PAYMENTS - A GLOBAL REVIEW 2020

Dramatic changes in the next decade!

The world is a very large place with 7.8 billion people and 241 countries and territories and payments are a vital tool in all of these countries/territories.

To fully understand the next decade payment participants and regulators need to have a global view – not entrenched views based on past local or regional activity.

Developed Markets are NOT All the Same!

 Developed markets have two major themes, a small number of strong credit card markets with high cash and cheque use -- 72% of global credit card receivables are in only 5 countries - USA, Canada, Japan, Korea and UK - Australia is part of this expensive mix.

Mainland Europe with 540 million consumers is the world’s largest consumer market is an EDI/debit card market with little cash or credit card use and virtually no cheques.

A number of EU countries have all but eliminated cheques over the last 15 years replacing them with EDIs, well before 'digital' became fashionable. 

Both of these models are expensive and regulators need to understand the true costs as compared to new less expensive alternatives.

Emerging markets are about Cash, Unbanked and Mobile

Emerging markets make up 78% of the world population and are heavily dominated by cash.

The unbanked population is estimated at 2.4 billion or 45% of working adults.

Mobile payments have limited impact in most emerging markets; however a number of pioneers developed very efficient and wildly used mobile payments - Philippines since 2000, South Africa in 2001, and Kenya in 2007 all created new payment infrastructure where none existed. Bangladesh, Brazil, China, India, Nigeria, Mexico and Pakistan are all examples of emerging markets that are developing mobile payments. 

The key drivers of success are factors such as the international remittance flows in the Philippines, drive for social cohesion in South Africa and Kenya or eCommerce in China.

China is now the world’s largest mobile market with AliPay and WeChat totally dominant.

India launched its own debit card scheme - RuPay to reduce payment costs and avoid being dependent on Visa or MasterCard debit.

Future Growth in population and GDP will drive payments

The world’s population is estimated to reach 9.1 billion by 2030 – most of this expansion is in Asia, Africa and Latin America. Population by itself is not a key driver of payments. However when added with GDP this becomes a key driver.

Asia with 60% of the world’s population is already a key payment driver. Africa with 16% is a future market, while Europe with 10% and USA with 3% are in danger of becoming ‘legacy’ markets.

The next decade will see significant shifts in global GDP with growth in ‘developing’ economies. The USA is projected to lose its preeminent position as the world’s largest economy by 2035.

The rise of China, India, Indonesia, Turkey and Brazil will have a profound impact on current economic and political norms.

Payments will be impacted as growth in consumer and business use drive new forms of payments.

The dramatic rise in ‘China mobile’ is but one example of the change that will sweep the world. The rise of regional cryptocurrencies and new digital payments will challenge current legacy payment systems.

Payments of Vital Strategic Importance

The European Union (EU) states that ‘Payment Systems are the 2nd or 3rd most important infrastructure/network in any member country outside national security and military issues’.

Payments impact every government, business and household as well as every import and export transaction, every consumer and business payment transaction which make payments truly ubiquitous.

Payment systems must be fast, reliable, secure, offer data protection and inexpensive to operate – an exciting and challenging task. 

Comprehensive National Strategic Plans are a Priority

Given the strategic importance of payments the critical question is does every country have a comprehensive payments plan? If there is a plan why isn't it public?

Unfortunately, the vast majority of countries do not have comprehensive, public plans and therefore savings and efficiencies are not being pursued and maximised. Nor is public scrutiny available to act as key driver. Australia is one of the countries without a public payment strategy – this is the key area public policy which should be developed.

 The Cost of Payment System is a Key Issue

The cost of retail payment systems is a major impost on all economies running at estimated average 1.2% of GDP. The EU estimates the range for retail payment systems in Europe is 0.6% to 1.6% of GDP. These costs blow out when emerging economies are considered - India recently changed its banknote policy to try to reduce cash use,

South Korean has tenaciously developed credit cards in an attempt to eliminate the 'black' cash economy. 

The Irish National Payment Plan reflected the EU view -- they estimate their payment system is 1.4% of GDP and set clear goals and actions to try to reduce costs.

‘Same Day’ digital transactions are essential

Since 2002 Payment Regulators in developed countries have targeted digital 'same day' transactions as the next key development - much of this has centred on ISO 20022 and has led to expensive executions using current systems and legacy providers. The first ISO 20022 standard was issued in 2004. It took ten years to have it widely deployed at an international scale with 34 countries and thousands of banks using it for cross-border credit transfer and direct debit applications.

