Top six trends in payments
The payments industry is going through a period of unprecedented change, across the retail, corporate and wholesale segments. The financial crisis of 2008 famously brought payments “out of the cellar and into the boardroom” and the ensuing tranche of regulation has brought great challenges – and great opportunities – to payments players.
Fintechs continue to accelerate the industry’s transformation, connecting the old and new worlds and creating a perfect storm for payments. Collaboration is the new mantra as the whole payments ecosystem recognises the need to partner in order to embrace and optimise the changes ahead.
So what trends should you be looking out for?
1. Successful payments players put customers at the heart of what they do
“Get closer than ever to your customers. So close that you tell them what they need well before they realise it themselves.”
Steve Jobs, Apple
The payments industry will have to run fast to keep pace with the expectations of a new breed of customer who expect payments to be invisible and instant. The players that get it right will put customer-centricity, customer experience, and value-added services at the core of what they do. Harnessing the vast amounts of data available and leveraging the latest technologies will be critical to success in the battle for the hearts and minds of customers. And what retail customers expect today, corporate customers will expect tomorrow.
2. Payments data is the oil; analytics is the combustion engine
“I keep saying that the sexy job in the next ten years will be statisticians, and I’m not kidding.”
Hal Varian, Google
While new players in the payments space – like Apple, Google and Facebook – understand how to harness data to compete and take market share industry incumbents have been sitting on a data gold mine which they have been unable to exploit to their maximum advantage.
This is all set to change; a new appreciation of the huge value of this customer data and the advent of new technologies (such as artificial intelligence) to extract it will arm traditional payments providers with the weapons they need to compete with industry disruptors.
3. Finding the upside in instant payments
“I want it all and I want it now.”
In this new digital age of instant information, goods and services, customers naturally expect instant payments. The benefits are easy to see: for the economy; for liquidity; for settlement risk. And the use of cash will diminish, reducing massive costs to society (the EU puts the cost of handling cash at 50 billion euros per year) and making life a great deal harder for criminals.
But it will cost banks to migrate legacy instruments and create enhanced security for faster instant payment systems and even if payment costs go down dramatically, the Federal Reserve Bank estimates that the overall business case for most financial services institutions would be at best neutral. But instant payments will become a must-have to compete with third party providers and non-bank payment services providers.
So how can banks find the upside? What are the new overlay services that they will be able to build on the instant payments foundation? How can these arm banks in the battle for the payments space, which is ultimately a battle to win the customer relationship and to gain control over customer data in order to offer high-margin services, within and beyond payments.
4. Partnership, partnership, partnership – it’s the industry’s future
“If you do not seek out allies and helpers, then you will be isolated and weak.”
Sun Tzu, “The Art of War”
Value chain disaggregation is leading to rapid growth in payments partnership opportunities, and it is partnership that will be integral to the success of both the fintech sector and the payment industry’s digital transformation. The partnerships built upon the use of open platforms and APIs, whether through the launch of an open platform on which fintechs can develop products or by opening up access to third parties, will be truly transformative. Banks at the cutting edge of payments have already embraced this opportunity and will be rewarded with huge competitive advantage.
5. Regtech – the new fintech?
“The banks, because of mismanagement, of huge risk taking, are now in very vulnerable positions.”
And so the crisis in the markets in 2008 created an avalanche of new regulations for financial institutions at a time when the European Commission was driving a regulatory agenda to open up the markets to competition.
Regtech consultancy firm JWG estimates that over 300 million pages of regulatory documents will be published by 2020. This tsunami of regulation has driven compliance costs sky high but regtech may ride to the rescue. To date the choice has been between established technology vendors and building in-house solutions but new agile regtech providers are harnessing distributed ledger technology; machine learning; artificial intelligence; cryptography; big data, and cloud computing to change the game.
2018 is tipped to be the year that regtech takes off with many predicting the beginning of fundamental, tech-enabled transformation of the middle and back office.
6. Blockchain – the jury is still out but the debate rages on
“Forget the currency; it’s the protocol behind it that matters. It will mutate and take over everything we do (or could one day do) on the web. You’ve been warned.”
Morgen E. Peck, IEEE
Nothing seems to excite debate quite as much as the future role for distributed ledger technology (DLT) in financial services. Advocates believe DLT will transform financial institutions and the financial landscape they operate in; sceptics maintain that the blockchain is a solution looking for a problem; that it is not scalable and has huge privacy issues. Wherever you stand there can be no doubt about the time and money being invested in exploring the possibilities of DLT across multiple functions by financial institutions; regulators and new players alike – the question is whether ultimately the blockchain will just have niche applications or whether it will have a much broader role to play.
This article was originally published on InsurTech Rising (FinTech Futures’ sister company)