) by November 2025. Instant Payments feature instant settlement 24 hours a day, which will require banks to develop new, always-on, 24/7 operating models. As the differentiated value for consumers from the Instant Payments use case is not yet clear against existing products, banks are only focusing on maintaining compliance while delivering change that could impact existing services.

So how can banks transform their approach to payments innovation and develop more convenient payment experiences?

1. Become more product led, based on an understanding of the payments value proposition

Banks must shift their focus from traditional methods to a more product-led approach. This means understanding the evolving needs of customers and creating payment solutions that are not only innovative but also add real value. By concentrating on seamless customer journeys and leveraging data insights, banks can develop products that meet the demands of the “always on” environment, ensuring they stay ahead of the competition.

• Take a customer-focused approach, concentrating on what users need in today’s “always on” environment rather than what they have had in the past.
• Ensure that new products have a clear use case that creates customer value to avoid wasted investment, this includes looking beyond just the payment to what both payee and recipient are looking to achieve, as this may identify untapped opportunities.
• Devise customer journeys that are as seamless as possible, then design the processes that will enable them to happen. Look to embed payments into existing customer journeys for financial products.
• Give customers the options they need to make their purchase easy – but keep choices simple and tailored to the customer segment.
• Identify the data that new payment processes will generate, and how this can be harnessed to add further value for consumers.
• Accelerate payment innovation by reducing the number of steps in the product development cycle, focusing on the minimum viable product (MVP) and iterating with customer feedback.

2. Build trust by reinforcing customer protection

Trust is the cornerstone of any successful banking relationship, especially in the realm of payments. To build and maintain this trust, banks need to prioritise customer protection by understanding what they value most in terms of security and reliability. Going beyond regulatory compliance, banks should proactively implement robust fraud prevention measures and transparent communication strategies. This approach not only safeguards customer interests but also enhances the overall payment experience, fostering long-term loyalty.

• Understand what protections customers value in existing payments products to determine what protections should be considered to build trust in new products.
• Maintain trust by understanding how customers value data protection, continuity of service, and fraud prevention to aid customer retention and boost payment flows.
• Get on the front foot and go beyond compliance with regulation. Provide solutions for customer protection and fraud reimbursement that go beyond the regulatory requirements and implement them before the mandated deadline.
• Avoid outages and errors at all costs, but be prepared for failure scenarios; map your resilience vulnerabilities, design contingency solutions, and undertake scenario tests to validate their reliability.
• Be transparent, communicate with your consumers in a timely and consistent manner to quickly rebuild trust in the event of a disruption.

3. Balance the competing priorities of innovation and trust with the right technology investments

Maintaining customer centricity requires technology that is highly adaptable and allows for open sharing of data to provide embedded and tailored products. It also requires highly resilient technology with strong security controls to maintain customer trust.

• Leverage the existing expertise from organisations that provide best-in-class products that already lead with customer centricity.
• Adopt delivery models that can continually reprioritise delivery to meet changing customer needs.
• Deliver highly integrated technology that has the ability to determine a single view of a customer.
• Invest and migrate relevant services to cloud-based infrastructure to improve technology adaptability.
• Be on the front foot in leveraging the opportunities and mitigating the risks of emerging technologies such as AI and blockchain.
• Adopt best in-class resilience and security controls to reduce the likelihood of failures.
• Avoid concentration risk across technology and infrastructure providers to reduce the impact of failures.

Incumbents need to strike a better balance between innovation and risk if they are to enhance payments convenience while maintaining high levels of trust. Precise solutions will need to be tailored to each institution’s strategic priorities, risk appetite, and market position. Above all, banks need to step out of their comfort zone, behaving a bit more like challengers and a little less like incumbents – transforming their capabilities without disrupting existing services.