Payments
Overview
One Minute Read
Payments is one of the largest sectors of the financial services industry focused on the transfer of money for individuals and businesses. Technological innovation, regulatory reforms and the increasing digitalisation of people’s daily lives have reshaped the payments landscape and are set to continue to do so. The COVID-19 pandemic has only accelerated this with a cross-generational shift to digital. Payments are shifting from cash and physical cards transactions to digital payments & mobile wallets. Digital currencies are likely to go mainstream, helping to replace physical cash. In response, the sector is transforming towards to a digital financial ecosystem, driven by five challenges and the widespread adoption of digital technology.
Sector Description
Payments is a $6.6 trillion sector of the $25.6 trillion global financial services industry [1]. The global digital payments industry has grown 40% increase in the last two years. In the next four years, the digital payments market is set to reach $10.5 trillion [2].
Payments is a complex web of different payment types, systems and parties:
- Banks - Payments is a large part of the traditional banking operation. The bank of the entity initiating the payment is know as the Issuing Bank. They issue the credit/debit card or payment instruction. At the other end of the process is the Acquiring Bank that processes the transaction on behalf the merchant (e.g. a retailer) or the entity receiving the payment.
- Payment Gateways - The entity paying often (e.g. in the case of debit or credit card payements) hands over the payment details to a Payment Gateway provider. For example Square or Verifone. These could be digital wallets such as Apple Pay.
- Payment Processors - handle the accepting and processing of the payment. These could be companies like Paypal. Ayden or Fiserv.
- Payment Sytems - In the case of debit/credit card a card system (such as Visa or Mastercard) requests authorisation and sets interchange fees.
For their services, the payment service companies charge fees.
The payment value chain is breaking down due to geopolitical concerns, regulation and BigTech innovations.
Segments
Drivers
Shaped by the global megatrends, the pandemic, and now worsening economic conditions, the sector is being transformed by five major drivers:
Customer Experience – The growing influence of BigTechs, such as Google, Amazon, Facebook and Apple and others has raised the bar for customer service and seamless experience. Players are now battling to be the financial front door to consumers (banking as a service) and value-added provider to businesses.
Trust & Compliance – The financial crisis challenged the trust previously placed in the financial services system. banks. Financial Services have seen a 35% increase in fraud attempts through digital channels during the crisis [1]. 25% of Europeans exposed to any fraud suffered financial damage, causing a total loss of around €24bn in 2 years [2].
Innovation – Innovation such as Apple Pay, Wechat Pay, Bitcoin and M-Pesa have transformed payments. Blockchain, digital currency and mobile payments are just some of the technologies which are disrupting the market. Mobile Payments are expected to almost double to $4.6 trillion by 2025, and by 2024, digital wallets will account for more than half of all ecommerce payments worldwide [3]. The challenge is how do the players harness these technologies and how does regulation keep up.
Efficiency – The payments market is complex with many steps in the value chain, leading to cost. Payments are seen as expensive to merchants and businesses. Consumers value ease, convenience and speed. Disruptors will seek to reduce friction whilst maintaining trust and compliance.
Profitability – Payments represents a strong fee income market for banks. This at risk of disruption by innovative payment service providers capturing digital wallets and BigTech, e.g. WeChat Pay, who cut out the middlemen in the value chain.
Transformation
The industry is transforming towards to a digital financial ecosystem where the payments market is shifting from cash and physical payments towards the speed and convenience of mobile wallets and digital payments. The decline of cash accelerated by COVID-19 and the rise of cryptocurrencies is accelerating a move towards digital cash. Ultimately payments will become invisible as they are embedded into real-life transaction within an open finance ecosystem.
Payment Providers and Banks understand that the new normal is digital:
- The COVID-19 pandemic has caused a cross-generational shift to digital channels. Contactless digital payments accounted for nearly 87% of all ‘face to face’ transactions in 2020 [1]. Cash usage dropped 10 percentage points in 2020 to account for just one-fifth of all face-to-face payments worldwide [2]. Globally, use of mobile wallets exceeded cash for the first time for in-store payments [3].
- The COVID-19 crisis has also driven a rapid increase in cyber-attacks and fraud, a 20% increase in actual attacks and a 500% increase in attempted attacks [4].
- As other industries digitise, payments will be increasingly embedded into digital transactions rather than being separate actions. The immediate battle is between banks, payment providers and BigTech to be the financial front door to the mobile wielding consumer and/or the merchant/business. The evidence is that the FinTechs (e.g. Paypal) and BigTech (Apple Pay, Google Pay) are winning the battle.
Transformation will require a shift to the design & development of:
Mobile Wallets
Digital Payments
Digital Currency
and Open Finance Ecosystems
Digital Technology
Fundamentally Payment Providers will need to adopt three key technology approaches:
Mobile-first for the new normal digital experiences.
Cloud-first for operational efficiency and time-to-market gains.
API-first for effective ecosystems collaboration.
This will be supported by significant investment in Data, Analytics, AI & Automation to deliver better customer experience and combat fraud. Security, Compliance & Data Privacy is a priority as customers, and regulators, expect payments to operate at a very high levels to protect customer confidential information and money.