The Next Generation Payment
Ecosystem
We are witnessing an unprecedented churn in the payments
space.
We are witnessing an unprecedented churn in the payments space. The components have been in the
making for decades - but the global digital revolution has given them a convergence platform. We are
well and truly in the middle of the plastic money revolution.
Automated Teller Machine (ATM) led the way back in the 1960s and it took well over 3 decades to gain
popularity. While the developing nations were getting on the adoption curve, plastic money was
conceived. It had huge advantages over traditional payment methods. The prospect of entirely
replacing cash made it a universal hit. Again, developing nations with some of the world’s most
populous countries were slow to adapt to it, given a lack of infrastructure. Also, all the
stakeholders (consumers, merchants, issuing banks, acquiring banks, regulators) needed to make their
share of investment to make it universal.
We have come a long way since then and the innovations in the mobile phones and data penetration
domains have been game changers, especially in populous countries of Asia. Payments have been
digitized to an extent that it requires almost negligible investment from consumers and merchants.
The emergence of Asia’s manufacturing and IT services centric economy has given a major boost to the
global digital ecosystem – completely revolutionizing payments.
Here are some of the technology trends that are redefining payments and would transform the sector
in the next decade:
Change in Consumer Profile
Technology Takes Centerstage
The digital wave has hit industries across sectors. E-commerce, utilities, travel and tourism,
food ordering, transportation, ticketing, bill payments, etc. are all undergoing massive
transformations.
Consumers have traditionally had their hands tied with respect to available payment choices.
That is no longer the case now, as consumers have become more knowledgeable and tend to
prioritize convenience.
Therefore, payment providers are constantly competing with each other for retaining existing
consumers and attracting new ones. Cashbacks and related loyalty programs are commonplace.
Consumers are also becoming smarter, not committing to a single payment platform and using the
most rewarding ones.
Generation-Z
Millennials already form the core of the modern workforce. Freelancing and gig economy are
becoming popular across the globe. The next decade will see digital natives (those born in the
2000s), the generation Z, globe-trotting more than ever as businesses will trust them with
greater responsibilities to drive digital transformation across the world. This generation wants
everything, here and now!
Shift to Mobile
The costs of smartphones are crashing, data has become dirt cheap and users are switching to
mobile phones for accessing the internet. The next decade will be powered by digital payments,
virtual creditcards, 3d secure transactions, and many other innovative solutions that will
continue to grow the share of mobile users.
Consumers no longer want to go to their banks. The millennials just do not accept going to banks
and demand all banking and financial services to be made available online. Banks are developing
their mobile banking apps to address this need – where consumers can access their account
details, make transactions, handle investments, insurance and do much more through their
smartphones.
Virtual Payments
Card-based payments have firmly established themselves globally in the past two decades. Despite
its associated risks, consumers trust their plastic cards for carrying out secure, cashless and
instant transactions.
Despite their advantages, consumers are required to carry a separate physical card (and often
multiple cards from different banks) for executing transactions, fragmenting the entire
experience. Fin-tech companies are solving this through virtual credit cards.
Virtual payments are ideal for consumers without personal cards, ideally those looking for short
term, low value payment solutions. As you can only pay at specified merchants for limited
services, they have a high degree of security. Corporates find it especially useful, as it goes
a long way in integrating compliance seamlessly in the process
Virtual payment methods offer many benefits over plastic cards:
Mobile-friendly
Virtual payment cards are built within the corresponding mobile apps. It gives consumers the
convenience of not having to travel with an additional card. It makes use of the smartphone – a
device consumers anyways carry – to scan payee details through a QR code and smoothen the entire
experience.
Though a considerable number of consumers belonging to the older generation find it tough to get
used to, the tech-savvy digital natives have taken to this as a duck to water.
Cost Savings
A virtual card saves logistics cost at the issuer’s end. Users can carry it around in their
mobile phones and they no longer need to stuff multiple cards in their wallets. It does not need
to be sent physically to the customer. It is delivered digitally through the internet, saving
time and costs. These can be administered digitally and can be replaced in a short turnaround
time.
High Acceptability amongst Digital Natives
Acceptability of virtual payment solutions remains a hot topic in the payments industry. Even in
developed countries like the United States of America, there are many businesses and individuals
who still prefer old-school cheque over digital solutions.
However, the encouraging sign is that approximately 45% millennials do not even own a card in a
traditionally card-dominated market like the U.S. This is a common trend around the world and as
a greater number of digital natives join the workforce, the number would only go up.
These are the consumers that demand integrated, friction-less solutions and it is only a matter
of time before businesses embrace this. They have never used plastic money and now that they
have a choice between physical cards and virtual ones, they find virtual cards more attractive
for its convenience.
Security
Frauds related to plastic cards have existed as long as the cards themselves. Traditional
plastic cards have a fixed number and other sensitive user data in their embedded magnetic
strips. Hackers have utilized this vulnerability to perpetrate many financial frauds across
international borders, which are nearly impossible to trace.
