How Digital Transformation is Shaping the Payments Landscape?
The digital economy has made significant progress, and businesses must now provide multi-channel delivery options to remain competitive. However, the next phase of connectivity involves customers engaging in seamless, customer-driven interactions through mobile devices, moving beyond just making purchases and payments.
The article delves into the technical aspects of payment systems, including using APIs, blockchain technology, and real-time payments. It discusses how these technologies are being used to improve the speed, security, and efficiency of payment transactions.
The Landscape of Digital Payments
The digital payments landscape is undergoing a significant transformation due to rapid advances and investments in payment offerings and capabilities. However, despite the flood of change and innovation, only a few initiatives have proven successful. This raises the question: why?
The Forces Reshaping Payments
To begin addressing this question, it's important to recognize the major trends that are currently taking place. The banking industry is rapidly shifting towards a digital-first approach, with traditional distinctions between channels and devices becoming increasingly blurred. Interactions across various mediums, such as the internet, mobile devices, and in-person experiences, are converging into a single set of digital services that are typically accessed and managed through smartphones or tablets. As consumers quickly adopt these devices to manage their daily lives, many organizations are finding themselves caught off guard by the speed and scale of this transformation.
Several distinct trends are emerging within the overall shift toward digital payments. Among them are:
In some markets, contactless transactions are experiencing growth rates of 200% to 300% per year. For instance, Visa reported a 46% increase in contactless transactions across Europe in the first quarter of 2023, reaching 19 million per month, with the UK, Poland, and Spain being the top adopters. As contactless payment continues to gain popularity, point-of-sale (PoS) readers can facilitate near-field communication (NFC) transactions, and consumers can easily transition from contactless cards to mobile NFC or other contactless technologies such as QR codes or barcodes.
Digital commerce is now incorporating payments as an essential aspect, seamlessly integrating pre and post-purchase activities such as search, comparison, selection, payment, and rewards. This integration can be seen in digital wallets like Google Wallet.
Square's mobile payment solution allows merchants to accept card payments from anywhere using their mobile devices. Square's success in the US has been remarkable, with over three million merchants and US$15 billion in annualized transaction volume. This success has led to the emergence of a new industry aimed at serving micro-merchants and transforming payments at the point of sale, including larger merchants.
Real-time payments offer an unparalleled level of immediacy, providing instant availability of funds upon payment. This differs significantly from real-time authorization and guarantee of funds, as it allows payment-versus-payment interactions that are analogous to cash transactions. In essence, real-time payments involve the transfer of electronic cash to the recipient, enabling them to make a purchase immediately.
The Emergence of Digital Ecosystems
As the aforementioned payment trends gain traction, they are simultaneously contributing to the development of more extensive digital ecosystems. These ecosystems are forming as consumers increasingly link themselves digitally with the organizations and communities they encounter in their daily routines. This marks the next phase of connectivity.
The emergence of various payment trends has led to the formation of several types of ecosystems driven by different participants. These ecosystems include:
Such as social media platforms like Facebook and Twitter. Apart from facilitating interactions between individuals and organizations, these ecosystems enable commerce and payment interactions. Examples of such ecosystems are Commonwealth Bank of Australia's Kaching and Amex's "Link, Like, Love."
These are specific to a store or brand. For instance, the Starbucks mobile payment and loyalty app allow customers to use their mobile devices to interact with the store for browsing, searching, ordering, payment, and loyalty point redemption.
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Size of the market?
Although cash and plastic card payments are unlikely to disappear anytime soon, digital payments are gaining traction in the market. According to estimates, the global addressable market size for payments is around three trillion transactions annually, worth approximately US$13 trillion.?
However, predicting the extent and pace at which digital payments will displace traditional payment methods is challenging.
Adoption of Mobile Payments
The objective of the study (according to payments BIS) was to gain an understanding of how to encourage consumers to make mobile payments. The study's findings identified three critical insights:?
The Future Payments Landscape
Looking ahead about five years from now, it's uncertain what the complete payments landscape will look like as the winners emerge. However, several characteristics can be predicted with some degree of certainty.?
One such feature is that there will be a significant decline in physical cash transactions, and instead, there will be an increase in the volume of contactless transactions that will effortlessly migrate from plastic cards to mobile applications.
The forthcoming account-driven payments will have three unique features that distinguish them from card-based payments:
This creates a safer payments experience where the interaction flow is reversed, with merchants providing their IDs to consumers to authenticate and retrieve the necessary details to send the payment via their apps.
2. APIs can facilitate account-driven payments,?
This offers banking services to retailers and third-party applications beyond just payment initiation (as with embedded cards). These APIs(Application Programming Interfaces) can provide additional services, including account balance display pre- and post-transaction, payment account selection, and instant refunds.
Exposing Payment APIs to Retailers
Retailers are presently struggling with the digital transformation of their industry. The retail sector worldwide is encountering disruptive changes, such as the hastened migration of retail spending online and the necessity to meet consumers' expectations of a smooth, omnichannel purchasing experience.
Physical and digital retail is blending in novel ways, resulting in groundbreaking innovations such as in-aisle purchasing, where consumers employ their smartphones or tablets to capture barcodes before proceeding to checkout. Additionally, customers can now scan barcodes or QR codes in various locations, such as through a physical store window (even when closed), posters, or virtual stores, such as Tesco's virtual QR code supermarket in Seoul's subway. They can then place orders and make payments using their mobile devices for home delivery at a later time.
Retailers are eager to reduce their dependence on card networks to achieve their objectives. However, they want to accomplish this without introducing new intermediaries, providing third-party access to their customer's data, or making significant investments in new infrastructure, particularly multiple PoS devices. They also require payment systems that all customers can use. The dilemma is that card networks offer this widespread acceptance, which only a few new payment proposals can match.
Conclusion
We believe that satisfying this requirement necessitates that banks go beyond developing a digital wallet proposition with digital card capabilities. It involves facilitating the use of bank accounts for all digital commerce transactions, exposing payment APIs for retailers to utilize and disseminate, and creating an experience that both consumers and merchants appreciate. It also entails constructing solutions for high payment volumes, widespread digital commerce, and widespread consumer adoption. This, in turn, requires extensive changes not only in external digital propositions but also in the capabilities needed to implement them internally.
Banks possess a unique competitive edge in their expertise in payments. One of the reasons for the limited market success of several new digital payment offerings is that the entrepreneurs creating them lack payment knowledge and comprehension of crucial factors such as settlement, liquidity, finality, regulatory compliance, financial crime, mass volume, commodity, risk, and economics. However, many banks also lack digital skills, an understanding of the digital consumer, and an entrepreneurial mindset to capitalize on their competitive advantages, and perhaps even the courage to do so. They must transform.
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