While some banks have seen increased profitability this year as a result of rising inflation rates, macroeconomic events such as Russian sanctions have had an impact on many banks’ services in 2022. With regards to payments, the rise of digital challenger banks, CBDCs and open banking have been major trends.
Impact of the Russia/Ukraine war on banks
The Russia/Ukraine war had an impact on banks in the affected countries and further afield. This report from earlier in the year looks more closely at the main effects in the immediate wake of the invasion, but here are the major points from the year as a whole:
- Many Russian banks, including Russia’s largest bank Sberbank, were banned from using the interbank messaging system SWIFT, meaning they were unable to make large cross-border payments. China and Russia have been developing alternatives to SWIFT to overcome this.
- Sanctions on major banks and the country’s central bank caused major upheaval, while several payment companies also cut services in the country. Some sanctioned banks have turned to alternative card networks, such as UnionPay and Mir, to avoid using Visa and Mastercard for domestic payments.
- Remittance services to Russia were also suspended as a result of bank sanctions. For example, Western Union’s service in Russia is provided as a result of a partnership with Sberbank. Meanwhile, some remittance companies, such as Revolut, removed transfer fees for sending to Ukrainian bank accounts.
- The European Central Bank signed deals to protect the currencies of Poland and four other countries in the wake of the Russian invasion. This included setting up a €10m swap line with Poland’s central bank, Narodowy Bank Polski, in order to provide it with euros in return for Polish zloty until January 2023.
- US investors were banned from buying Russian government and corporate bonds, while several banks began selling off Russian assets in a bid to reduce their exposure to Russia. Societe Generale, for example, sold Rosbank as part of its exit from Russia, leading to a net loss of €3.2bn.
Banks boosting payments through new partnerships/acquisitions
Banks and payments companies have partnered for a variety of reasons this year, from launching new products and services to expanding into new regions. Some major banks are also acquiring payments companies to boost their payment offerings or expand into new regions.
A common theme across new partnerships is banks trying to create more seamless experiences for customers. J.P. Morgan, for example, recently partnered with Mastercard on a new service, Pay-By-Bank, which will allow customers to automate bill payments in the US and reduce the risk and cost of storing bank info for billers and merchants.
Many banks are facing increasing pressure to improve their payment services to compete with digital challengers. Digital banking remains particularly important in underbanked regions, with some countries actively promoting a push towards it. For example, Nigeria is now actively capping daily ATM withdrawals in order to encourage electronic payments and the use of alternative channels such as mobile banking.
CBDCs make progress and banks remain wary of crypto
The crypto market has seen a seismic downturn this year, punctuated by major events including stablecoin TerraUSD losing its peg and the implosion of crypto exchange FTX. With regulators worldwide now pushing to regulate digital currencies, some banks are moving away from them or banning them entirely.
Concerns around crypto are driving the development of central bank digital currencies (CBDCs), which are state-backed and run by national banks, meaning they are (in theory) more secure. CBDC advocates say they could have particular benefits for cross-border payments, including faster, more transparent and risk-free payments. For example, the New York Federal Reserve recently conducted an FX spot trade in 15 seconds using its CBDC prototype; normally, settlement would take two days.
The declining use of cash and the desire to reduce the power of private tokens have continued to drive CBDC projects, but these remain at very different stages.
Open banking sees increasing adoption
Open banking – providing third parties with access to financial data through the use of application programming interfaces – has seen increasing adoption in 2022.
According to fintechs like Trustly, open banking could facilitate faster, more convenient cross-border payments for customers as the technology offers more transparency of data, leading to speedier validation and settlement. However, a lack of compliance standards in some countries and questions around protecting user data remain key challenges for financial institutions to address.
Regulations are being introduced to facilitate open banking, such as the EU’s PSD2 regulation and the UK’s Open Banking Initiative. The UK’s Financial Conduct Authority recently scrapped a 90-day re-authentication rule, under which customers used to have to provide consent every three months to access open banking services.
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