News & analysis from across the industry
Executive Interview – Payments Forecast
As the world adapts to the effects of the pandemic, we have been speaking to our network of contacts around the world to assess their reaction and thoughts on the future of the payments industry.
Rittick Banerjee is an SME in Cards & Payments with 15+ years of knowledge across Payment network, Clearing/Interchange, Merchant acquiring and Card issuing. He is an advocate of Digital Payments, Fintech, AI and Blockchain; a blogger and a public speaker. In his professional role, Rittick is an Associate Director at a global IT services company and is responsible for the delivery, growth and client relations across Network, Merchants and Servicing lines of businesses for one of their largest Financial Services clients.
He took the time to give us his views on how the industry will develop…
How will the payments industry be affected by the pandemic?
The initial phase of lockdown everywhere has seen the volume and value of payments plummeting to an all-time low. Card payments at PoS, payments through paper-based instruments, ATM withdrawal and cross-border remittance through agents – all have seen a sharp decline. Global trade has fallen in double digits, with temporary closure of travel and hospitality, restaurants, non-essentials retail and the manufacturing industry, and partly for complex supply chains that go through China.
The silver lining of the current pandemic is the steep rise in adoption of cashless payments and an accelerated shift towards a contactless economy. Retail payments at the point of sale through mobile wallets, contactless cards or wearable payments are set to grow sharply. There’s a more radical shift in the unorganized sector, where SMB merchants are in rush to accept payments through cheaper alternatives such as mobiles, with an easy onboarding option. The drift away from COD (cash-on-delivery) in e-commerce would force payment gateways and aggregators to offer customers a wider range of payment options.
Another area facing major disruption is cross-border remittance. As economic volatility causes large-scale loss of income for gig workers and people without access to an agent network, cash-heavy remittance across corridors has declined sharply. There has been a huge impact in the emerging economies such as those of Africa and Latin America, who largely depend on money transfer to make ends meet. A pre-Covid study predicted that 30% of remittances in Latin America would go digital by 2030, and the current pandemic will see a rapid acceleration. While digital remittance is set to grow, supported by government regulations, it’s important to extend the benefit till the last leg of disbursement to a hospital, school or for utility bill payments.
A paradigm shift towards online remittance exposes another obstacle to digital finance for poorer communities in places like sub-Saharan Africa, Mexico or south-east Asia, where the majority of the population don’t have access to a traditional banking system. However, mobile penetration in most of these areas has reached a tipping point and the cost of digital communications will continue to fall. This opens up an opportunity for low-cost digital products to create a more inclusive economy. Tapping the under-privileged market by providing mobile payment instruments and related services would eventually enable deeper engagement as it would open up ways to track their financial need and build services to address that
Small & Medium Businesses
A very important market struggling to survive is the micro, small and medium enterprises (MSMEs), and no economic revival is possible without sustaining their business. They are the backbone of any emerging economy; MSMEs constitute 30% of India’s GDP and 45% of exports, and nearly 50% of them have witnessed a 20-50% dip in their earnings due to the current disruption. Managing liquidity, securing the supply chain and minimizing the cascading effect are critical hurdles these businesses are striving to overcome. While governments in many countries are providing a relief fund as an initial stimulus, banks and payment companies need to roll their sleeves up to help small businesses survive by providing micro-financing, clearing payments faster or extending the credit period.
Accounts Payable and Direct Transfer
Accounts Payable has traditionally been an intensive manual process starting from a paper invoice to receipt of a cheque in the post. During lockdown, printing paper cheques, collecting them from bank lockboxes validating them manually are almost out of the question. Added to that, as the supply-chain comes under more stress, managing account receivables and achieving a faster cash-flow are impending challenges that businesses will need to address. They will increasingly adopt digital supply chain finance solutions, with real-time payments like direct bank transfers being preferred. Payment platforms such as VISA Direct, card-based Push Payment (Supported by services like MasterCard Send) and country-specific RTP rails like UPI in India are fuelling innovation in real-time bank transfers.
