Are incumbents seeking comfort in infrastructure

A metaphor describing the challenges incumbent banks were facing at the dawn of fintech was whether the banks were destined to maintain the rails or operate the train in competition with nimble startups and tech giants. Even though every bank out there were and still is unified in their quest to resist disintermediation and maintain ownership of the customer relationships, actions speak louder than words.

Where challengers in the payment space like Amazon and Klarna focus their efforts on simplicity in the user interface, banks are investing in operational efficiency on the infrastructure level.

Nearing the end of last year, The European Central Bank (ECB) launched a pan-European service for settling electronic payments instantly. TARGET instant payment settlement (TIPS) uses central bank money to settle payments individually in less than 10 seconds. The initiative has been sparked by the growing popularity of digital, contactless payment services offered by big tech firms such as Apple, Google, Amazon, and Alibaba in China. According to a statement from Marc Bayle de Jesse, head of market infrastructure and payments at the ECB, “Banks in the eurozone are under pressure from tech rivals, and TIPS is a way for them to not give up the game to these digital players.”

The new service is offered at an attractive price for both retailers and consumers, with no entry or maintenance fees for account holders. The price per initiated transaction is set at €0.002 for the first two years of operation, with no charges for the first ten million payments settled on each TIPS account by the end of 2019.

The new service will be available to both consumers and businesses across the 19 states in the eurozone and will offer near real-time payments via smartphones, PCs and in-store payment points.

P27 is another cross-border payment initiative between major Nordic banks with a vision to create, within the Nordics, the worlds’ first solution for domestic and cross-border payments in multiple currencies. In a press release, Henrik Bergman, deputy director for financial infrastructure at the Swedish Bankers’ Association states that the collaboration reflects an effort to stay ahead of global technology giants like Apple and Samsung as customers no longer rely exclusively on their banks for financial services.

On a national level, Norwegian banks agreed to combine payment units Vipps, BankAxept, and BankID to improve product offering and wait for it… Prepare for competition against global tech firms.

This pattern tells a tale of an industry attempting to maintain control over the ecosystem through infrastructure innovation. On one hand, this makes sense as payments rely on cost-efficient solutions, processing speed and state of the art digital security.  The banks also have a long tradition of innovating on process efficiency and the infrastructure. The question is if this is enough when the customer relationship is up for grabs, or are incumbents building faster horses while someone else redefines banking as we know it. At the end of the day, if the only tool you are used to is a hammer, every problem looks like a nail.

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