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Convergence in the New World of Unified Payments by Bruce Jennings
August 15, 2018
Bruce Jennings | Payments Product Director
Old payment mechanisms may never die. But the digital revolution has created ever-increasing numbers of mechanisms. Payment processors have no choice but to adapt. By consolidating stakeholders, channels, clearing and settlement systems into one hub, payment processors can futureproof their capabilities and ensure all payments can be supported.
Relentless March to Unification
The rapid advance of new technologies, coupled with changes in consumer preferences and behavior, is changing the boundaries between previously disconnected industry sectors. After all, once you can have any piece of information in your hand in an instant or shop from a mobile device and receive same-day delivery, how long are you willing to wait to transfer money? At the same time, open banking and instant payments initiatives around the world are tearing down market barriers in the payments industry.
Players from non-financial backgrounds – merchants, telecoms, insurers, utilities, car manufacturers and social media platforms among them – are grasping the opportunity to develop their own payment processes. This will inevitably fuel cross-sector convergence. However, it also means more players encroaching on the territory of traditional banks and payment providers.
Core processing systems, which evolved in a siloed fashion to handle distinct payment types, are no longer fit for purpose in the current environment. The reality is that payment types are not all the same. For example, retail payments made via credit card have different consumer protections than those via credit transfer. Unifying all payment types will allow seamless acceptance for consumers, while requiring fewer systems for processors, thus reducing costs and providing new revenue-generating offerings.
Retailers are key stakeholders whenever a new payment service is being considered. The real-time payment revolution that is underway is a prime example. For retailers, the benefits are clear: instant funds availability and no interchange or handling fees to credit card companies. However, convenience and speed at the point of sale (POS) is vital – whether in-store or online – to ensure a frictionless payment phase that maximizes transaction closure.
As we digitize payments and open-up the payments world to new possibilities, merchants are increasingly keen to embed payment mechanisms into the buying process because it removes barriers to purchase.
Banking and payments are relatively late to the game when it comes to the digital revolution in corporate sectors. ACH transfers and paper checks remain mainstays, although many corporations are beginning to take advantage of more instantaneous payments, improved reconciliation and the mitigated risk that follows.
Banking on Payments
On the surface, payments convergence seems a threat to established payment players. However, if payments are central to a financial institution’s franchise, convergence can help it generate growth by mixing capabilities with those of companies from other industries and by challenging market assumptions.
The first issue is that of revenue. As with other industry sectors, there is value in customer data. Payment data is a key part of a customer’s profile, and it represents a behavior indicator. Therefore, shared payment data is a significant asset as it enables new service opportunities that can generate real revenue.
However, customers are becoming more likely to expect compensation for use of such data. Consequently, payments are likely to evolve into a “value transfer” whereby non-monetary value – loyalty, time or use of a consumer’s transaction or behavioral data – will be accepted as payment for goods and services.
Some banks will inevitably decide that payment processing costs too much to maintain. Smaller, retail-centric banks may consider outsourcing payment services so as to mitigate costs and risks. Banks that are deep in the SME or corporate markets, however, may continue to see payments as a central pillar of their business.
The big winner from the payment revolution is the consumer. With more choice than ever and a payment experience that is increasingly frictionless, the payment becomes a nearly invisible part of the whole transaction. New and enhanced experiences – available through improved and personalized offers, geolocation services and consistency across channels – tie the entire payment experience together into one seamless activity.
A Unified Future
When new payment processes come along, the old ones do not necessarily go into retirement. After all, we still see significant use of cash and checks decades after cards gained mainstream use. As new payment types become available, we simply add a new lane to an increasingly busy highway. Catering to this increased traffic – in a consistent and consolidated way – is what makes a successful, unified payment story.
To reap the potential benefits of becoming a leader in a new ecosystem, a new and innovative way of thinking is required. The payment process must be reimagined as a pathway to added value or another related service. Banks and payment providers need to adapt to industry convergence and create new sources of revenue that can combat expected erosion of fees from simple transaction facilitation.