More uses for Push payments should emerge in B2C scenarios like the wage payments, insurance claims or government funds, and in P2P money transfer. However, it poses a major security question for the industry about ensuring the authenticity of payments and bank accounts, as direct bank transfers are irreversible.
The growing use of app-based and online payments, complemented by a sudden spike in unemployment, can potentially lead payment fraud to an all-time high. The current situation creates new opportunities for phishing campaigns through Covid-related messaging. FIs should be continuously vigilant in their anti-fraud and security measures. Multi-layered authentication and use of advanced technology like deep learning and behavioural bio-metrics could become the new normal in detecting early fraud. Demand for trust and transparency in large-ticket payments, particularly in B2B or cross-border payments would be higher than ever before. With a sharp decline in transactions in large-ticket industries like hospitality and airlines, revenue for payments companies is set to fall.
With international travel being curtailed, cross-border transactions have been radically slashed. Higher interchange and foreign-exchange cross-border transactions contribute significantly to non-interest income, which is now facing a severe crisis. This is a trigger for the payments industry to –
- Tap new markets, which are not profitable to begin with but break even as they grow
- Encourage financial inclusion through digital growth
- Create new lines of revenue through value-added services to merchants and consumers
- Co-create value through cross-industry and fintech collaboration
- Take a deeper look at the operational cost structure and safeguard profits with greater efficiency.
What do you think are the key drivers of growth in payments over the next 2-3 years?
As the pandemic enforces a fundamental shift in purchasing behaviour and money transfer, C2B, B2C, B2B and P2P should see significant growth in digital payments. Once a tool for convenience, they are now a necessity in the current pandemic. Despite the looming economic recession, the payment gateway market is set to grow at 11% CAGR. Besides high smartphone penetration and low internet connectivity cost, the key factors driving growing adoption would be:
As cashless payments are set to reach a new high, speed of innovation is a major challenge for the large financial institutions (FIs). While they bring the infrastructure, security and deep knowledge of processing payments, they are finding it difficult to expand at the rate required in the current situation. Co-operation with fintechs could be the answer, and there should be a market-specific alliance strategy where the fintech companies are in close touch with the local customer demography. Some of the areas, where value co-creation might drive growth, are:
- Local fintechs issuing debit cards as instruments for financial inclusion as the economy turns away from cash, although this would need underlying support from payment networks
- The search for faster fund transfers for efficient management of working capital. It opens up opportunity for Fintechs to build new services having a near real-time payment platform at core, where they take care of onboarding, integration and local compliance
- Fintechs handling personal finance management can bring knowledge of industry-specific sales data in local markets. The aggregated view can show banks how small businesses are performing and help them decide what finance or additional help they need.
While regulation has traditionally curbed the speed of innovation in payments in many markets including the US, Covid has encouraged the trend towards a cashless economy. Decisions by the EU and UK regulatory authorities to raise the limit for contactless payments, and the Financial Conduct Authority’s more lenient approach to strong customer authentication have helped to make contactless payments more acceptable. In Africa, which has the world’s largest population without bank accounts, countries like Kenya, Nigeria and Ghana are implementing measures to incentivise cashless money transfer, in the form of waiving fees, increasing daily transaction limits and easing up KYC requirements to onboard in mobile money platform. The Indian regulatory body, the RBI, is giving particular emphasis to digital payments, and government-backed payment services should accelerate their acceptance in all sectors. While concern about security still looms large, and digital awareness is traditionally low in most of the emerging economy, a well-balanced government policy would facilitate its growth.
