2018 saw customer expectations for value-added services rise higher than ever. Increased competition due to the growing number of FinTechs, the emergence of new payment solution technologies, and an ever-changing regulatory landscape forced the development of an open and collaborative Payments ecosystem. Instant payments are becoming catalysts for next-generation payments and cross-border payments are likely to be transformed through Blockchain technology. However, this open and collaborative environment also brings with it a number of vulnerabilities related to cybersecurity and data protection.
Here are six ways in which payment solutions are impacting the financial industry today, and how payment solutions will most commonly be utilized moving forward.
1. Banks Are Becoming Forced to Welcome Collaboration to Retain Customer Relationships
Historically, banks have been the sole providers of end-to-end services across the payments value chain. Today, however, the position of banks is being challenged due to increasing competition from FinTechs, as well as new regulations such as Europe’s PSD2, which in essence promotes open payment systems. As a result of this, banks today are running the risk of losing market share unless they conform and adapt their operating model to become part of this new collaborative payments ecosystem in which a variety of industry stakeholders work together to provide more innovative customer services. By adapting to this new model, banks have been able to retain customer relationships while simultaneously leveraging the capabilities of emerging FinTech’s through collaboration.
2. Payment Vendors Will Be Forced to Consolidate Their Operations to Offer Better Solutions for the End Customers
Due to an increasing demand for customized offerings, additional agile solutions, secure platforms, and payment services, providers are likely to converge through mergers and acquisitions. We witnessed such processes recently with PayU's acquisition of Zooz, an Israel-based platform focused on maximizing payment performance for merchants. PayU's decision is signaling that it is listening to its customers' needs and continuously developing better products and tools for a better customer experience.
3. Open API’s Enable Stakeholder Collaboration
Due to the introduction of the PSD2 in January of 2018, FinTechs are expected to leverage open Application Programming Interfaces (APIs) to examine available opportunities. This is because the regulation introduced Account Information Services Providers as value-chain stakeholders that leverage APIs and collect information from customer accounts to develop new customized offerings. Uber is an example of a company that has utilized this opportunity to its advantage. The company collects customer information through API’s to create predictive models to estimate where a user’s destination will be. Their data team has successfully created a model that is able to determine a user’s destination 75 percent of the time.
4. Wearables Are Gaining Acceptance
With the widespread use of smartphones, mobile banking, and payment applications, wearables are gaining acceptance as they provide convenient access to such applications. These contactless payment channels are enabling consumers to make everyday purchases quickly and safely, especially for low-value transactions. The World Payments Report 2017 estimates that by 2021, more than 15 billion machine-to-machine and consumer electronic devices are likely to be connected. On top of this, the Capgemini Financial Services Analysis 2017 found that there were 144 million users of mobile contactless payment channels, almost doubling the 2016 figure of 75 million.
5. Banks & Fintechs Are Further Exploring Distributed Ledger Technology
The current cross-border payments model is arguably inefficient, slow, and costly as it relies heavily on correspondence between banks. Today, corporate clients are demanding transformation and distributed ledger technology such as Blockchain has been the solution, eliminating intermediaries through algorithms to verify and authorize payment transactions securely. The outcome of this new technology has been improved efficiencies, enhanced security, and lower costs. One successful example of this is Ripple, a company that is helping banks process international payments through Blockchain technology. The company has built a real-time gross settlement system that allows quick and accurate payment processing. One remaining major issue with Blockchain-based transactions is the number of transactions per second. Whereas Ripple can support 1,500 transactions per second, Visa can support 24,000 transactions per second. This gap is expected to dissolve in time.
6. Instant Payment Processing Is Becoming the ‘Norm’
A number of global initiatives have been launched by central banks to implement instant payment infrastructures with the aim to modernize the existing payments processing system and to retain market share against challenger banks. A number of schemes such as the European Banking Association Real-Time 1, The Clearing House Real-Time Payments in the US, and the Australian New Payments Platform scheme have already been launched. These schemes enable real-time payment transfers across the United States, 34 European countries, and Australia, with the potential to reach more than 1 billion people.
To Conclude
It is clear that the payment solutions industry is in a significant period of change, and while this change has clear benefits for both consumers and corporate customers, it must be remembered that these innovations can be a double-edged sword. If organizations fail to implement these solutions cohesively alongside new and strict regulations and/or they fail to be vigilant regarding fraud potential, the consequences could be dire.
Tal Sharon is a Managing Partner at Equitech Financial Consulting specializing in analyzing the requirements of corporates and financial institutes.
