Payments Today 102 – What Lies Ahead
Payments is undergoing a massive upheaval. Within 5 years the landscape is going to look very different to what it does now as digital currency, shifts in economic power, regulations, technology, particularly mobile and cloud, put everything we know into the mixer and serve it up in a very different form.
Music was first disrupted by Napster and CDs were finally hoovered up by the cloud through iTunes and Spotify as distribution was legitimately digitised. The same thing happened with Newspapers as global brands like the BBC fought hard to win digital and provide more real time, bit-sized choices to consumers. Every now and again I might get all nostalgic and buy a newspaper but it’s rare. Now video content is the headlights of the digital excavator as Video Easy, Blockbuster and now Fox customers flock to Netflix and its ilk with better choice, flexibility across devices and price.
Like these examples, and perhaps even more so, payments has huge capacity for digitisation with payments providers, particularly banks, at risk of a similar disruption brought about by similar shifts in the value proposition based on attributes of choice, speed and price. Like the distributors above there is also an opportunity for incumbents to claim the high ground of service by offering faster, more convenient mobile and cloud based systems that are built for the 21st century consumer, so long as they recognise the opportunity and actively create the new landscape in time. “Time” means now as Amazon, Google, Apple, BitCoin, Facebook, PayPal, Ripple and Vodafone, through M-Pesa, all demonstrate how the many of the entry barriers to this market have been dramatically lowered in recent years and challenge traditional providers that don’t move with the right speed or form.
The galactic size of the addressable market is driving lots of innovation and investment with promising opportunities for very real growth for those prepared to respond with foresight, innovation and determination. By way of example here are some of the payment sub markets:
- Foreign Direct Investment (FDI) are investments made from one country into another, normally by companies rather than governments, usually to establish operations or acquire tangible assets. Globally these payment flows grew 9% last year to $US 1.45 trillion with the vast majority going to developing countries.
- International Remittances will grow 20% to $US 681 billion next year. With the global average cost for sending money at 8% and as high as 12% in Sub-Saharan Africa that’s a $54bn prize pool right there and no surprise that the P2P and remittances market is busy with contenders.
- Cash as an analogue payment instrument is clearly a natural target of digitisation. If alternatives can offer the same degree on anonymity and convenience with improved security and reconciliation there’s approximately $USD 4.3 trillion of it kicking about.
- Point of Sale generates approximately $USD 21bn in revenue for Visa and MasterCard globally. Assuming these revenues are generated from 0.5% interchange fees that would reflect a $USD 4.2tn turnover. Despite lots of talk of threat and an increasing preference for EFTPOS and debit cards these schemes are still growing at about 5% per annum. Business is going so well that the Mastercard stock is already up over 20% over the year. This arena presents an opportunity for alternatives as well as participation, through value added payment proximate activities.
Payments generate a large proportion of banks revenues, generating $1.6tn in revenue and accounting for 41% of all banking revenues in 2013, up from 34% in 2009 and expected to grow to $2.3tn and 43% of all revenues in 2018. Not surprisingly most of the volume and growth coming out of APAC.
With the landscape upheaval generated by alternate payment mechanisms which now outnumber scheme based payments it’s very much a time to pay attention. Payments have traditionally involved complex banking routines that have protected the market for banks. The arrival of new backoffice mechanisms as cloud and mobile enabled services such as credit, identity, AML and KYC checking mechanisms with support for billions of consumers and merchants, coupled with rapidly changing customer expectations of how stuff should work, place these traditional reserves of banking under threat.
The payments landscape going forward will have many attributes that are different to that which we have today including:
- Integrated Global Real-Time Settlement and Clearing – The world is full of very fast silos, yet Ripple is showing us what lies ahead. Indeed, had Ripple been around when Australian Payments and Clearing Association (APCA) were looking for a new payments platform they absolutely would have selected it over SWIFT’s platform.
- Less cash as mobile, digital currency, P2P and EMV (American Express, MasterCard and Visa) continue to make big progress. There were an estimated $6.2 trillion in consumer C2C cash and check payments (or 40 percent of total C2C payments) globally in 2013. If only 5 percent of these were to migrate to faster payments solutions, they could generate an additional revenue pool of $80 billion.
- More cloud as outdated client server architectures server workloads that are unable to serve mobile get consumed.
- Greater Size – As convenient and secure alternatives to cash arrive along with new ways of paying people and the world’s middle class growing by 3 billion people over the next two decades, predominantly originating from Asia, the total size of the payments markets substantially increases. McKinseys predicts that merchant payments revenues could double in size as new digital solutions open up untapped revenue pools.
- More little guys – 97% of businesses are SMEs. Traditionally they have been costly to reach and serve but mobile and the cloud changes all of this and present a rich platform of size and wallet share opportunity where payments, business solutions and cash management are all linked holistically. As with many facets of the broader market these services will be necessarily targeted at people, not identities or accounts as, people who own and run businesses but also have household accounts as in these businesses, blurring the distinction between personal and company finances as they all largely roll up to the same thing – a total position.
- New stakeholder mix – Driven by the change in technology there will be new solution providers as the explosion in FinTech is showing. This will mean new payments mechanisms and systems across front and back office as well as sophisticated decisioning systems that help companies choose the most effective payment mechanism on the fly.
- Regulatory Convergence as countries group together to provide more consistency and standardisation for payments legislation and by doing so remove friction and improve support for both global trade and security. This may take some time and until it does new entrants will look to find regulatory environments that give them the best mix of flexibility and trust.
- Better integration across the context within which the payment is made with payment service providers moving further back along the value chain to get embedded earlier, secure the relationship and add value.
- Broader Context – As the value chain is explored new opportunities arrive in the broader context of the merchant or consumers life with an opportunity to explore add on services such as lending and financial planning. Those that get customer success in this regard will show who truly understand customer centricity. As fee margins get squeezed through initiatives like the European Commission’s new interchange regulations and the Durbin Act in the US that is lowering card fees which together will wipe $7.2bn of bank revenue off the P&L forcing banks to identify new ways of looking at the customer.
- Smarter use of more data: As mobile adds location data and more granular transaction at the SKU level, rich reserves of behavioural data will emerge as the new treasure for better market insight and opportunities. With 400 billion cashless payments occurring a year there is lots to acquire and glean insight from.
Ralph Waldo Emerson once wrote: “Whence this worship of the past? The centuries are conspirators against the sanity and authority of the soul. History is an impertinence and an injury if it be anything more than a cheerful apologue or parable of my being and becoming”
His idea is that history is just the story of what happened to get us to here. Indeed if we look to the past for guidance on the future we’re likely to be amongst the injured. It’s an exciting time to be building the next generation of payment solutions; we’re honoured to be here with a great team at a great time.