Covid provides an opportunity for Fintech innovation to target the unbanked and under-banked segment, and give them access to free or low-cost digital financial services. Low-income households, with little or no access to traditional banking, should greatly benefit from fintech solutions that make funds available more quickly. Having wages or funds from government social programmes paid directly into a mobile wallet gives the unprivileged immediate access to money, when they might otherwise have to walk for miles to an agent to obtain cash. This creates a digital money transfer eco-system where the preferred mode for utility payments or daily purchases would be the mobile wallet. Small street-side vendors would find this very acceptable. Regions like south-east Asia or Latin America, with high smartphone adoption, affordable internet and a significant population percentage living below the poverty line, present a great opportunity for the industry.
One-time use Virtual card in corporate payment has existed for quite some time now; however the market has not been widespread. In the current economic volatility, with suppliers demanding faster payment, paper checks and ACH would change into virtual card payments. Moreover, the low risk of fraud makes it a lucrative tool in the current pandemic.
Another sweet-spot for virtual cards should emerge in C2B payment which can have many uses, from insurance payments to rewarding employees. A favorable interchange rate between networks should see a massive growth in the issue of virtual cards. It also opens up a new opportunity for fintechs to tap into, in collaboration with FIs.
Digital lending platform
A major threat to recovery in a global economic downturn is the question on survival of MSMEs, which employ a large part of the global workforce. A majority of them can’t get access to traditional banking. Micro-finance lenders must be equipped to address the requirements for MSMEs as they struggle with disposable income, and provide them with convenient repayment solutions at an affordable interest rate. It will be an opportunity to onboard them to a digital lending platform with minimal KYC requirements, and make micro-credit facilities available through digital disbursements. The digital inclusion of MSMEs would eventually lead to a more flexible supply-demand cycle and would help them maintain growth.
As digital payments become a new normal, IoT-devices should continue to evolve as a mainstream payment tool. While wearable payment is not new, touchpoints have so far been limited. We should see a new world of payments emerge where every customer touchpoint would be enabled to accept all kinds of payments. What will it mean for payment companies? They will be creating value and establishing new lines of revenue with other industry players.
The public utilities are also ripe for IoT, most obviously through smart grids or meters to improve efficiency and prevent revenue loss, however, the payment still requires a manual trigger. Covid opens an opportunity for payment gateways to be part of this smart utility eco-system, and integrate IoT payment processing with single-tap authentication through a mobile app.
What are the biggest barriers to New Product Development and Innovation in payments?
Innovation has to be managed in an efficient, scalable and cost-effective way without compromising on safety. Some of the biggest barriers the industry needs to overcome are:
Need for real time
Real time payments are not new in the payment world, and some of the most conservative payment systems like that of US have also built RTP rail. Faster cashflow is a prime necessity now for gig workers, SMBs or people waiting for insurance payouts. There are several operational and technical challenge that FIs need to address to make RTP programs successful, as the system doesn’t have the luxury of downtime, and 24/7 operational support is required. Another stiff challenge is seamlessly integrating an RTP system with internal ERP or corporate accounting. However, the toughest barrier is building a real-time partner eco-system. No payment network or scheme can work in isolation; involving all the players in a real time clearing and fund transfer system will be a major challenge.
Lack of interoperability
In next few years the payments industry will be defined by a growing number of acquisitions and co-operation with fintech. Finding partners to help create additional value is an easy and affordable way to win, particularly at a time when slashed R&D budgets offer no headroom. While fintechs are nimble enough to speed up innovation, banks and networks should have interoperability embedded so that they can seamlessly integrate with fintech systems. For example, launching a prepaid card for a financially-distant region can be accelerated when a fintech handles acquisition, onboarding and services, and banks offer the infrastructure and BIN services for card issue and payments clearing. When financial institutions house outdated and inflexible legacy systems unsuited for innovation, with heterogeneous data sources and fragmented data storage, it is a major stumbling block. Industry players need to solve this strategic problem when they take advantage of fintech innovation, in order not to be left behind.
