Pay it your way: Why payments innovation is needed
The humble payment that moves value from A to B takes many forms. Innovation in the sector is booming: in recent years the payments industry has seen the highest number of FinTech entrants – and largest proportion of investment in FinTech – of any banking sector. The push for real-time and mobile payments is a dominant theme, with over 40% of payment companies partnering with FinTech companies last year. Payments is among the most disrupted domains in banking.
Yet innovation and adoption are very different beasts. Whereas tech-savvy smart-watch yielding users might pay with the flick of their wrist, others entrust their payments to cash and cheque, much as they would have done 50 years ago. With so much innovation comes an increasing divide in adoption and preferences, and payment habits vary significantly by region and by user – a corporate treasurer can’t pay on behalf of her firm in the same way she pays at home, for example.
So why do we continue to innovate in payments, despite the variation in adoption of innovative trends? I firmly believe there is much good to be had in continuing these trends, both to the industry and society at large. Let us outline five of the primary reasons why our industry continues to re-invent itself, and why it must keep doing so.
- The primacy of the end customer
We should start with the most important stakeholder, the payment user. While some segments of society are well catered for by the payments systems of today – professionals with a regular source of income, for example – other users have unfulfilled needs. In 2016, the UK payments industry ran an extensive exercise to collate unfulfilled user needs from payment providers and users (including consumer advocates, corporate billers and government). They sought to address these “user detriments” by outlining a UK Payments Strategy, which holds the blueprint for the payments of tomorrow.
What are some of the examples of unfulfilled user needs? Three stand out:
- Payments may not be fit for vulnerable or financially excluded users, so innovation in this space should be welcomed. Better user control of notifications and realistic balance prediction (based on known and forecast payment behaviour) gives users a chance to delay their payment before using an overdraft.
- A customer’s ability to self-exclude from certain transactions could nudge them to make better financial decisions, for example with regards to gambling spend. For the first time, banks have started to give users control of where they make payments. Monzo, Starling Bank and Barclays Bank led the way with others set to follow.
- Those earning their income in irregular patterns may find that a commitment to pay their bills on the first working day each month is a source of stress, when their wages are, for example, paid weekly on a Thursday in arrears. For this scenario, an initiative called “Request to Pay” is proposing to create a communication channel between user and biller to facilitate the right outcome for both user and biller. Each payment request would accommodate a number of options for the user: pay all, pay some, request extension, decline, request contact.
2. End-to-end visibility
Innovation that increases transparency of funds within the financial system can vastly improve customer experience. Even today horror stories of funds lost in international transit for 12 weeks emerge, understandably causing real concern and inconvenience. Whether it’s a relative sending emergency money abroad, or a small business paying for perishable goods at port, we all rest easier when we know our money has reached its target.
The developments in logistics providers giving step-by-step visibility on the delivery progress of a package should be the ultimate aim for international payments. Developments such as SWIFT’s Global Payments Initiative (GPI), which includes a unique transaction identifier, and the EU’s Revised Payment Services Directive (PSD2) are enhancing the speed, visibility and cost transparency of international payments.
- Reducing costs
For retail payment users many payments are free, instant and in the palm of their hand. It’s a different story however for commercial and corporate payments, where:
- Paying for payments is the norm and pricing varies widely by provider, by type of client and by volumes.
- Mobile payment options are varied and not always catering for multi-person payment authentication journeys.
- Reconciling a payment to a shipment, purchase or invoice is either manual or enabled by paid-for solutions, e.g. Xero or SAP
The New Payments Architecture (NPA) seeks to provide Enhanced Data and to provide a single type of payment infrastructure for all payment types, which might better serve these needs. This will be enabled by implementing the ISO 20022 messaging standard, which provides richer data for activities around the payment itself. Given the importance of small business start-ups to the economy, reducing payments costs for this group warrants a greater focus.
- Combating Fraud & Financial Crime
We should recognise that sadly the payments system is not free from abuse. Payment fraud including Authorised Push Payment (APP) scams abound (UK consumers lost £236m in 2017 to this type of fraud alone). Laundering of criminal proceeds through the financial system often involves a payments transaction. Innovation is being used to process vast volumes of data to identify trends that can point to sources and outlets of financial crime across the financial system. Recently, Faster Payments and Vocalink implemented a system for the detection of laundered money regardless of where in the UK the money is transmitted, enabling the funds to be blocked before leaving the system. In addition, NatWest and Vocalink Analytics deployed a system to detect and prevent invoice redirection fraud for businesses.
- Innovating for show
Finally, there are examples of payments innovation that appear to exist for other reasons. Perhaps they are there to challenge the status quo or to seek publicity. These projects could be valid avenues for future innovation and an outlet for creative thinking for the teams involved, whether they gain critical mass or not. Generally, this is good for the industry, but some of these can be perceived as vanity projects. For example, I remain unconvinced that turning the orientation of a payments card sideways is a game-changer.
Whatever the motive for innovating in payments, the purpose of our innovation should be crystal-clear: there are many genuine customer needs that remain un-catered for by our industry. To remain relevant in future, we should ensure that we achieve the basics all the time today; there can be no sympathy for innovation at the cost of basic security and resilience. Building on that foundation, we can innovate with purpose to make payments of tomorrow better than today.