By Chris Hamilton, payments industry consultant, Hamilton Platform
National debit card schemes used to be able to think of themselves (perhaps a little complacently) as national utilities. As long as they were reliable, ubiquitous and cheap, they didn’t need to lead the pack on innovation. But this mindset has now largely gone. There is a broad global consensus amongst national payments schemes that survival, let alone growth, depends on continuous systemic innovation. So what’s next for the basic plumbing of the world’s retail economies?
National payment schemes are the original platform businesses – it’s all about ubiquity amongst both merchants and consumers in a given country.
In many countries, a single national debit card scheme evolved from the linking up of bank ATM networks. It was typically run as a collective of the country’s banks, and the national card often came to be accepted nearly everywhere in-country. This a model that has stood the test of time. Longstanding and much loved brands like Bancontact (Belgium) and Interac (Canada) have been joined by similar services in developing economies like UnionPay (China) Troy (Turkey) RuPay (India) and Mir (Russia).
And why not, when you can offer a service used every day, right around the country, by most consumers?
But the world has become a lot more complex. The international schemes, Visa and MasterCard, have deployed their impressive global cashflows to offer enhanced services, in direct competition with national schemes.
New network technologies, particularly those built on the smartphone, have enabled new players to enter the game, particularly in developing economies. In East Africa, mobile operator Safaricom now dominates retail payments through its M-peza system. In China, social media platforms WeChat and Alibaba have rapidly become the default option for consumer payments in the world’s largest market. And let’s not even think about what’s coming in the near future, with private and public cryptocurrencies on many agendas around the world.
Recent research now makes it clear that for national debit card schemes, “innovate first” is becoming core strategy. John Chaplin of the Payments Innovation Jury has been tracking the evolution of national retail payment schemes for many years. The Jury’s 2021 Report is entitled: “To survive or thrive: Domestic payments innovation in the pandemic”. It was published in April with input from 48 of the world’s national payments schemes and operators.
“As card schemes, telcos, social media platforms and fintechs vie for market share, domestic payments organisations have to strike a balance between standing on their own two feet commercially while bringing their diverse national payments communities together,” says Chaplin.
77% of domestic schemes indicated that their pre-pandemic programme of service innovation was “ambitious” (such as rolling out a new payments stream) or “significant” (such as major enhancements to existing services). This is a major shift from previous years.
This structural shift seems to be delivering benefits in many national economies, as competition between the international and local cards schemes generate service enhancements, and both turn to new network technologies to gain an edge. As the chart shows, many national schemes already offer other payment methods, particularly mobile and realtime account-to-account.
So far, so good. But then, of course, came the pandemic. National economies all over the world were pitched into crisis. Lockdowns had, and are still having, a crippling effect on commerce.
Nearly half of all national payments schemes suffered a drop in volumes of 25% or more.
We know the turmoil isn’t over yet, but we also know that in many economies, volumes have bounced back impressively. What, then of innovation?
Do national payment communities still have the stomach for the hard work of structural innovation, or are they just trying to stay up and running?
The Payments Innovation Jury research provides a clear answer. The great bulk of national schemes report that their innovation programmes have emerged from the pandemic largely unscathed. More than a third say it has even led to an increased focus.
The report gives some guidance on why this is.
- National schemes already enjoy strong support from local payments communities and regulators.
- Many were in a position to assist their national government with emergency financial support for the community, thereby demonstrating the economic value of a local payments scheme that puts the national interest first.
- The jury noted how much the pandemic accelerated the “digital shift” already under way in national economies. This led to increased recognition from scheme owners and regulators that the scheme had to innovate, in order to support this broader social evolution.
There’s nothing like a pandemic to focus the mind.
Having weathered the storm (so far), national payment schemes have big plans for the future, and the focus is squarely on structural automation.
Nearly everyone has a focus on mobile. Digging a little deeper, this includes both provision of ubiquitous mobile wallets in country, and various forms of mobile integration, so that payments can be executed in-app.
The global realtime payments revolution continues to roll out across the world, with many countries now well-advanced on their first implementations, with a few (UK and South Africa, for example) engaged in developing second generation services. Many are also upgrading card services for better customer experience.
There are arguably two surprises in the innovation trends identified in the research.
The first is the prominence of digital identity services in the thinking of national payments schemes. This is a notoriously difficult area for innovation. As a foundational element of a digital ecosystem, it touches everything else, so rolling out a digital identity service can feel like trying to boil the ocean. But getting it right clearly has huge structural benefit.
The other surprise is that cryptocurrencies get relatively little attention in real-world systemic innovation programmes. The likes of Diem and CBDC (central bank digital currencies) have been much talked about and increasingly experimented with – PwC estimates more than 60 central banks are looking at CBDC. But judging by the views of the schemes that currently underpin retail commerce around the world, mainstream adoption is not yet on the horizon.
Nevertheless, a world of change in payments services is clearly upon us, and far from impeding this, the pandemic has only increased the urgency.
About the Author:
Chris Hamilton has run national financial infrastructure in Africa and Australia for 25 years. Now, he operates his own payments consultancy, HamiltonPlatform.com