Gone are the days when individuals would rely on traditional methods of payments, such as cash and cheques. The advent of computers and mobiles have not only changed the way we work, but also how we manage our financial aspects and payments. The ever changing and evolving technologies have also led to the introduction of newer services, such as e-commerce that has led to the demand for quicker payment systems. Unfortunately, the traditional modes of payments, which was growing at a slow pace, was unable to meet the demand for new payment systems. Thereby, leading to the growth of new digital payment technologies.
The rapid adoption of mobile devices and proliferation of ecommerce weren’t the only two reasons for accelerated growth of digital payments. The growth of these payment technologies were fueled by the following reasons:
- Changing customer preferences and expectations. The speed and convenience of ecommerce or online shopping has also altered customer expectations about the immediacy of payments experience. In today’s world, customers expect faster services in all sectors, and this appreciation for time-saving has quickly extended to the payments environment.
- Enhancements to traditional payment mechanisms. Despite customers being interested and expecting newer payment options, the payment industry still recognizes the importance of maintaining customer choice over the range of payment options on offer. For instance, for those customers who continue to prefer to use cash and cheques, the industry is still looking to innovate and evolve these traditional payment methods. Some of the innovations that the industry is currently looking at is cheque imaging. Once introduced, cheque imaging will speed up the time taken to clear cheques and also offer customers an additional way of paying cheques into their accounts. One of the recent innovations that the Bank of England introduced is polymer banknotes. These new bank notes are cleaner, more durable and secure than the previous paper banknotes.
- New technologies and the adaptation of existing technology have provided new ways to pay. In particular, smartphone technology has given customers access to an ever-expanding range of services through ‘apps’. These apps have enabled payments for everything from taxi to hotel bookings, as well as giving the option of quick, secure payments through mobile banking.
- Regulation and legislation continue to define the framework within which payment service providers and consumers interact, exchange data and make payments. Good regulation supports innovation, protects consumers and encourages competition in the market. It also gives the market confidence to go in a specific direction.
- Competitive and collaborative developments. Payment service providers compete by providing new products and services to their customers. New payment services result from industry-driven collaborative initiatives such as the introduction of contactless technology on cards, Faster Payments or Paym. The emergence of new entrants into the market, in particular from the UK’s growing FinTech sector, is also driving new products and services. The UK already employs more people in this sector than Singapore, Hong Kong and Australia combined.
- New entrants. It is estimated that there are now over 2,500 payment service providers in the UK, many of whom are offering new payment products and services. As UK has become the home of the FinTech community the number of payment service providers are only expected to grow.
These drivers have led to the UK payment sector undergo numerous changes, which can be seen from the timeline below:
- In 2003, the UK was the first country in the world to roll out Chip and PIN technology to make cards safer.
- The introduction of contactless technology in 2007 has been making card payments more convenient.
- In 2008, Faster Payments was launched. This enabled online and phone payments to be made at the touch of a button.
- Mobile payment technology Paym was introduced in 2014. This new technology has made payments through a mobile phone a widely-available option. Along with Paym, other payment methods such as Apple Pay were also introduced.
These innovations have collectively helped mobile, online shopping and banking become the norm for many of the UK’s consumers and businesses, thereby, changing the payment ecosystem in the UK.
Drivers for change towards digital payments
These traditional payment systems, however, are undergoing a paradigm shift with an influx of technology, demographic and regulatory dynamics. Trends, such as new opportunities in the payment industry in terms of adoption of open application programming interfaces, growth in digital payments, innovation in cross border payments and challenges from the entry of alternative payment providers are impacting the industry in terms of fostering competition, nurturing innovation and enhancing process and system related efficiencies. The intersection of new payments technology, emerging markets, increased consumer expectations, a new regulatory environment and greater impact of non-traditional players is transforming the payments ecosystem. This transformation demands that banks reassess the way they participate in the payments ecosystem.
While, the industry is poised towards transformation, the entry of non-traditional payment providers with solutions that have an instant service, are challenging the traditional payment providers to upgrade their products and services.
