August 22, 2018
The global payments landscape is experiencing its greatest transformation since the dawn of electronic payments. Obvious trends are the decline of cash and checks, the continuing growth of cards (forecast to reach 500bn in volume by 20221 ) and the rise of open and instant payments.
And with a CAGR of 10.9 percent 2, the industry is an attractive one, but with many challenges. Regulation, technology and rising customer expectations are reshaping the market, and success requires an integrated view across all payment types and channels. While this is simple in theory, there are many practical considerations. Why?
The payments landscape has evolved along product lines. In the beginning there was just cash, then checks arrived, followed by electronic payments, cards and so on. Each has unique support needs, producing a siloed infrastructure with a staggering TCO. Moreover, instant payments and open banking will have a permanent impact on payment business models. While some payment providers may initially perceive this as a threat, it is also an opportunity to do things differently.
With over 40 live schemes worldwide, instant payments are appreciated for their convenience and as a platform for innovation. A key driver of uptake is the ability to add value to the transaction.
In parallel, open banking and open APIs herald a new era of possibilities. Among many changes, banks in some regions are required to provide access to account information and payment initiation to third parties. Other banks see open APIs as central to building an innovative flexible architecture. This changes the traditional bank/customer relationship and third parties may also distribute a bank’s products or vice versa.
Many open banking initiatives encourage new market entrants. Chiefly fintechs, these agile participants are unencumbered by legacy systems. Although there has been plenty of talk about the threat of fintechs, they more often complement bank services, bringing new ideas to market faster.
Banks can build on customer loyalty. In the new era of open and instant, they can offer services that deepen customer relationships. Research3 shows that 52 percent of people trust banks over technology providers (<5 percent) to provide them with an app to manage their finances.
Many customers feel more confident about choosing third-party apps promoted by their bank offering “marketplace” opportunities to existing institutions. New apps help build customer loyalty and generate new revenues for both banks and their fintech partners.
On the face of it, the infinite use cases offered by account-to-account payments will easily outshine their older, less flexible card network cousins. However, the cards world is also evolving to a more real-time open experience. Card account opening, fraud management and authorizations are all offered 24/7. Tokenization is liberating the card payment from the constraints of the physical world.
The key strength of card payments lies in the existing customer base, where cards have truly reached ubiquity in many markets through significant investments by banks and merchants in developing POS networks. Cards are known and understood, which is a key strength in an increasingly complex world. Card payments also offer significant consumer protection through the chargeback and disputes rules of the schemes and regulation. These have been built up over many years. The level of trust embodied in the Visa and MasterCard brands will be difficult to replicate.
So, for the foreseeable future, we believe there will be two core platforms that participants in the payments industry must support – account to account and cards or enterprise and retail payments, as you prefer. The balance between the two could change dramatically depending on the moves of the larger participants, regulatory pressure, standardization efforts, how machine-to-machine payments develop. And increasingly, even these two core platforms will have greater interplay, with transactions starting in one channel and completing in another.
Innovative fintechs, such as Revolut, are focused on delivering winning customer propositions regardless of the channel. They are cherry picking customers for the lucrative foreign exchange business and using data to bring real value to their customers, fulfilling this through bank transfers or card purchases.
Ultimately, all payment providers will need greater agility to adapt to unpredictable market and customer demands. Success will come with building platforms that have capabilities that can be turned on and off, tuned up and down.
Most payment providers need help to boost their business agility. The move to open and instant payment rails is a unique opportunity to review the payments blueprint. Technical partners can help, but they must offer insight and a practical understanding of the payments business.
Although different types of card and non-card payments have individual specificities, often there are strong potential synergies. By adopting a holistic view, payment providers can identify areas to streamline in core processing systems and in peripheral systems, such as fraud detection and dispute management.
A technology partner must offer an integrated blueprint for payments, such as FIS PaymentsOne, which offers a comprehensive suite of payment solutions. Once the overall payments blueprint is understood, the transition to greater integration can be modular.
Understandably, there is increasing appetite for hosted payments services, whether for real-time payments or card management. These services enable a more consistent customer experience across multiple channels, insulate payment providers from change and remove many integration barriers, making it easier to add in new features.
Payment providers start from different points and should be free to choose payments components as either licensed software, a managed service, fully outsourced, or as a hybrid solution. The key is to ensure smooth integration and world-class service. Furthermore, what’s right for today, may need to adapt tomorrow.
Some banks have a bold vision of their future position; others are adopting a cautious approach. While a “wait and see” attitude is understandable, doing nothing is not a viable option. In theory, a payment is a payment is a payment, but payment providers that can accelerate the move to a holistic blueprint will be able to streamline their operations sooner and release investment for where they can really add value and win customer loyalty.