What’s Up, Payments?
While the global payments scene continues to be dynamic, broadly speaking, there are three regional approaches directing the progress of the market in their respective geographies. In the European Union, the United Kingdom, and South Korea, the regulatory aspect – rules such as PSD2, GDPR and Open Banking regulations – remain highly influential in the changes taking place, especially the creation of financial ecosystems.
In Asia, it is market and consumer forces that are driving payment innovation. This article by Rajashekara V. Maiya, Vice President and Head, Business Consulting Group, Infosys Finacle, discusses the different forces that are driving global payment innovation.
Power is passing into the hands of consumers via their handheld devices, which are today more technologically capable than desktops and laptops. With every individual owning a mobile, maybe even two, in the markets of Asia, “cross-industry relativism” is in full flow – consumers, who can pay for their Amazon purchases in one Paytm click, want similar levels of payments innovation from their banks.
In North America, where an overall weak payments market infrastructure exists side by side with pockets of excellence, it is the latter that is leading payments evolution. For example, Silicon Valley’s rich financial ecosystem is a driving force that every bank wants to be a part of. The North American approach is the opposite of the European one, with innovators, rather than regulators, in the payments driving seat.
Besides these three approaches, the following factors are shaping payments today:
Trends in the making
- Emerging regulatory or recommendatory payments standards – FDX in the U.S. and Canada, BIAN globally, PSD2 in Europe, CMA in the U.K. and CDR in Australia
- Trending domains, for example, Buy Now Pay Later in North America and Europe; P2P payments in Latin America, Europe, and North America; personal finance and payments aggregators; and cryptocurrency-based money transfer
- Disruptive business models, for example the recently announced Digital Banking Units in India, or other “people-less” branch models, providing a frictionless banking environment
- Banks behaving like Fintechs, and Fintechs behaving like banks to diversify payment and remittance ecosystems
- APIs which provided a strong enablement framework and then evolved an economy of their own
- New technology trends, including green tech, metaverse, big data, artificial intelligence and cloud, making the payments revolution more solid, yet seamless.
Retail payments innovation is crossing over to SMB and corporate segments
It is time to push the boundaries of payments, to give SMB and corporate banking customers the same benefits as retail consumers. For example, how can the QR code, where the rapid growth in subscription (1.5 billion in 2020 predicted to reach 2.2 billion in 2025) fuelled peer-to-peer or person-to-merchant payments, be extended to drive ease of SMB and corporate payments?
A start for global standards
The shift from ISO 15022 to ISO 20022 is freeing cross-border payments from message type, to allow a broad swathe of remittance transactions. As payments become open, and API-driven, it is morphing from a peripheral service into a “product” in its own right. What’s more, it is seen as a foundation for innovation, a potential “platform” offered as a cloud-based service with ecosystems built around it. No other banking product offers so much possibility.
A new class of start-ups, namely paytechs, is focusing only on payments innovation. Almost 90 countries are involved in pilot, or advanced POC, projects to build Central Bank Digital Currencies, which will fuel the payments journey by enabling faster, cheaper, safer, transparent and seamless transactions.
While payments are looking up globally, some regions are clearly ahead.
India leads the way
India is taking its success in digital payments forward with its Payments Vision 2025, which seeks to bring about industrialization, internationalization and inclusion in payments, and ensure UPI transactions continue to grow at a 50 percent CAGR over the current base of 6 billion monthly transactions.
Expectations run high with regard to innovations such as ONDC (Open Network for Digital Commerce) and OCEN (Open Credit Enablement Network), which are expected to drive payments to a new level. Both are game-changers, with the potential to disrupt the disruptors. ONDC will democratize digital commerce to bring about a multiplier effect in payments. OCEN will help to close the $1.2 trillion funding gap that cannot be bridged by the mainstream banking industry – think street vendors, micro-industries, and other tiny businesses with no access to formal credit who can now tap a microlending ecosystem. OCEN, which has already got the support of 7 banks, 40 account aggregators, and several Lending Service Providers, will change lending from low trust, high cost, high friction to high trust, low cost and low friction, to set benchmarks in global banking.
APAC payments are expected to expand at 22.8 percent CAGR between now and 2026, must faster than North America’s 6.6 percent or Europe’s 12.9 percent1. One reason is that North America in particular is battling process and technology challenges, an example being the traditional, low trust-high friction lending processes mentioned earlier. A solution is to build “public good” infrastructures that can serve a variety of purposes, such as India’s UIDAI, whose Aadhaar number facilitates everything from bank account opening to SIM card purchases to direct benefit transfers.
This is especially critical because in theory, the American e-commerce market, estimated at $2 trillion in 2025, is best placed to propel the future growth of real-time payments. The problem is that it lacks the market infrastructure to do it. The U.S. should start building this infrastructure now, to be ready to tap exciting future opportunities in global payments.
March 22, 2023
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