Growing propensity for Fraud
Covid has reinvigorated payment fraud and an unprecedented growth in digital payments offers the perfect breeding ground for fraudsters. Account opening fraud may see a sharp spike with a push to onboard MSMEs or the unbanked segment to a digital platform, and this innovation can’t succeed within a rigid KYC requirement. Transaction fraud can also skyrocket with the steep growth of e-commerce and shift towards digital remittance. Real time payments increase the exposure to authorized push payments (APP) fraud. Businesses or individuals may easily be trapped by an apparently legitimate invoice with a fake account number. A push payment instruction to a bank authorises an instant transfer that doesn’t provide opportunity to react later, and makes the system vulnerable for Account Takeover fraud.
As people mostly stay at home and spending on travel, hospitality and retail drops dramatically, the healthy flow of transaction data in banks’ analytics system is hampered. This ‘dried up’ data is a major challenge for the analytical model to interpret, which is key for new product decisions. The problem intensifies as data compiled pre-Covid does not reflect a customer’s change in behaviour and can’t help with difficult judgements in product design. How to recalibrate analytical models, and how to define and collect relevant and reliable information for a risk-based but intelligent decision, is a major problem that all financial industry players must solve.
Slow merchant onboarding
The current paradigm shift would need faster onboarding for merchants on a digital platform to have access to micro-lending or digital payments. The magnitude of the problem varies across different markets. Even in developed countries, many merchants are going online for the first time, and need help at every step from website creation and inventory management to payment acceptance. In a market like India, where oligopoly of payment wallets presents a very different challenge, merchants are looking for solutions that would accept all forms of payment, including leading wallets and UPI, and cards would make reconciliation easy. In heavily under-banked markets like Latin America, the drive for financial inclusion can’t succeed unless merchants get easy and low-cost access to an acquiring network which will accept an increasing number of debit and pre-paid cards. The other challenge is an inefficient onboarding process which is document-heavy and relies on traditional measures of risk-profiling, alongside poor infrastructure that over-prices the risk and sets unaffordable interchange and interest fees for SMBs.
Agility to hyper-personalise
Unpredictability in the current situation redefines adaptability for the global payment eco-system. As the situation continuously evolves, , payment systems need to flex their muscles in this dynamic environment. To engage meaningfully with their loyal customers, FIs need to be flexible enough to change their business rules quickly to meet the needs of every micro-segment. This will vary from an early payment discount in supply chain finance to revisiting the rules for loyalty points repayments. Systems should be sufficiently agile to change their product check-out options, cashback accrual or credit card offers in ways that reflect changing customer needs. For example, points meant to be redeemed for film tickets would be more useful if they could be used for retail purchases, and card issuers need to be adaptable in their rule management.
How can modern technologies assist in these challenges – particularly in combination with some of the issues faced in the pandemic?
As the payments industry becomes commoditised, technology will make the difference and fintech will point the way forward. To alleviate the challenges the industry is facing, technology can be the game changer. Some of the major potential drivers of change include:
API-driven innovation and open banking
Enabling MSMEs to go online is absolutely vital for any country’s economic recovery. Small merchants going cashless for the first time need an easy-to-integrate online payment solution. This is an opportunity for fintechs such as Google Pay which offer an API-based payment solution for app- or web-based checkout. As the drive for innovation gives birth to deeper collaboration in the evolving payment eco-system, API driven Open Banking creates an opportunity for FIs to build a plug-n-play platform model where tech companies can innovate and create a whole new bouquet of services for customers. Another area ripe for API-powered innovation is cross-border payments for both low-value, high-velocity P2P and high-value B2B scenarios. We should see more and more banks and fintechs joining hands to build fast and efficient cross-border settlement platforms in a regulated environment, where simple API integration removes the headache of payment originators or treasury banks for local rails or complex FX.
Big Data muscle and machine learning
The analytics model trained over the years to decide customer segmentation or make product decisions is unsuitable during the current economic downturn, and FIs are grappling with the challenge of information deficit as transaction volumes dry up. Data-mature companies able to process new information will have an edge. Companies with ‘big data muscle’, able to capture, store and process semi-structured and unstructured data from changes in customer’s financial profiling or social demography will have an advantage.
