August 3, 2018
Leah Middlebrook, Vice President Business Development, International Payments
Computers and smartphones have forever changed the way we make payments and manage finances. But their biggest change may be our expectations. Gone are the days when people accepted the days it could take to process checks, and, while cash offered instant transactions, moving it from one location to another was anything but instant. The reality is that traditional payment methods can no longer keep up with our demands.
We are now on the verge of a new digital payment world.
Before we get ahead of ourselves, what are digital payments? Some experts limit the description to new, fully digital payment methods, initiated on channels such as mobile and internet. At FIS, we take a broader view. That’s because digital payments represent a wide range of different instruments used in a variety of transaction types. In reality, any transfers of value which utilize electronic devices or channels are digital payments. That can include credit card, ACH, real-time payments, mobile payments and debit, cryptocurrencies, digital wallets, contactless payments and more.
Fortunately for financial institutions who have not already embraced digital payments, the overall digital transformation of our industry has not progressed as far as many other areas of life. However, much of the growth in digital that has occurred has come from non-bank providers. That means financial institutions and other payment service providers must make a digital payment a key area of their digital transformations.
To succeed, they need to adopt a more collaborative approach and make increasing use of the open payment paradigm by creating payment offerings based on API (application programming interface) infrastructure. The customer experience is the number one factor to consider in any digital transformation. That means smartphone ubiquity, deeper data analytics, cloud-based operations, perhaps even social media. It also means remaining agile as customer behavior and privacy expectations are constantly evolving, and providers must be able to adapt.
Regulatory changes are another factor. As Europe moves to adopt real-time payments and standardize open banking, initiatives such as the second Payment Services Directive (PSD2) oblige all institutions to get on board with digital transformation. India, a country with a historically high proportion of under-banked citizens, took the bold step to require all citizens to open a bank account. While account usage was slow initially, this was a vital step to including more people in the digital revolution.
But no amount of regulation will spark a payment revolution. Smartphone service providers such as Alibaba and WeChat made the difference when they began offering payment capabilities through their phone apps. Almost overnight, millions accepted and adopted the convenience of frictionless payments. In Africa, millions of people have bypassed traditional banks and now conduct everyday commerce through mobile phones – often not even smartphones.
In Europe and the United States, meanwhile, headway is being made, but both countries remain behind due to long-established habits around cash and check as well as widespread use of non-digital payment infrastructure, which impedes the rollout of new services.
Change must come, however, as demand for frictionless digital payment capabilities continues to grow – in the public and, perhaps more importantly, among corporate clients as they look to bring payment capabilities up to the same level as other, non-payment ecosystems.
Commercializing digital payments is another key step because it pushes financial institutions toward change. Commercialization means looking beyond card revenue to returns that can be generated from payment APIs themselves. For example, financial institutions can open their core payment systems to retailers and other third parties through API interfaces, thus allowing those third parties to embed payments into a bank’s own offerings and apps. This would make payments a simple part of a customer’s everyday life, while also driving growth for the financial institution. In fact, merchant innovation in omnichannel retailing, where consumers switch between channels such as mobile, internet and shops to complete a purchase, is driving much of the consumer adoption we see, with retailer apps being currently the most successful of mobile payment methods.
Sometimes, the future comes at you quickly. In India, after a drive toward digitization on their immediate payment service (IMPS), street vendors and taxi services began accepting instant payments – almost overnight. China saw a similar transformation of the economy as QR code-based transaction initiation made it simple and easy to buy anything, anywhere, from anyone.
The overriding aim of digitization across the globe is the move to cashless societies (and check-free in the few regions where they are still prevalent). Asia may be making massive inroads toward the goal, but Sweden recently announced its intention to be cashless by 2020. Such predictions may be overly optimistic, but there is widespread belief that toddlers today may never know what cash is. Of course, the end of checks has been predicted since the 1980s, yet we even see usage rising in the U.S. corporate world, and many reports suggest that millennials are still keen on using cash for smaller purchases.
As digital ecosystems grow, both consumers and merchants are demanding payment mechanisms that are open, flexible and relevant to the transactions they want to make. Financial institutions and payment service providers need to adopt a more collaborative approach with Fintech’s so they can incorporate innovations into their offerings to customers.
Fortunately, financial institutions can build on the inherent strengths of the banking system – extensive infrastructure, deep customer relationships, multichannel capabilities, and a strong focus on data security and privacy – as they work to catch up with more disruptive competitors.
The future of digital payments will inevitability be driven by retailer acceptance and innovation, coupled with smartphone prevalence. Working together, those things can produce a world of frictionless payments that can solve everyday problems for all customer segments. Cash and checks will probably be with us longer than many analysts predict, but they will become increasingly marginalized.
Maybe it’s not terrible if physical money stays with us a little longer, however. Just imagine if you won a slot-machine jackpot at a casino. Would it sound as appealing without that avalanche of coins spilling on the floor?
Sometimes, the old ways remain appealing.
FIS | Vice President Business Development, International Payments
Leah Middlebrook is VP of Business Development for International Payments responsible for global market strategy with a focus on identifying future payments trends, FIS’ Payments Innovation Labs in Brazil, India and Thailand, partnership development and strategic opportunities across FIS’ global footprint. She joined FIS in 2003 and has over 25 years in the financial services and payments industry. In 2017, Leah was part of the award-winning CAO team receiving Gold for Women in Business Awards Management Team of the Year and Women in Payments USA Team of the Year. Leah leads the FIS Women in Payments Leadership Mentor Program team.