The Future Of Payments
Innovation in the payments sphere is being driven by two key factors: consumer demand and technology. It could be described as a chicken and egg situation where the lines are blurred between whether technology is creating consumer demand, or if demand is initiating payments technology development.
In recent years, perhaps the single most significant technology innovation that has driven change in payments is the smartphone.
At the heart of this trend are a number of different payment solutions that allow consumers to make payments in a secure and convenient way. From using tokenisation to store payment details securely on a smartphone and make payments without passing card details to the merchant, to digital wallets, mobile apps and closed loop cards; consumers can leave their traditional wallet at home and just take their smartphone.
As a result global smartphone payments are on the rise, not only in western countries but also in developing economies too. This is not only facilitating the march towards a cashless society, but also supporting financial inclusion amongst the unbanked.
However, smartphones are not the only innovation that is shaping the payments industry. FinTech challengers are causing disruption and forcing the old guard to either innovate or risk becoming redundant. Technology such as blockchain, and the growth of virtual currencies like Bitcoin, is part of this new financial services landscape. FinTech innovation is fuelling expectations and consumer demand for faster, better, and more intuitive payment solutions, and driving substantial industry change.
At this point we should add a third factor that is also influencing innovation in the payment industry: regulation. The European regulatory environment is actively promoting innovation, including removing the barrier to entry for new payment service offerings, and thereby increasing competition. Stronger competition, with a focus on transparency of services and charges, is a key theme for European and UK regulatory authorities.
We believe that this combination of different factors is steering the payments industry to a future that looks a bit like this:
Mobile phones to become primary payment method:
Whether in store or online payments will be made using mobile apps instead of debit or credit cards (or cash). Increasingly mobile payments are being used even when a consumer is shopping online from another device, or making payments to friends and family. Mobiles also becoming integrated with ATMs, and we expect that requesting cash using a mobile app connected wirelessly to an ATM will gradually replace traditional cash withdrawals using a card.
However, there is room for further innovation, specifically to help consumers manage their payments and finances better. Consumers are leading the demand for more transparency and access to their financial information on their mobiles; detailing their transactions and integrating payment and mobile banking apps so that consumers have a clear picture of their financial position at the time of purchase.
Biometrics and two-factor authentication will be ubiquitous:
While mobile technology is driving payment innovation a significant barrier to adoption is security and identity management. On the one hand is demand from consumers and regulators for robust customer authentication methods to prevent fraudulent activities; whereas on the other is a need for smooth, frictionless transactions without the customer needing to remember complex passwords or endure protracted authentication procedures.
Authentication solutions using biometrics and two (or multi) factor authentication provide an answer and are expected to improve significantly in the next few years. Customers will identify themselves to their mobile or wearable at the beginning of the day, and then provide additional authentication linked to the transaction value and payee such as a fingerprint or PIN at the time of purchase.
Biometrics may eventually make the mobile phone redundant as a payment facilitator, especially when combined with wearables such as the Apple Watch and Samsung Gear. These have an advantage over mobiles as they are attached to the user and are less likely to be lost or stolen. They also have the potential to use biometrics almost seamlessly for authentication purposes. Apple Watch can detect the user’s heartbeat and this data could be used to confirm that the user is wearing the watch at the time of purchase.
FinTech challengers will continue to increase agility and innovation in payments:
Consumer demand for faster and more convenient payment transactions is responsible for the growth of non-traditional payment methods, often facilitated by non-traditional banking providers. Digital wallets, virtual currencies, pre-paid / closed loop cards, mobile apps and mobile money are all fulfilling this demand; which some traditional financial providers – because of legacy systems and infrastructure – are unable to bring to market effectively.
Merchants and businesses are also driving this demand by accepting alternative payment methods, and we expect them to gain momentum. Accepting PayPal, for example, is no longer viewed as ‘alternative’, it has become mainstream. Payment transactions involving Bitcoin and other virtual currencies are still relatively rare, although big name brands such as Expedia are now accepting this payment method.
These new payment methods are also driving financial inclusion, allowing the unbanked in developing economies (and those in western countries) to make digital payments.
The challenge for regulatory authorities, which have been responsible in part for this growth in non-traditional providers and solutions, is to ensure that consumers are protected from data breaches and fraud; and to prevent alternative payment methods being exploited for money laundering and tax evasion.
In our view the key takeaway for merchants is to embrace payment technology to meet the future demand from consumers. While your customers may predominately use traditional payment methods today; in the next five years expect to see a reduction in the number of cash and card payments, and a more multifaceted payment landscape evolve.