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The world of payments has changed in a comparatively short time span beyond all recognition. Old certainties have been swept away by a digital revolution, and consumers are loving the resulting freedom.
For one thing, reliance on cash usage is clearly decreasing. These days you can buy a bus ticket by text, pay for groceries with a QR code or tap a sales terminal with a mobile phone to get a coffee or a paper. Cashless payments will account for one trillion transactions a year globally by 2025, up 80% from 2020 and set to triple by 2030, according to an analysis by PwC.
Other profound changes are afoot, ones that raise important questions about where banks, both traditional players and challengers, now sit in the payments value chain.
Anyone who has bought a new sofa or a secondhand car recently might have reflected how much easier it has become to complete the deal, how much less reliant we all are on conventional forms of financing. Buyers are less restrained than they were by the friction of seeking approval from an intermediary.
Take embedded finance, said by many to be the future of the financial services industry. This is where a non-financial provider of services, perhaps a retailer or ride-sharing company, bases its operations on a digitally embedded financial service. This might be in the form of payment processing, but it could just as easily centre on lending or insurance.
The appeal of embedded finance is that it streamlines financial processes, eliminating the gap between consumer and the company they do business with. No more need for a separate financial services provider, such as a lender or bank. No presentation of a credit or debit card required. Guilt and hesitation are ironed away. The consumer is less likely to reconsider a purchase if all they have to do is tap a few keys on their smartphone to activate an embedded payment app. Who wants to go back to filling in forms and waiting in hope?
Then there’s Buy Now Pay Later (BNPL), a digitally-driven way to buy goods on credit and pay for them in the future. BNPL is commonly used by catalogues and online retailers, but is also becoming a common payment method on the high street. It’s particularly popular with younger consumers because it is easy and can be a cheap way to borrow. Klarna, Clearpay and Laybuy are among the leaders in the space. BNPL providers may, or may not, check your credit score to gain a bigger picture of your worthiness, since they are not bound by the same KYC obligations as traditional financing.
Smart contracts are another non-traditional payment innovation, self-executing contracts written in code and designed for anonymity. They use blockchain to automate the consummation of an agreement without any delay or any intermediary’s involvement – no banks, no lawyers, no regulatory scrutiny.
For many banks, these alternatives to the mainstream have uncomfortable echoes of the rise of crypto. The world of crypto currency has outgrown its niche early adoption phase, and is now of interest to a new generation of consumers of financial services. This is especially so in regions where traditional banks have poor reach, like Africa, South America and the less developed bits of Asia. Decentralised finance (DeFi) in all its guises is all about the removal of the control that banks and institutions have over money, financial products and financial services. Thus a new pool of liquidity is put at the disposal of consumers, independent of the mainstream.
All of these developments beg the question of how financial institutions should respond, whether they be Tier 1 banks or digital rivals. How do they get to grips with a world of easy, frictionless payments and open banking innovations that seems set on disintermediating them?
The answer lies in technology that allows banks to play their part in this ecosystem rather than stand outside it. We’re talking about the power of software at the level of the API. Banks must start by choosing a platform that allows them to emulate some of the agility that the new payments players are so good at. The right platform could help financial companies to forge partnerships with digital payments rivals, as well as reduce cost-to-service and attain faster time-to-market for their own products. It could additionally play to their strengths by letting them do what they are already good at, but in an augmented way, for example fraud mitigation and getting insights out of customer data.
A good platform not only takes away the need for complex integration and coding, it also enables the kind of digital omnichannel experiences, faster transactions and increased security that customers now demand. Once channels are synced and integrated, customers can choose to start a transaction on one channel and fulfill on another.
All this is made possible with a payments backbone and orchestration layer that breaks down silos and so removes the friction that customers hate. It will also lead to faster innovation and differentiation, and immediate advantage over other players less able to adapt to changing market demands. The power of the right platform is that it is a scalable engine of innovation and thus has far more power and potential than the deployment of multiple individual point solutions to individual challenges.
Consider the example of SIBS. To build competitive advantage and prepare for future requirements, Portugal's leading payments processor applied a forward-thinking strategy using unique API infrastructure to create a differentiated customer experience. SIBS built a revolutionary open-banking platform from scratch to change the way users and 24 financial institutions in Portugal do business and also developed an award-winning digital wallet app and a marketplace for all Portuguese banks and customers.
In the wider economy, digital payments are the lifeblood that will power tomorrow’s global growth. They will drive access to new markets, raise adoption rates among the unbanked and open a world of fresh opportunity for those banks that can get on board. New types of payment are underpinning the development of entire digital ecosystems. Be part of it. Get the foundation in now before it takes off. Develop your innovation agenda and proof yourself for the journey.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Boris Bialek Vice President and Field CTO, Industry Solutions at MongoDB
11 December
Kathiravan Rajendran Associate Director of Marketing Operations at Macro Global
10 December
Barley Laing UK Managing Director at Melissa
Scott Dawson CEO at DECTA
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