The cost of debit and credit card networks continues to be a major issue for regulators regardless of attempts to rein costs in. While ‘wholesale pricing’ interchange has reduced this has been more than compensated by banks/issuers and franchises increasing retail fees: annual fees, other fees - for example all international charges now have a 3% fee plus FX rates, having been zero fee prior to 2000.

Other real time digital platforms run at 30-40% of the cost of association payments while new mobile offering in Asia are 65% cheaper.

Banks Profits and Payments

 Banks and independent card issuers are the prime drivers of consumer and business payments. However, major payment networks also exist within Governments and Business environments and can be used to create change.

The ability of banks to service these three sectors efficiently and effectively is critical.

Payments across institutional, wholesale and retail are a key part of most banks – “In 2016, the global payments industry accounted for 34 percent of overall banking revenues — up from 27 percent just five years earlier. For the next five years, annual growth will average 7 percent, making payment revenues a $3-trillion-dollar-industry by 2025,” according to McKinsey.

Technology is Critical to Payments

Technologies influence on payments will expand dramatically in the next decade - the growth in computing from edge computing to quantum computers along with data service beyond the current ‘cloud’ will aid significant improvements. Add AI, the IoT, biometrics, autonomous computerised cars and transport, all of which need to be understood and regulated by payment regulators.

The payments industry has been an early adopter of technology; one key example is ISO 8583, early in 1980s the industry adopted electronic switching, which quickly developed into electronic charge submission to eliminate manual authorization phone calls and expensive paper charges. Today ISO 8583 underpins all consumer payment systems globally – a new standard ISO 20022 is progressively being adopted with 32 countries now using it.

 Technology is part of the back bone of payments and is implicit in its efficiency. However, not all technology is well used and adoption rates can be low e.g. the US EMV program is a disaster, 6 years after the deadline only 74% of merchants are fully compliant and 18 years behind other developed markets due to the size of its installed base. The current market developments revolve around fast payments, wider adoption of social media payments, P-P payments, multi-currency payments with netting and better use of internet/eCommerce payments.

Mobile is Soaring in some ‘Emerging Markets’ 

The rapid growth in mobile in key emerging markets has been largely ignored by Western economies. Yet the figures make eye catching reading – in just 9 years China’s mobile has reached US$41.7 Trillion while Visa/Mastercard and other credit and debit cards combined have taken 60 years to reach annual volumes of US$24.5 Trillion.

China Mobile is the innovative model – but a regulatory night mare.

It combines payments, eCommerce, social media, games, dating, music and entertainment with a Telco in one ecosystem. In other words the China Mobile model effectively combines: Visa/MC, Amazon, Facebook, EA Games, Match.com, Spotify along with Telco services – a very powerful and alluring offering.

China Leads the Way with Mobile

 China's mobile payment market is the world’s largest reaching US$41.7 Trillion in 2019/20, from US$81 billion in 2012. AliPay has 1 billion active users globally and TenPay is in partnership with WeChat -- WeChat has 1.2 billion active global users 45% using payments.

These two platforms share 85% of the mobile market and now threaten the government owned payment card China Union Pay.

Key to the initial rapid development and growth is Nov 11th ‘Singles Day’, which is a rebranding of Batchelor’s Day, a 90s student tradition – sales for one day in 2020 totalled US$74.1 Billion!

Mobile has also expanded overseas to support the 190 million travelling Chinese tourists: AliPay is in 38 countries and WeChat in 27. Chinese mobile payments use QR codes, this is currently not standard at point of sale globally - there are some concerns about the security of QR codes.

Third Generation Mobile P2P Show Potential 

 Zelle, Venmo, PayPal Cash, Square Cash and Dwolla are all 3rd generation US P2P transfer apps on smart phones primarily aimed at 15-35 year olds -- these apps have zero cost for consumers and are a quarter of the cost to operate vs debit/credit cards and present a major threat to the card schemes for smaller transactions and social media interaction.

Zelle (re-branding of ClearXchange) owned by 7 US banks, Venmo owned by PayPal with combined volumes expected to be used by 275 million users spending US$1 Trillion by 2021 year end. These are a threat to other forms of payments notably debit cards.

