Payment, although a small component of the banking function, is becoming a key competing factor amongst the global banks today. In this competitive environment, where banks are looking to innovate, adopting digital wallet payments have become the means of outdoing each other. Payments, a word which brought to mind a picture of cash being exchanged, has evolved into technologically complex function, involving multiple parties coming together to simplify and speed up the exchange of cash in a way that focuses on user experience and convenience.
Mckinsey estimated that the payments industry makes up approximately 34% of the global banking industry in 2017. The first factor which indicates the rising popularity of this trend is the large amount of funds being diverted to this area. An example that comes to mind is the payment start-up Stripe. Founded in 2010, it has a value of $20 billion today. This is equivalent to some of the largest banks in Europe at the moment. The value of this company more than doubled in the past one year itself as a number of high profile companies, including Amazon chased it. The second major factor which points towards the growth of this area is the number of partnerships in this space. Majority of the banks can be seen collaborating or forming partnerships to get an edge. Western Union subsidiary, Speedpay announced an alliance with Beguided to integrate an avatar-guided payment channel into its platform; Bank of England is looking to partner with fintechs to revamp its payment system using DLT; PayPal has announced multiple global partnerships to enhance its payment systems in the past few months itself. An increasing number of companies and accelerator programs can also be seen focusing on this topic. For instance, Western Union in partnership with Techstars is holding a mentorship-driven accelerator program to uncover creative payment solutions. A research by Square also indicates that there may be a ‘cost of cash’, which comes from using paper currency. This may be in the form of time taken or expenses incurred in the process of accepting and depositing cash. This hidden form of cost may further drive digital payment services initiative.
The fierce competition in this area has also resulted in multiple technological innovations which challenge the scope of payments itself. Contactless card is one such trend which seems to be spreading like wildfire. Visa recently shared that two out of five of its payment is done through this method in some of its markets. Many of its markets saw contactless usage go from single digits to over 50% within 18-24 months period. This trend can especially be seen in the U.K., European Union, Singapore, Australia, and Canada. A recent research by Square also shows that 51% of Australian consumers prefer contactless technology.
Wearables is another interesting area of innovation, where fitness trackers can be seen partnering with MasterCard and Visa. Blockchain too has caused disruption in this space by enabling faster and more efficient cross-border payments. A collaboration amongst more than 70 global banks have combined forces in an ‘Interbank Information Network’ (IIN), which involves some of the biggest global banks including JPMorgan, Royal Bank of Canada, ANZ, Société Générale, and Santander, which is running pilots to test DLT in payments. An alternative to credit cards has also emerged in the form of PayPal Credit and Square Installments. Venturing into IoT, Bank of America is making headway through IoT enabled payments which looks into improving security, with biometrics and cryptography, one of the major concerns in this area. Mobile wallet is another innovation which can now be commonly seen in the market. ANZ revealed a 150% increase in the use of digital wallet in just a year. Commonwealth Bank too reported a 35% increase in usage of smartphone payment in the six months to July 2018. ANZ thus launched the ANZ Wallets@ATM which allows customers to make card-less withdrawals. Although some believe that mobile wallets have not reached their full potential yet and will see more progress in the future. An interesting possibility also lies in AR-enabled payment gateway. Worldpay has made some progress into this technology.
Adoption of digital payments has also generally been higher in the younger generation. This has seen banks focusing innovations targeted at this populace. However, in the upcoming period, more P2P providers, which had seen higher acceptance in P2P, will parlay into a C2B payment options to generate higher revenues. Square and Venmo are making advancements in this area while Zelle is making early inroads with B2C disbursements.
Another major development which has developed at an increasing pace is real-time payments. Real-time payments, once believed to be a reality of the future, is coming into realization today. Statements by banks like Deutsche Bank and J.P. Morgan indicate that this has come into play much faster than anticipated. 42% of U.S. corporate finance and treasury respondents ranked real-time payments as having the greatest potential for positive change in their departments over the next 3-5 years, as per research by TD Bank. Australia’s big 4 banks rolled out real time payments with Osko in September, while in the US, the Clearing House launched its RTP system last year.
While these developments can be seen taking place around the globe, surprisingly it is Europe which comes ahead in the payment space and U.S., usually the leader, being left behind. New initiatives can however be seen coming up as with companies are seen partnering up. Partnerships levels are also expected to soar as the competition level rises with new fintechs and third party providers entering the market. Changing regulatory environment and cybersecurity remain a concern as well. Another challenge in this space is that while retail segment sees interest, the adoption in corporate segment remains low largely due to large investments required in the upgradation process. Nonetheless, as the market progresses, firms will make the adjustment to remain in this race.