By Matthias Setzer, CCO, PayU
The payments industry sits at the very core of modern life. As a market, it is multifaceted and complex, relentlessly evolving, scaling and disrupting, with new trends continually emerging across different countries and regions. In order to flourish in such a fast-paced, dynamic landscape, payments companies and merchants must continually observe market patterns and tailor their business offering to be in line with industry trends and changing consumer demand.
The following are the top five trends that I believe to be the most disruptive to the payments landscape.
Technology disrupting payments
Many leading payment companies are already capitalising on the benefits of new technologies like artificial intelligence and machine learning, both of which will help revolutionise the payments industry. Data produced by AI and machine learning systems will prove invaluable to payment providers, allowing for unique insight into a group of consumers whose habits may have been previously ungraspable.
Rapid consumer adoption of modern technology is having an ongoing impact on the way that merchants are able to access consumers across different geographies. For example, in India more than quarter of the population will use a smartphone in 2018. This means that a huge portion of the population will be accessible via digital channels in a way that simple was not possible in the past, presenting a massive opportunity for businesses to reach new customers.
With all the buzz around new technologies, one should not be tricked into overlooking the more traditional solutions. For example, the deployment of large scale database applications, an abundance of open source technologies at scale and cheap cloud-based hosting options have allowed payment companies to build advanced solutions for consumers and merchants.
The regulation of financial markets is one of the most hotly discussed global trends that is set to continue reforming the traditional payments landscape. The biggest challenge in this space is the need for regulation to keep up with the pace of technological innovation and also adapt to both local and global nuances.
Take a look at PSD2 that went live in Europe earlier this year. By acknowledging the rise of fintech companies, the playing field was levelled out for payment service providers, while improving security and strengthening protection for customers. However, while all eyes in Europe were on PSD2, where we really need to look is to high growth markets like Argentina, where they’re leading the way with Data Protection changes. In fact, along with Uruguay, Argentina is the first Latin American country to be recognised as an ‘adequate country’. This is the European Commission’s method of measuring whether a country outside the EU offers an adequate level of data protection. And Brazil openly takes inspiration from PSD2, as seen through their marketplace regulation, or GDPR, that will most likely come into effect later this year.
In India, in the world’s second most populated country, regulation plays a substantial role and has huge impact. The pace of change facilitated by regulation is likely unprecedented with regards to its speed and number of people impacted.
Regulation is a factor that creates a need to adopt, invest and potentially even stop certain businesses. There are still significant regulatory borders, for example with regards to import/export regulations, currency exchange or taxes. Technologies and logistics would allow for even greater international exchange of services, goods or capital without any real borders. Regulation opens up tremendous opportunities and helps to build stable environments in which to invest and build.
Relentless consumer demand poses both an opportunity and challenge for organisations, who find themselves under constant pressure to supply a continuous stream of innovative technological solutions to an insatiable customer base. In order to meet demand, incorporate new technologies, scale markets effectively and conform to local regulation, a solution for businesses can be to collaborate with another organisation to form a strategic partnership. When successful, partnerships can provide the resource and expertise needed to succeed in a particular market and as a result, hugely boost business revenue and reach.
Research undertaken by PwC predicts[i] that there will be an 82% increase in partnerships between financial institutions in the next 3-5 years. This perfectly demonstrates how businesses are increasingly recognising collaboration as a way to strengthen their service offering.
Access to credit
Access to credit remains a significant barrier that is prohibiting financial advancements across the world. In recognition of this, the World Bank has set the target of achieving universal financial access by 2020. Undeniably, progress is being made to reach this goal, but access to credit is a challenge that continues to plague consumers, merchants and payments facilitators alike. Innovative technology is emerging as the most promising solution to help provide access to credit for millions of under-served populations. High scale adoption of advanced technologies including automation drives down cost and allows for a further distribution of financial services.
Companies are using AI and machine learning to move away from the traditional lending models based around an individual’s financial and repayment data. Instead, they can focus on collecting relevant data through alternative methods, such as social media channels via smartphones. The relevant data points are then compiled in such a way that creates a personal credit score, enabling tailored financial decisions to be made for the individual. Traditional credit score models are being reinvented.
When considering the rise in smartphone adoption in high-growth emerging markets such as India, this innovative digital approach to credit analysis is a powerful tool has the potential to open up financial systems to millions of people in currently under-served markets.
The changing face of the consumer
We live in an increasingly connected and digitalised world. Consumers have become accustomed to living a life of constant connectivity and maximum convenience. The digitalisation of services means that consumers now have a social and intellectual network quite literally at their fingertips, accessible through the tap of a screen at any time, day or night. Nor is this convenience purely confined to the bounds of the virtual. Services like Amazon Prime Now enable customers to place an order online and have the physical item delivered to their door in a matter of hours.
The payments industry has seen the manifestation of this trend through ever-increasing consumer expectations. Features such as instantaneous connectivity, mobile access to financial services, a higher degree of personalisation and seamless, frictionless transaction experience are no longer considered luxuries, but necessities. In order to compete, organisations are under mounting pressure to integrate these features into their offerings. This shift inevitably means that the preferred environment for payments is moving from the bank branch to the digital sphere.
Evidence of this can be seen through the increasing popularity of alternative payment methods – payments made using something other than a credit card e.g. bank transfers, prepaid cards, cash, coupons, etc. – which currently[ii] account for 59% of transactions across the globe.
The international demand for easily-integrated transaction methods that deliver on the consumer demand for real-time, personalised and seamless payment experience, is palpable.
As technology continues to innovate the payments industry, traditional infrastructure will become more and more displaced and legacy payment methods uprooted. The landscape is likely to become more densely populated with a growing number of players capitalising on the opportunity of digital to create flexible payments solutions that offer a wide range of services.
In order to ensure a consistent level of service and security, regulations will be implemented. To support regulatory compliance in new markets, maximise business scalability and expand their technology portfolio, organisations will find themselves incentivised to forge strategic partnerships with other businesses.
The monumental potential of new technologies such as AI and machine learning, along with continued deployment of traditional solutions such as cost-efficient storage, computing power and opensource,is poised to be at the core of revolutionary advancements, the impact of which could be ground-breaking. When considering all that is going on within the payments space, I can’t help but feel as though we are just at the start of a hugely exciting chapter in the future of payments.