Mobile Payment Wallets in Developed Markets are a Dud

Mobile wallets have been totally unsuccessful in building critical mass quickly in developed markets. Attempts made by banks, card issuers, Google, Apple, Microsoft, Amazon, Visa, MasterCard, Amex, Telco joint ventures include WPS in Canada and ISIS (rebranded Softcard in 2014) in USA, all have been resounding failures in attracting mass consumer use. Expensive contactless payments have quickly become the default point of sale payment in most developed markets, despite being ‘legacy’ technology, reaching 60-90% consumer usage in 3-5 years.

 Apple Pay is a good example of the 2nd generation mobile product which is performing poorly – due to poor strategy and implementation. Apple Pay was launched 7 years ago in the USA just as the entire payments market was distracted with EMV implementation. Apple’s low market share in many markets combined with the fact that 2/3rd of Apple phone users couldn’t use Apple Pay also created considerable dissatisfaction among existing Apple consumers.

Card Networks Proliferate in Developed Countries

The global players all have strengths and weakness - Visa and MasterCard are the largest but are far from dominant. For example Visa are weak in mainland Europe known as a debit card, both MasterCard and Visa has made no progress in China and limited progress in India. Other global card players include American Express, Discover/Diners Club, JCB, Cetelem and China Union Pay.

There is also a strong layer of local players who in many markets control 30-45% of a market – these include, domestic debit networks, retail store cards, conglomerate consumer cards, single purpose consumer offers e.g. car finance, airline cards, consumer finance offers, buy now pay later, instalment loans as well as budget services, payday lenders, pawn brokers and traditional lending practises e.g. family loans which vary in many markets.

Bitcoin is a Non-Starter for Mass Payments

 Bitcoin has been attempting for a decade to convince markets of its ability to provide timely payments. Shortly after its launch in 2007 a number of experienced payments experts reviewed the capabilities of Bitcoin. The review concluded that Bitcoin and or blockchain had no possible role in global mass consumer or business payments.

The concept of a global peer to peer network was simple not feasible given the current and future volumes. Bitcoin processes 7 transactions a second with an average transaction time of 12 mins – but with peak delay of up to 3 days. Visa and MasterCard process 16,000 transactions per second with a peak of 24,000.

No amount of ‘tweaking’ will take bitcoin to this level. Bitcoin has also had 2 systems outages in 10 years requiring the total network to backup transactions for 2 days – if this was to occur in the global payments market the result would be catastrophic. The ability of blockchain to work in other high volume segments such as corresponding banking or foreign remittances is also unlikely given the global spread of these products and the volumes.

Cryptocurrencies have Potential – Maybe?

There are over 2900 cryptocurrencies most aimed at investors brave enough to invest in them and risk never getting their money back. The number of fraud cases grew in 2020 to US$325 million as did the amount of alleged fraud and the US$4-5 billion OneCoin ponzi scheme. This activity is not limited to cryptocurrencies but certainly creates media headlines.

The other area of development is sovereign cryptocurrencies which has been quietly developing over the last 5 years. A number of countries and technology companies have been exploring the potential to replace cross border payments with cryptocurrencies which would avoid the need to use reserve currencies – much is yet to play out and it’s not a case of will the technology work, but rather how will the geopolitical issues play out.

Central Bank Digital Currencies (CBDC) have been discussed – however this brings central banks face to face with AMY and KYC issues. Banks simply cannot comply and pay fines while struggling to service clients – how will central banks do?  

Fintech Revolution Has So Failed

 Fintech - the buzz word invented in 2008 was to herald the ‘total destruction’ of banking, payments and insurance by fledgling start-ups - however a decade on Fintech has yet to reach this goal with investment levels insufficient to build true competitors to banks.

Total Fintech Investments 2008-19 are US$83.9 billion which includes Venture Capital and other investors including private equity and crowd funding, representing only 6.7% of total start-up funding.

The key question is whether this level of investment is sufficient for major disruption. Uber, for example, has raised US$11.5 billion in funding and debt in 18 funding rounds since March 2009 and has success in some taxi markets, a much smaller segment than Financial Services.

Uber as on start-up raised the equivalent of 14% of total Fintech funding. AirBnB raised US$2.95 billion and Snap (SnapChat) raised $2.63 billion – this is more than many Fintech categories have raised in a decade.

Today most Fintech’s are seeking to sell or create partnerships with banks in the hope of being acquired - hardly an enthralling prospect for many of these young entrepreneurs.