A new payments ecosystem: How will the innovations of today affect the payments of tomorrow?

Payments is at the heart of the innovation revolution taking place in financial services and technological advancements will have a major role in creating an open, frictionless payments future. Along with political, social and regulatory influences this will create a new ecosystem facilitating both competition and partnership. The technological changes though, will come with a set of challenges the industry needs to overcome. These will only be exacerbated if the demand for faster, frictionless payments continues to drive innovation.

Looking at a subset of the key changes, the emerging open API landscape puts customers in control of their data, encourages genuine competition across financial services, and crucially enables customers to manage money from a single interface of their choosing. This, together with the ubiquity of mobile banking, and real-time payments, has the potential to introduce genuine end-to-end real-time service offerings and new intuitive payments options.

In addition, the widespread adoption and advancement of Cloud technology is leading to the creation of cheap and scalable payments services. This is resulting in the availability of payments-as-a-service (PaaS) functions via web or APIs, reducing the need for costly, complex infrastructure and further stimulating innovation in the sector as the barriers to entry are lowered.

These factors will combine to create a broad and diverse payments ecosystem, with a premium on frictionless payments. We have seen payments “Unicorns” like Stripe, Klarna and Adyen take advantage of the new opportunities for digital payments in a similar way to PayPal decades earlier. But as the industry progresses further, these companies will be able to play a larger role in the payments ecosystem and potentially take market share away from traditional banks and push into the public consciousness.

The impact of API technology and PaaS will lead to an increasing number of competitive neo-banks and non-bank financial institutions, and result in traditional banks trying to evolve, modernise and look for increasing numbers of partnerships. Given the dependence of traditional banks on today’s complex (and costly) payments infrastructure, there will be an increase in companies like ClearBank offering a component of the payments process as a service (in this case clearing).

This increase will stimulate innovation and encourage competition, in turn enabling a broader ecosystem and encouraging new payments products. The question will be whether this expansion of competitors can hold, or whether it will contract into a new set of dominant players in the way of other digital industries.

There will also be an increase in new, innovative payments methods. One example could be automatic merchant payments, whereby customers have a profile with a merchant and, through GPS and mobile payments, the merchant can take the payment directly without needing any physical method. Curl are already looking to do this and the new open API ecosystem enabling seamless payments to accounts will make this more common.

In the long term, it could result in a reduction of debit card use as the industry enables account-to-account payments in online shopping through these no-touch payments, contactless QR code payments, or social network payments. These last two are already well advanced in China with Alipay and WeChat Pay and the UK is expected to catch up in the next few years. The counter to this is credit cards and unless these new payments methods can come up with rewards and consumer protection systems to match, it is unlikely that credit cards will be usurped.

As with any change, there will be challenges to overcome in order to see the benefits of this new ecosystem:

1. Responding to cyber and fraud in real-time: More data flowing between more actors will result in a rise in cyber threats. Putting customer experience and safety at the forefront of any innovation will be key, balancing risk and reward as they go.
2. Processing mountains of data: Another challenge will be dealing with the sheer volume of data available and utilising that in a way that is both ethically sound, but also provides genuine benefit to customers. Data is increasingly valuable as an asset but is often poorly used, especially given data security has been traditionally more important than data analytics. Organisations who secure their data as well as using it to improve services, will quickly be seen as providing best value to customers.
3. Promoting responsible spending: Linked to ethics and the use of data, there is also likely to be an onus on financial companies to help people manage their money responsibly. The primary driver behind smoother online payments is for merchants to reduce the dropout rate of customers, so as this process gets easier (especially in mobile payments) it could encourage customers to spend more. Recent research has shown a trend for millennials to turn away from contactless cards to avoid over spending and debt[1]. How banks and non-banks help customers manage their money to prevent financial vulnerability could be a key selling point for their services.
4. New regulation: It is also likely that these changes will see increased regulation to deal with these challenges, current examples being secure customer authentication (SCA) and confirmation of payee (COP). Payments companies are likely to have to deal with further changes and controls as new innovations take effect. How to balance regulatory change and commercialisation is an age-old problem for banks and will increasingly become a problem for all parties involved. Partnerships and acquisitions are likely to be one way around this, but well-defined innovation strategies that are properly resourced and funded be more productive in the long run.

The payments ecosystem of the near future is likely to be comprised of multiple actors, representing a shift from an industry traditionally controlled by very few organisations. The focus will be on creating frictionless, fast payments that provide a customer-centric experience and technology, in conjunction with societal and regulatory impacts, will be a key enabler.

For the newer digital entrants to the market, the challenge will be to gain the trust of consumers and to remain on the right side of regulators and politics in a world with a heightened awareness of data privacy. For the traditional banks, the challenge is greater and requires the ability to respond more quickly to these changes, whilst still meeting their regulatory demands. Given payments is such a significant revenue stream for banks, retaining their place in the payments value chain and embracing these innovations will be crucial for their continued success.

[1] ‘Why a return to cash might be the answer to the millennial debt problem’ – The Telegraph, 6^th September 2019