It's Not A Choice: Banks Must Both Innovate AND Continue to Provide Basic Services

Many banks around the world want and need to innovate, but at the same time, must be inclusive and not leave anyone in the society behind. This particular challenge was brought into sharp contrast in the last 24 hours in the UK. Yesterday, I had the privilege to attend the UK Finance event, announcing the Experimentation Phase results of the Regulatory Liability Network (RLN) initiative aimed at bringing innovation into the UK payments market; thank you to R3, one of the project's technology partners, for inviting me. On the other hand, the new Financial Conduct Authority (FCA, the UK regulator) rules came into the effect today, requiring banks and building societies "to weigh up if local communities lack access to cash services, like branches and ATMs, and plug significant gaps".

Opening the proceedings at the RLN event, Bob Wigley, chair of the board of directors of UK Finance, remarked that the UK used to be the world leader in payments but is not anymore, and expressed hope that this project would reset the agenda for payments in the UK and put the country on the front foot again. RLN is a collaborative effort bringing together major UK banks, Visa and Mastercard, and several other partners such as EY, R3, DXC, and others, to explore how a new type of financial market infrastructure could deliver new capabilities for payments and settlement, including tokenisation and programmability, deliver economic value, and support innovation in the market. The project began in 2022 and went through several phases; the findings of the latest, Eperimentation, phase were published yesterday in three reports that I would encourage everyone interested in payments innovation to take a look at.

The Experimentation Phase of the RLN project delivered a new platform for innovation which consists of two main components:

• A multi-issuer Tokenisation Platform, that facilitated the issuance of tokenised commercial bank deposits, as well as simulated tokenised retail and wholesale Central Bank Digital Currency (CBDC), with programmability, and in a way that met the required privacy goals.
• An API and Orchestration Layer: enabling access to a rich set of 14 ‘foundational capabilities’, such as interoperability across various forms of money and different ledgers, locking/ unlocking of funds, and settlement finality.

For example, one of the use cases explored during this phase was how a home buying experience could be improved by ensuring that all related payments (e.g. auto-draw of the mortgage, transfer of locked deposit funds, payment to conveyancers, payment to estate agents, payment of stamp duty, repayment of receiving client’s mortgage, and distribution of the remaining proceeds to the receiving client’s account) are synchronised and coordinated with the transfer of title. The project also identified over 40 business benefits to various different parties, from simplified customer journeys to reduction in fraud, especially Authorised Push Payment (APP), reduction of failed payments cost, and boosting of the UK economy through increased payment efficiency.

The project clearly has a lot of potential and will continue, with one of the next steps being a two-day hackaton open to any teams that would like to explore innovative use cases that could be delivered on the platform. However, when asked during one of the panels about their top wishes for the initiative going forward, not surprisingly, several banks expressed hope that there will be a commercial framework that allows all participants to benefit from the investments, citing Open Banking as an example of how NOT to try and bring innovation into the market.

The desire to benefit from innovation efforts is completely understandable, not least because, unlike their fintech counterparts, banks must be inclusive and are required to provide the infrastructure that supports all members of society. Today, the new FCA rules come into effect, which put more onus on banks that might want to close down their branches; they now have to first assess how such a decision might impact access to cash and whether that might leave some members in the local communities vulnerable. Many reports today cite figures from Which?, a consumer association, showing that 6,000 bank branches have closed in the last nine years, with more forecasted in the next 12 months. In the meantime, the UK Finance figures show that the number of adults mainly using cash for day-to-day spending has risen again in 2023 to 1.5 million, having declined fairly consistently over the last 8 years, and especially during- and immediately after Covid.

One of the proposed remedies is to offer shared facilities -- Money Hubs -- run by the Post Office but staffed by representatives from different banks each day on a rotating basis, which would allow customers to get cash and make deposits. Over 80 such hubs have already opened with more promised. However, many banks are yet to decide what services if any beyond cash access can be provided by such hubs, and some of those hubs drew criticism for lacking basic things, like the ability to print out a statement.

There is no question that banks are key at driving innovation in payments. However, even when driving forward, banks must keep checking their mirrors to ensure they don't leave anybody behind.