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We will need to keep adapting and reinventing ourselves

At PA, we are always curious about where the payments market moves and how executives perceive and shape the developments. As part of this, we recently started the research for our 2020 Global Payments Report, including interviews with senior executives across the industry. While our full report will be ready in the second half of this year, we’re sharing our previews along the way. So, in this edition of PA Perspectives, we start with our interview with Tore Haarberg, EVP of Payments in SpareBank 1, the second largest financial group in Norway.

PA: What are the major payments trends you are seeing in the market and what impact do you think they will have?

Tore: One development that you cannot ignore, and this is something we have seen for some time already, is that the global card schemes are adapting and repositioning themselves with massive investments in the account-toaccount value chain. Both Mastercard in Europe, with the acquisition of Vocalink and Nets’ account-to-account based services as well as the partnership with the P27 Nordic Payments Platform, and Visa, with the recent acquisition of Plaid in the US, are evidence of this. They also have a very strong push on other products and new solutions.

PSD2 was meant to stimulate innovation and competition. In particular, it has been seen as a way to challenge the dominant position of the card schemes. However, the schemes have in fact become the players that perhaps respond best to PSD2.

And their transformation extends to the fight to win the mobile payments market. There we see partnerships between the card schemes and the global technology giants, offering payment solutions outside the traditional payments infrastructure. The card schemes offer 100+ APIs with functionality that you can connect to and use to improve your transaction data, with maps of where you have shopped, classification models for your spending patterns and so forth. Apple Pay and Apple Card, based on Mastercard, already offer this type of functionality. For the card schemes, Apple and Google Pay are like trojan horses where they must let go of a bit of their value creation, at least in the case of Apple, but it helps them maintain their position.

For Apple and Google, a credit card entry strategy is very smart because they don’t need account access infrastructure to do it. And with current NFC penetration, they immediately get a great reach. Furthermore, in the case of Apple, it has what it needs from me as an iPhone user, including my payment history from AppStore and everything I already have there.

I think the Apple Card is likely to be very competitive and could become the card people use for their day-to-day transactions. I hear sceptics argue with the strict regulatory regime in Norway, but that’s an obstacle which is likely to be overcome. If that happens, a large share of today’s bank account transactions would disappear into an invoice from Apple, or the partner bank.

Concerns about competitive practices and dominant positions have been raised, particularly with Apple, but it seems regulators have struggled a bit with this. Apple Pay or Google Pay haven’t been regarded as payment infrastructures in a traditional sense, and because of this, have kind of fallen between two stools. I think this could potentially reduce the efficiency of the whole payment system. However, there are signs the EU’s competitive authorities are looking more closely at this now.

PA: How do you see Norwegian banks meeting this development?

Tore: If you look at this from the position of the national card schemes, they are under substantial pressure in a world where the plastic card is on the defence and everybody is working to turn the card into an unnecessary intermediate step in the payments chain. This will be a real challenge, at least for the Norwegian payments infrastructure and BankAxept, in my view. It’s also challenging for Nordic bank-owned payment apps like Vipps. Allowing BankAxept to be used directly with Apple Pay would have been a game-changer but something that seems unlikely to happen, at least in the short term. We will need to keep adapting and reinventing ourselves to ensure the propositions are attractive both to customers and merchants, but also to the banks, compared to the card scheme offerings.

In SpareBank 1, we have also been working directly with the large retailers to find new solutions. For example, we are currently testing an account-based payment solution together with Coopay. This is an initiative that truly answers the PSD2 challenge. However, implementing account-based solutions based on PSD2 is not a walk in the park. From a regulatory perspective, there are a lot of things that need to be put in place, delegated Strong Customer Authentication (SCA) being one of them. It’s really complicated, and we have almost had a weekly dialogue with the FSA to finalise the solution. Everybody wants to make it work but it’s so hard.

“I hear sceptics argue with the strict regulatory regime in Norway, but that’s an obstacle which is likely to be overcome.”

PA: How do you view the advent of real-time payments in this picture?

Tore: Real-time payments will be very important in this context. What makes real-time solutions interesting is that they allow us to add substantial value for a wide range of customers delivering both services and physical goods. There’s no reason why these shouldn’t get their money immediately, as long as the goods have been delivered.

We see the number of such use cases growing and it’s good we implement this in Norway now because, in this particular area, we have lagged behind.

PA: What are the biggest consumer pain points in payments? Are there other pain points you think should be solved for retail or corporates?

Tore: The first thing that springs to mind with regards to the consumers is that there are still a lot of improvements that can be made to the customer experience.

In SpareBank 1, we are looking at the incoming traffic to our customer contact centre and seeing there are still a substantial number of what we see as “unnecessary” service requests. That’s a paradox. We have a massive focus on digitalization and self-service solutions but still a lot of people call us and engage with us through chat to solve questions and issues they have with the payment and ID solutions. So, to create solutions that make the user feel they’re in control and secure, that’s an area where we invest a lot currently.

With regards to invoice payments, simplification is still what it is all about. In some cases, just to explain and demystify the terms properly would be helpful. And the solutions need to be really intuitive. For example, we saw that few customers used the invoice scanner in our mobile banking solution even though we had made all kinds of instruction materials and videos to promote it. So, we started experimenting with the user interface and moved the camera icon a little bit lower towards the middle. The result was that the traffic shot up! It sounds very trivial, but we come back to the fact that it must be very intuitive.

In my view, there is also a big potential to improve the customer experience for merchants and payees. This is an area where the banks perhaps haven’t invested as much as they should have over the years. There are several interesting Fintech-based initiatives in this area trying to improve the offerings, and we are also looking at these.

PA: What do you think about the on-going market infrastructure initiatives and how much space will these occupy in the years to come?

Tore: I think they will take up a lot of space in the years to come. There will be a need to further develop Norwegian infrastructure from interbank clearing to end-user services. Standardisation and simplification will be key. A standard like ISO 20022 will be an enabler for future efficiency and improved services but require substantial attention and resources.

The Nordic P27 initiative seems to be running its course. And although Norwegian banks decided not to join, our infrastructure company Bits remains part of the Nordic Payment Council, so we participate there. And with Mastercard’s purchase of Nets’ account-to-account business, there is a new dynamic on the supplier side that we will need to understand the impact of as well.

I also think it is interesting to watch how various central banks are responding to market developments, considering their own positions going forward.

The US Federal reserve has decided to build its own instant clearing and settlement rails. And Sweden now joins the TIPS platform for instant payments. Furthermore, you have experiments with central bank-issued digital money. And in Norway, the Norwegian Central Bank has been very active in the Norwegian instant payments project.

Overall, central banks seem to analyse market developments and more actively adapt their positions in what they deem to be the longer-term interest of society.

PA: Finally, what’s the future world you believe in? Where do you think the market is going?

Tore: Well, that’s a big question. However, what strikes me is that we have been very “gadget-oriented”, for example by implementing watch and wristband payments, and focusing on the importance of “being present where payments are made”. However, I see us moving toward a world where the mobile phone will be at the absolute core.

Again, this may sound trivial, but it has become the device where you keep everything, and you bring it with you everywhere. It is a hub for a lot of services, and I can’t see why it shouldn’t play the same role in payments to orchestrate all our day-to-day financial transactions. Building on that, I also think we should be moving to regard the smartphone itself as a financial infrastructure component, with the implications that has for supervision and oversight.

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