The future landscape of payments

18 August 2011

By Tony Virdi,
vice-president and head of banking and financial services practice,
Cognizant

Tony Virdi, vice-president and head of Cognizant’s banking and financial services practice for the UK and Ireland, discusses the changing face of the payments industry

The last fifty years have seen a vast change in the way that payments are undertaken. At a time when the wider global markets are nervous, liquidity is of vital importance to prevent potential system risk. As such, a number of changes are occurring. They include draft reforms proposed by the Independent Commission and emerging technologies deployed in the finance arena. Payments service providers are also consolidating, new players are present, and the evolution of payments infrastructures has become even more fast-paced.

Research Cognizant recently conducted with The Financial Services Club, among 300 payments professionals, revealed that 40 per cent of the organisations surveyed will be using just two to three key payments platforms in ten years' time, compared with the nine platforms that 21 per cent of these organisations currently use. This clearly indicates that payment systems will undergo substantial change, as traditional payments frameworks are being challenged by the demand for more cost effective, more transparent and faster remittance services. We can expect a period of consolidation and transformation over the next decade, but in order for companies to remain competitive, they must quickly adapt to these changes and be flexible and transparent enough to adapt.

Regulatory changes are having an impact on the operational, technological and competitive models of payments in Europe today and these changes are likely to have a wider effect overseas. Our research highlighted that the current payments infrastructure, while being fit for purpose today and with an enviable track record of essential payment continuity, is not flexible enough to adapt easily to regulatory changes in payments. Around 63 per cent of the participants say that the payments infrastructure will require significant changes.

As an example of what’s to come, the UK’s Independent Commission on Banking (ICB) has stressed the importance of maintaining critical banking services, such as payments. Its proposals to ring-fence retail banks from investment arms are designed to ensure that vital services to the economy are maintained, even if an investment arm fails. Systemic risk should no longer result in economic crisis. In addition, its proposals to encourage greater competition, by reducing the barriers to entry and establishing requirements for payment redirection and speed on swapping accounts, will bring new challenges for payments infrastructures. The Dodd-Frank Wall Street Reform and Consumer Protection Act also includes payments risk management within its scope.

The fact that over half the respondents we surveyed did not feel that current payments infrastructures are able to cope with such change is cause for concern. At Cognizant we continue to see an increased demand for deep technology and domain expertise in this field as this impacts all banks. As such, we are closely monitoring regulatory changes from institutions like the ICB and Dodd-Frank Act relative to our deep payments expertise and are working with a number of our clients to help them address these challenges.

A generation of ‘digital natives’ are driving the demand for real-time, anytime, any device, anywhere payments, and this is speeding up the rate of change. Payment vendors have to embrace new technologies to keep up with the rest of the market and continue to innovate to remain competitive.

The internet and rise in mobile usage in particular are introducing significant changes to the retail and corporate banking sectors. Our research revealed that for wholesale as well as retail banks, internet-based payments feature in the top three technologies that will have the most impact on their payment platforms. Around 96 per cent of retail banks cite the internet and 82 per cent cite mobile technologies as either the most important change or one of the important changes. A higher number of wholesale banks also expect cloud computing to have a big impact.

These emerging technologies pose a threat to traditional payment methods, because they are more accessible, quicker and easier to use. By the end of this decade we can expect the cheque to have disappeared and we will see reduced volumes of cash and plastic. Mobile payments will soon take the lead, as they take advantage of the always-on, service-rich mobile internet, and a wealth of ever more secure near field communication (NFC)-enabled smartphones. Regional Pan-European Automated Clearing Houses (PE-ACH) will have been established and physical borders will no longer be a barrier to effective, real-time payments.

Banks need to be prepared for these developments by investing in innovative technologies and creating knowledge processes to serve the next generation of customers. They need to easily enable the shift to real-time services and be prepared to operate in a world that requires complete transparency of information throughout the payment lifecycle.

Advances in technology also mean the barriers to entry are reduced - allowing new players such as PayPal, Vodafone, Google and Apple into an increasingly competitive market.

Traditional payments providers are being squeezed out by the combined effects of channel evolution, disruptive innovation from players such as Google, the threat of consolidation with the likes of PayPal and mobile telecommunications companies, and regulation designed to open up payments competition and to provide regional as opposed to country-specific services.

In Europe, clearing houses for retail payments will be locked in a competitive battle. In Asia, clearing houses will consolidate with some pan-regional or potentially global players likely to emerge, and we expect to see the largest countries - such as the US - protecting their national infrastructures. In addition, in the unbanked and under-banked world, players such as Luup, m-Pesa and Western Union, are providing peer-to-peer and mobile remittance services to previously underserved economies.

The scene is set here for new entrants to bring further disruption by pushing innovation, both in terms of process and technology, to help meet customer and regulator expectations amidst a highly competitive and regulated environment. Banks will need to consider carefully whether or not they have the scale economies and underpinning technologies to be competitive, whether or not to invest in building that capability alone, and whether or not further collaboration with other banks and service providers will be needed ( eg in the form of Payments Utilities) to deliver the economies required.

While payments infrastructures currently remain fit for purpose, there are many challenges and opportunities ahead. The industry must meet those challenges head on to transform payments services while at the same time retain its enviable and crucial reputation for payment continuity.

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