A scaled up big data platform is essential to adapt to changes in machine learning modelling. As new data dimensions and attributes emerge, they will need the application of unsupervised machine learning (ML) as the lens of past knowledge does not exist. FIs need to move from rule-based supervised classification modelling towards intelligent and adaptive machine learning. This will generate meaningful insights about hardship relief and curated collection strategy, offer customised credit terms for personal loans and identify the potential turnover of a loyal base.
Another very important use of ML is to pre-empt fraud, with help of richer data like ISO20022, which will increasingly be adopted to bring more interoperability in payment systems. Sophisticated ML technology has become increasingly necessary to build robust models able to pre-empt fraud, as digital payment expands to record levels.
Going Cloud-native enables faster innovation and the better management of engineering costs and product development. Traditional in-house infrastructure not only uses available resources inefficiently and raises the cost of product building, but also adds overhead in managing data centre, network and storage management. At the same time, a rigid, monolithic architecture doesn’t allow agility in product development or rapid adaptation to changes in demand, which is best done through the cycle of prototype-test-feedback-improvement. The incremental launch of product features is moving towards loosely-coupled Microservices architecture, containers and DevOps, which essentially fuel the adoption of hybrid cloud technology.
Another area ripe for a sharp growth trajectory is cloud based point-of-sales services, that offer industry-specific, affordable payment acceptance solutions for SMBs. As more and more small and medium businesses prepare to accept cashless payments in their physical stores, cloud-based SaaS products make it easier to accept newer payment form factors. Value proposition goes wider as they address the operational, accounting and reporting needs of the business and help make more informed decisions.
Intelligent Process Automation (IPA)
New products targeted for MSME and the low income segment would normally be unprofitable until they achieve a significant market share. The launch of low-margin product suites challenges FIs to revisit their cost structure to remain profitable. Intelligent process automation, aka IPA, powered by RPA and AI technology like machine learning and NLP, is a great tool for increased efficiency and speed while reducing operational costs. As business moves towards e-invoicing and online payments, an efficient and automated system of vendor profiling, compliance and risk assessment, bank account validation and ERP integration can drastically reduce the onboarding time. Another area to go through major disruption is merchant onboarding which is traditionally a long process of three to five days for acquirers, starting from data collection to decision making on risk profiling and underwriting. As merchants now expect immediate activation, faster onboarding is set to become a strategic differentiator, and automation of data capture and verification (KYC), counterparty credit checks and activation is one way in which this can be achieved.
As online commerce sets a new record in transaction volumes, so does fraud. How to verify contactless payments is the subject of vigorous discussion. Behavioral biometrics has the potential to prevent fraud based on characteristic, user-specific patterns of behaviour. Traditional biometrics like voice recordings or photos can to some extent be falsified, but behavioural biometric factors, such as how someone holds a phone or how much pressure they use for key presses, are difficult to replicate. However, training a model is a time-consuming challenge and a poor model might lead to false positives.
Digital onboarding of businesses and diminishing paper invoices create demand for greater trust and transparency in the product supply chain, requiring faster processing and transaction settling. Blockchain offers the building blocks for trusted and secured data. It gives a real-time track and trace capability for businesses to be assured of authenticity when importing products in a disrupted supply chain, in a stressed economy. It creates an opportunity to build an integrated rail where supply chain finance and invoice financing are integrated with transaction data like sales orders and invoices. With recent data from the World Bank revealing that 1.7 billion adults globally have no access to a bank account — but two-thirds own a mobile phone — blockchain is well placed to spread financial inclusion. A major issue for the unbanked population is that even a valid ID does not allow them to open a bank account. Blockchain solves this problem with digital identity, as long as the banking-deprived community can access a mobile wallet to store digital currency. However, the success of blockchain depends on industry players collaborating to build interoperability, and isolated innovations will be incapable of inspiring change.
