Vertical vs. horizontal banking infrastructure

Horizontal banking infrastructure

Back in 1980’s banks in the Nordic worked together when it comes to technology and payment solutions. In Norway we got “Bankenes Betalings Sentral” (BBS) (Banking Payment Central) a joint IT company to support payment between banks and their customers. In 2010 BBS was merged with PBS (Denmark) to make Nets as, and is now operating in Norway, Denmark and Sweden. As a result, payment in the Nordic was far much faster and better and efficient than anywhere else in the world. This has up to recently also given the effect that PayPal and other alternative payment platform has not gained high penetration.

The payment infrastructure was vertical, whatever bank you used they was linked to the common payment infrastructure. If you for example had you bank account in Spare Bank 1, and used a ATM from Nordea bank, it worked perfectly well. And the cost for the customer was very low. When banks customer paid in store and online in Norway, they used “BankAxept” a joint payment solution. Up to recently almost all customer payment in restaurant, shops and store used the POS (Point of Sale) BankAxept solution. In contradiction to for example Germany where you needed to use ATM from the bank you banked with. Today most ATM uses Visa or MasterCard, and the effect is the same as in the Nordic, only that cost of withdraw from ATM is higher.

The beginning of the end?

In the Nordic banks started to balkanize this strategy some years ago. DnB have their Vipps, Danske Bank have their MobilePay, Spare Bank 1 has their MCash, Nordea have SWIPP, and so on.

Even if they use Nets for payment in the back, the front seen by the shops and customer have changed. Grocery stores, shop and restaurants need to have multiple payment solutions at their cash and payment counter as different bank is not seamlessly connected. The result is that stores and restaurant need to choose what bank and POS to bank with. Banks compete with each other to have most stores, restaurants and online-platforms on their customer list. (at least in Norway) This increases stores cost and complexity. And worse it increases frustrate of banks customers, both the end private person customer and the small and large stores.

And who is losing from this in the long run – banks are. On top it opens up for new payment platforms like Apple Pay, Google Wallets, Klarna, STREX and others where banks are not necessary a part of the payment value chain.

PSD2

PSD 2 (Payment Service Directive) is a new EU directive for vertical banking strategy. Banks have to open up for trusted 3^rd party software provider to aggregate information from all EU operating banks. This includes issuing payment transaction. I guess EU’s strategy is to create more competition among banks and give customer better services. PSD 2 is agreed on, and will come in full effect from 2019. Each country has some time to change their laws to align to PSD2.

As long as banks irritate customer and large store chain by Balkanizing the payment infrastructure the future becomes easier for 3^rd party providers to take large part of the payment volume in the future.

Vertical infrastructure

Once upon a time people banked with one bank, and some do still. You received your salary there, you have all your loans there, you have you MasterCard there and you do all your payment there. Some even used same brand for all their insurance.

You might call this a silo.

Not many people do the same today. They might have loan where the interest rate is lowest, Credit Card where fees are lowest or travel insurance is best and do their pension saving where expected profit and future money level is highest.

Younger people tend to swap banking more often than older people, focus on smarter banking and best-of-breed. Younger people become banks main customer in the future - the trend is clear.