The Evolving Global Retail Payments Landscape
Money is a medium for exchanging value and it only serves its purpose when moved from one hand or place to another. Since its inception over 3,000 years ago, the processes by which money moves have drastically changed.
The financial industry is under disruption globally, with the disruption in the payments landscape in particular becoming increasingly obvious as it accelerates. There has been a fundamental change in the way in which individuals and businesses pay, stemming from new products and ways of doing business. We are starting to see the disappearance of older paper-based payment methods like cash and cheques, and the emergence of newer ones such as mobile-based payments. As evidence, 2018 reportedly saw the highest growth in the number of non-cash transactions globally for the past two decades.
What’s changing the status quo?
Three trends, each with a different degree of impact, are driving the majority of disruption throughout the payments value chain; regulatory intervention, technology-enabled innovation and changing consumer preferences.
The aftermath of the global financial crisis saw the reshaping of many regulatory bodies. In the UK, it saw the formation in 2013 of the Financial Conduct Authority (FCA), which was given the unusual mandate to inject competition into the industry. This led to a new era of regulatory innovation in the UK, including initiatives such as the FCA’s Innovation Hubs and regulatory sandboxes. That’s played a part in encouraging other nations’ regulatory bodies to follow suit. Some examples include Office of the Comptroller of the Currency’s (OCC) Office of Innovation in the US, the Monetary Authority of Singapore (MAS)’s Fintech and Innovation Group in Singapore, Abu Dhabi Global Market’s (ADGM) FinTech Digital Lab in UAE and the Fintech Supervisory Sandbox in Hong Kong. Such initiatives are opening up opportunities in the payments arena, once dominated by banks and card networks, for new players such as fintechs, technology companies and retailers.
Another big regulatory driver of innovation in Europe is PSD2, a revised version of 2007’s PSD, to accommodate the changing payments landscape and encourage more competition and innovation. One of the most impactful parts of PSD2 is its rules requiring the introduction of open APIs, including those that allow regulated third parties to initiate payments from banks on customers’ behalf. Similar rules are being explored under Australia’s Consumer Data Right, Hong Kong’s Open API Framework and Nigeria’s Open Banking Nigeria.
As innovation emerges, security surrounding payments should not decline. This is where regulation also plays a major role, as regulatory bodies seek to ensure that the new payment methods that have resulted from their innovation initiatives are secure. As an example, PSD2’s rules on Strong Customer Authentication aim to ensure security and mitigate against online card fraud. These measures are designed to enhance existing rules such as 2006’s Payment Card Industry Data Security Standard (PCI DSS), which businesses are required to follow to ensure consumers’ payments card data is protected.
All this innovation in regulation also applies to the ways in which regulators do things. We are starting to see more collaboration between regulatory bodies in different countries in order to improve payments offerings for consumers. In 2017, several countries in Asia, including Indonesia, Thailand, Singapore, and Vietnam, signed an agreement to coordinate their payment regulations and agreed upon standards to link their respective real-time payment systems. The Global Financial Innovation Network (GFIN), a consortium of 50 regulators formed in 2019 that collaborates on fintech innovation on a global level, is perhaps the most comprehensive example of increased collaboration between regulatory bodies.
Technology is facilitating an increase in the number of options customers have to pay globally and enhancing the ability of providers to tailor solutions to specific countries and demographics to meet unique payment needs.
The purchase journey now spans multiple channels even for those consumers that shop in-store, while simultaneously mobile points of sale and payment apps are shifting consumers away from physical locations. Mobile wallets, QR codes, chatbots, virtual assistants and connected devices are just some of the technologies allowing innovative seamless payment experiences that are more engaging, personalised and frictionless.
Technology has also helped to promote a more collaborative approach within the industry in recent years, helping the shift towards a more interoperable and efficient global payments infrastructure.
While a huge range of technology is impacting the payments ecosystem, mobile phones deserve a special mention. This device can be credited as one of the biggest enablers of change and innovation in payments, with global consumers reportedly having spent $101 billion via payment apps alone in 2018.
Mobile phones have facilitated new payment mechanisms including digital wallets and SMS payments, while at the same time accelerating the use of existing payment forms including peer-to-peer (P2P) payments via apps such as Venmo. Although some propositions are not new, the wider availability of mobiles and the simplified user experience, which can be delivered through modern smartphones, have spurred adoption.
The use of technology to build infrastructure that enables payments to be processed in seconds rather than days or even hours is gathering pace and having a huge impact on the industry — 54 countries had activated real-time payment systems by September 2019.
Regardless of the payment option being used, real-time processing is becoming the aspiration for payments infrastructures around the world. For customers, the certainty of knowing when a payment is initiated and whether it has been successful, along with the funds being available for the recipient to use immediately, are huge benefits.
Changing customer expectations
The ways in which we interact, socialise and transact are being disrupted by new technologies, new products and innovative businesses in all industries. That’s changing customer expectations, which the payments industry must adapt to. The companies behind customers’ preferred digital messaging channels, such as WeChat and WhatsApp, are having to find ways to enable customers to make payments through their platforms. Meanwhile, incumbent service providers are increasingly realising that consumers are demanding smoother, faster and more secure payments, and that customer retention depends on factors such as having the right payment methods for each region or country. There is less concern with how money is moved and more with the speed and ease with which the transaction can be made. With this in mind, much of the innovation in payments has been geared towards reducing friction to enhance customer experience as spending habits have shifted.
That’s particularly true in the retail industry with research showing that the way payments are facilitated is crucial to being competitive as customers will simply shop elsewhere if they are not satisfied, with typical cart abandonment rates around the globe getting as high as 76 percent. This illustrates the power of the customer, and the direct impact that the payment experience can have on revenue if it is not built to consumer expectations. That has a knock-on impact on payments providers, as they will lose their own customers if their solutions aren’t meeting requirements.
Innovative payment methods
Historically there was little in the way of major threats to the established payments industry, but the recent advances in technology, regulation and rapidly evolving customer expectations have begun to drive profound change.
One of those changes is the significant number of new market entrants that have entered the industry in the last 20 years. That said, it’s important to remember that some of the propositions are not new, but the market is now ready for them. Pay-later solutions, for example, have always been prevalent but newer technology-driven schemes such as Sweden-based Klarna are reinventing them for the 21st century and introducing them to a new generation of customers.
Additionally, while the payments sector is ripe with innovation globally it must be remembered that what works in one country might not necessarily have the same impact in another. The world has moved from a more universal payment standard in the form of cash to an environment where common payment methods not only vary by region but also by country.
I look at how technology, regulation and changing consumer behaviour are impacting or will likely impact the payment landscape in various regions, in a series of posts which you can find on the homepage. The discussion will involve examples of innovative methods which are either already popular or emerging ones likely to have a positive effect in the future.