Some of the trends that are impacting the traditional payment industry are:
a) Increase in adoption of digital payments: According to a report by Capgemini, digital payments primarily comprised online, mobile and contactless cards and these were expected to hit $3.6bn in transaction globally in 2016. This figure would also witness around 20% growth from $3bn in 2015, out of which 20% would be attributed to the contactless cards segment. The adoption of these new digital technologies has primarily grown due to the increase in customer demand and adoption of electronic and mobile commerce, contactless devices such as, wearables, wallets, mobiles and cards. The advent of faster and more secure mobile devices has also fostered a degree of customer expectation for more efficient and faster methods of payments. Another reason for the increase in adoption is the downward pressure on fees charged by card processing merchants and increase in cheaper alternatives provided by fintech companies such as Uber.
The report also stated that the global value of the POS terminal payments was also expected to hit $500bn annually in 2017 from the expected $321bn in 2016.
b) Instant payments are potential opportunity for existing payments: The availability of instant payments has triggered a new customer need. The introduction of Second Payment Services Directive (PSD2) has also disrupted the payment landscape with new instant payment providers like e-wallets, having the potential to emerge as an alternative to existing payment instruments. A key factor for the increase in adoption for instant payments is its instant access to funds and its simple usage.
PSD2 aims to fundamentally enhance competition in the industry, bring into scope new types of payment services and enhance customer protection and security. After its implementation, PSD2 is expected to lead to a major change in the accessibility of customer data to authorized third parties when the customer has given their explicit consent. The implementation of PSD2 is also expected to enable new technology companies that recognizes new opportunity in financial services to compete on a level playing field with traditional financial services and banking institutions. An example of a new service that might arise is payments that are connected to social media. For instance, Services that enable to send payments directly from messaging apps are already popular in the US, where Venmo stands ahead of the pack, and pleasing investors with steady double-digit growth.
These fintech newcomers will be able to now access customer accounts, make payments on behalf of customers using API‘s, which account holding institutions will have to give fintech companies access to and enhanced security through SCA – Strong Customer Authentication – such as Two Factor Authentication. PSD2 also seeks to standardize the different approaches to surcharges on card-based transactions, which will be not allowed for those consumer cards affected by the Interchange fee cap. Traditional payment providers, such as banks will also have to adapt to the regulation. In this new regulation, banks will have to open up and the burden of developing new solutions, such as, creating, will come on the banks itself.
c) Implementation of Instant Payments and Basel-III Norms: Adoption of immediate or instant payments through initiatives such as SWIFT gpi and real-time payments schemes across the globe are expected to improve liquidity and shorten reconciliation times which result in faster order fulfillment across the payments lifecycle.
There is a growing need to monitor the level of liquid assets required to cover future liquidity needs and improve banks’ ability to withstand the liquidity shocks, the Basel III norms aim at better liquidity through longer-term funding of assets. Post-2008 Crisis the Basel Committee on Banking Supervision (BCBS) devised new norms and rules for revising the then-current capital-adequacy guidelines for global banks. The committee has recommended monitoring tools to supplement the Basel III liquidity ratios (such as the Liquidity Coverage Ratio), which are currently in different phases of implementation across different markets
While several countries such as the Netherlands already have an intra-day liquidity monitoring framework in place, additionally other national-level regulators are also supporting the BCBS tools, where banks needed to fully implement intra-day liquidity reporting norms by January 2017.
d) Cross-Border Payments Transformation: With the advent of blockchain, cryptocurrency and other alternative payment providers, cross border remittances are likely to witness a high degree of growth. According to the Top 10 digital payments trend reports by Capgemini, global trade flows are estimated to triple to reach up to $85tr by 2025 and will be powered by emerging economies. The spread of the Internet and digital technologies, are also driving the need for organizations to streamline their processes to keep up with the quickening pace and rising volume of international trade transactions.
The payments industry is also witnessing an increase in demand for cross-border payments to become simpler, faster, and more cost effective. Some regulatory initiatives such as SWIFT gpi and blockchain are also helping to change the traditional international payment methods that are growing less to high fees.
Given the pace of change – and customers’ increasing appetite for increased speed and convenience, digital payments will bring about a radical change in the payments sector. Currently, the UK payments sector has more than 2,500 payment service providers; future changes such as the PSD2 can also see the number of providers grow further and the range of services available to customers further explode.
However, despite increased adoption of digital payments, cash would still remain as a primary form of payment for many, especially for low-value transactions and certain demographic groups. Attributes of cash contributing to continued use include speed, universal acceptance, anonymity, lack of fees, etc. Some emerging markets also still lack a modern payments infrastructure while certain cultures still have not developed trust in the modern banking system, thereby indicating that we still have a long way to go to become a cashless society.