How can technology help, as a result of what we have learned over the last 3-4 months?
In the current economic volatility, and with the paradigm shift in payments behaviour, we have learned that payments companies must urgently consider the following –
- Rapid prototyping and faster roll-out of products and services
- Easier integration and interoperability
- Agility in product building for responding quickly to changes in demand
- Self-service and automation to speed up frictionless onboarding
- Intelligent security and fraud measures that can adapt and evolve
- Lower innovation costs to offer an affordable price point
- Risk modelling which champions the financial inclusion drive
The current need for innovation can be met by adopting new-edge technologies like cloud, AI/ML, Advanced analytics, behavioral biometrics and Blockchain, and right-fit implementation of newer s/w development methodology such as API, microservices, containerization, devops and SRE. However, most of the large FIs have age-old systems at the core of their payment processing, and a fragmented data strategy makes data-driven insight incomplete and costly. The ideal state of affairs is a seamless front-to-back integration for a consistent view of data and business processes, but in most cases this will need a well planned programme of several years’ duration. In the current economic downturn we cannot wait for a big bang transformation.
The payments industry needs to come up with a two-fold approach – while the evolved eco-system responds to immediate challenges with loosely-coupled API-driven integration, large players must look deep in their legacy systems and modernize. They will then be ready for the speed, agility and interoperability demanded in the changing industry environment.
Short term goal: Immediate advantage with API-driven strategy
Speed is essential if the changing needs of the payments sector are to be met. API, with its focus on digital technology, has the potential to emerge as a winning solution to some of the most pressing challenges. There are some of the things it could do:
- API exposure from payment service providers to initiate contactless payments through QR code
- Banks could connect to a digital remittance platform for a direct deposit to a recipient’s bank account
- API-enabled onboard in network’s real-time payments rail for push payments use cases in B2C or P2P payments
- API-driven integration in supplier payments through digitization of account payables with virtual card and self-service card management portal
- Plug & Play API feature for digital identity verification and bank account validation to facilitate faster onboard in a digital platform
Medium to Long term goal: Deeper and richer technology innovation
- Modernise payment platforms in readiness for real-time, scalable and resilient systems that can build the bedrock for innovation and new product launches
- Adopt right-fit hybrid cloud strategy to reduce the TCO (total cost of ownership) of the new system, and take away the headache of scale-in, scale-out in a volatile economic environment
- Build a culture of cloud-native applications to run in a platform-as-a-service (PaaS) model
- Build an API-powered partner portal for merchants, to act as a single point of entry for online payments and for servicing requirements like onboarding, certification, profile management, asset management, compliance, analytical insights and disputes
- Build sandbox of innovation leveraging the regulatory push of Open Banking and take informed decisions on new products with insights infused by fintechs
- Re-engineer to build a low-latency data strategy that can accommodate varying needs of data processing and storage in a distributed architecture, and tear down data silos, to build more real-time and data-rich analytical modeling
- Expand a Big Data strategy to capture information across new dimensions of geo-spatial data, government policy, industry impact etc and refine customer micro-segmentation to assess risk, acquire and engagement
- Tighten security measures at account opening and payment initiation with help of sophisticated, multi-layered authentication, with a mix of factors adjusted appropriately at threat level
Technology allows the creation of an innovative eco-system for banks, payments networks, processors and fintechs through collaborative co-existence. However, to reap the full benefit, large companies need to modernise their tightly-coupled, monolithic systems to seamlessly integrate with an API-driven open architecture. New payment systems should be agile and lightweight, able to improvise constantly without excessive IT costs, and catering for the radical behavioral shift in payments practice across markets and industries.
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The views, thoughts, and opinions expressed in this article belong solely to the author, and not to the author’s employer, organization, committee or any other group or individual