A virtual card holder does not have to worry about its physical security. A consumer can store
it safely in his mobile phone and there is no magnetic strip or sensitive information leak to
worry about. There is a new (virtual) number generated for each transaction, which expires by
the time your transaction is over. Even if attackers somehow gain access to that number, it
cannot be misused, as it expires within seconds.
Mobile Payments
Most of the western world has successfully transitioned into using plastic money in the previous
two decades. Developing economies such as China and India were not ready for it and are still
playing catch up. However, affordable smartphones and dirt-cheap data plans has made them
pioneers of digital wallets - where payments can be made through mobile phones!
As developing economies get bigger and attract investments from the developed ones, business
travel is getting a major boost. Corporates will be adopting the QR-code based payments popular
in developing economies to improve traveler experience.
In simplistic terms, any payment made through a mobile device is a mobile payment. FinTech firms
have come up with multiple ways of realizing this. It started from a simple digital wallet that
a traveler could load before a trip - just like a prepaid card. Mobile wallets and banks have
since seen the benefit of partnering with each other and now we have mobile based payment
solutions that can directly transfer money from one bank account to another instantly,
eliminating an intermediary such as the digital wallet.
Invisible Payments
Card payments (physical or virtual) and mobile payments are visible forms of payments. These
involve presenting a card to the merchant. Even QR code based mobile payments or virtual cards
sitting in traveler’s mobile devices constitute the visible payments category.
Isn’t it exciting to think of a solution where the payer does not have to present anything and
still make the payment in a contactless, frictionless manner? Well, if we look at a closer look
at our daily transactions, the technology is already here!
We save our card details on online platforms such as Amazon, Uber, Zomato, etc. It is a one-time
exercise and we are not required to present cards the next time we transact with them. Automated
toll collections use the same concept, where an RFID tag is mapped to a vehicle number and bank
account, allowing the customer to drive off as the transaction is automated. It is a win-win
situation for all parties involved. Some of the advantages are:
- Frictionless transactions
- Payment data securely stored over centralized servers
- Instant access to transaction history to generate reports
- Easier expense management
- Simplified claims settlement
Integration of Banking, Payments, and Financial Services
Payments form a core component of business travel. The global payment landscape is in the middle
of an unprecedented transformation. Corporate travelers need a technology-enabled infrastructure
where they have all the modern payment solutions at their disposal. Payments need to be instant,
seamless, mobile and secure.These are the top payment trends that will dominate the next decade:
The Rise of Generation Z
While millennials form the core of the workforce at present, generation Z (those born in the
present century) is already making its presence felt on the internet. These are the digital
natives that have not known life without smartphones and mobile internet. They want the best and
want it in an instant. They prefer their mobile phones over laptops. As a payment provider, you
have a very small window to attract them, as their attention span is very short.
Fintech and Banking Overlap
Banking has gone mobile and a mobile banking app is a necessity rather than luxury. Consumers
find it cumbersome to use separate apps for banking and financial service needs. Fintech and
banking have realized the benefits of collaborating with each other. Right from mortgage to
electronic transfers, these two are very different organizations with tremendous potential to
drive synergies.
Rewards Galore
Consumer expectation has peaked and they want to be incentivized for every transaction they do.
Banks have been introducing and improving rewards programs for decades but now they face stiff
competition from retailers and card issuers. The consumer finds himself surrounded by innovative
offerings (cashbacks, discounts, air miles and vouchers) from a host of merchants vying for his
loyalty.
This trend is set to continue, with a U.S. card company having already spent 30% of their
revenue on rewards and loyalty offerings last year. Customer loyalty is becoming fragile by the
day. Retailers are looking to take advantage of this by offering attractive up-front rewards to
sign them, given that 48% of consumers would instantly switch their primary rewards card for
something better.
Stronger Network Effects
Banks have tried collaborating with retail partners and merchants to gain a competitive
advantage over each other. They now realize the value of collaborating rather than competing
with each other. Banks and financial institutions stand to reap long term benefits by just being
a part of the digital payments' ecosystem. Network effects play an important part in providing
customized, cross-device payment solutions to consumers. Banks and financial institutions know
that they can multiply their reach by partnering with fin-tech and card issuing firms, without
going through the hassle of building solutions from scratch.
It's Raining Payments
Online payments through a bank’s website and card-based payments were considered a watershed
moment in consumer behavior. While the older generation is still convincing itself to trust
internet banking, we have been hit by the next wave of digital payments revolution. Thanks to
mobile wallets, countries like China have been able to largely by-pass cards and straightaway
took payments mobile.
Anybody can make, request or accept payments through a unique QR code generated by their mobile
phones. Biometrics based authentication is already beyond the testing phase and this is set to
become mainstream, depending on how much the regulators are willing to cede control.
As with all tech advancements, attempts at fraudulent transactions will also be on the rise in
the next decade - something to watch out for.
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