It’s not a novelty that customers’ expectations are constantly changing. People are looking for more value-added services and expect less friction when purchasing goods or services. To meet customers’ needs, agile competitors are entering the market, while regulatory bodies at a global level foster more collaboration through open ecosystems. Businesses in various industries now require innovation and adoption of emerging technologies such as APIs, robotic process automation, artificial intelligence, machine learning, or the Internet of Things (IoT) to stay relevant for their customers and survive in a highly competitive market.
In this context, understanding the trends and developments that have shaped the payments ecosystem in 2019 is of the utmost importance when preparing the business strategy for 2020, whether you are a merchant, a bank, a technology provider or any other player active in this space.
Data protection and privacy get center-stage position
Safeguarding and protecting the customer’s data is getting importance in today’s open payments ecosystem. Payment systems around the globe are opening up to make room for new players building value-added services, which can expose personal payments data to external vulnerabilities.
Globally, regulatory bodies are focusing on initiatives promoting data privacy and protection. Such examples include GDPR for the European space, similar initiatives being developed in Canada, Japan, or Israel, which are working toward data privacy and protection laws on par with GDPR standards. Likewise, in the US, the California Consumer Protection Act (CCPA), developed since 2018, is aimed to safeguard customer data. Cloud implementation in security services is gaining importance, with the global public cloud management and security services being expected to reach USD 26.41 billion by the end of 2022, according to Statista.
One of the most important regulatory-related events of the year is the second Payment Services Directive (PSD2), which went into effect on September 14, 2019; this directive aims to spur innovation and competition in this space by regulating new players on the market. At the moment, its juncture with the Fifth Anti-Money Laundering Directive (5MLD) – coming into force in January 2020 – and GPDR is still being refined. As per the regulation, Payment Service Providers (PSPs) are required to implement Strong Customer Authentication (SCA) on certain transactions, many companies adopting two-factor authentication as a form of SCA. Currently, the issues when it comes to the juncture of these three regulations are related to the fact that they have different goals and there are different approaches for implementation. The extent to which companies operating cross-border are impacted and the way in which the challenges of complying with the regulations are bypassed is something worth watching in 2020.
Analytics powered by machine learning and artificial intelligence gain traction
Capitalizing on transaction data insights is on the rise globally. Captured information on payment behavior can optimize revenue and lower costs by enabling personalized value-added services and cross-selling opportunities. Machine-learning-based processing technologies can help in “mapping” the transaction data and building patterns to help in recognizing customers, offering personalized experiences and services, and ensuring customer loyalty ultimately.
Through the so-called data-activated marketing, based on transaction data, PSPs can help retailers leverage payment data to personalize cart abandonment and ensure customer retention, a use case that has been on the rise for the past few years. According to Research and Markets, the global retail analytics market will grow at a rate of over 18% during 2019-2025 and will be valued at more than USD 9.5 billion by 2025.
The omnichannel experience
In 2019, voice and mobile have continued to grow in implementation as additional channels for payments, while advanced authentication models such as tokenization and biometrics have made these new payment channels more secure. With solutions in place, merchants prioritize omnichannel payment processing. With significant growth forecasted for the Smart POS market, this niche is something worth watching, as new solutions and players are expected to jump in.
APIs increase collaboration within the ecosystem
As banks are working to reposition themselves and regulatory initiatives are forcing them to open their systems and data to third-party providers, open APIs have emerged, showing promising potential to redefine payments business models. This way, banks can establish a well-orchestrated ecosystem of services, and emerge as first movers in the open API economy. In 2019, banks continued to open up to third parties. Recently, HSBC has announced that it is building a new digital banking platform, aiming to power the bank of the future using APIs, while Indian lender Yes Bank launched YES SCALE Marketplace, an online marketplace of innovative solutions, co-created with its APIs and startup partners.
The cool platform-as-a-service proposition
A few years ago, European banks were at a critical turning point as changes in the payments industry were forcing them to make a key strategic decision and become a banking “utility” – supporting other providers of new services – , or an “everyday bank”, playing a central role in consumers’ daily lives. Now, incumbents no longer consider third-party providers as a threat, but a business opportunity, fostering the emergence of new value propositions and better offerings. The trend of “platformication” is gaining traction with many ecommerce, social media, and technology giants implementing it (see the example of Alipay, which turned into a platform for accessing numerous types of services beyond payments).
As customer expectations change to more contextual offerings, this space leaves room for innovation and new value-added services. Open banking is fostering innovation, encouraging companies to adopt platform-as-a-service models to connect with various stakeholders for the exchange of data and value. This business case is gaining traction, with the global platform as a service (PaaS) being valued at approximately USD 29.58 billion in 2018, and expected to grow to USD 52.4 billion at a CAGR of 15.4% through 2022.
The rise of instant cross-border payments
Real-time payments was a major trend in 2018, when three important real-time payment schemes (SCT Inst in Europe, The Clearing House Real-time Payments in the US, and the Australian New Payments Platform) were launched, thus paving the way for instant cross-border payments. Distributed Ledger Technology (DLT)-based solution players like Ripple and Stellar, and SWIFT’s global payments initiative (gpi) come to further revolutionize cross-border payments. On the other hand, banks and regulators seek to make payments market infrastructures interoperable to enable banks and PSPs to offer multiple IP rails simultaneously. Of great importance in this sense is the implementation of ISO 20022, a high number of the ISO 20022 initiatives being in payments, many driven by SWIFT’s mandatory migration of payments and related messaging to ISO 20022. Major payment market infrastructures are currently in the process of adopting ISO 20022 messaging: Europe, with T2/T2S/TIPS consolidation into ESMIG and EBA Clearing Euro1 and STEP1; UK with FPS and BACS moving to New Payment Architecture (NPA) and CHAPS to ISO 20022; the US with Fedwire and CHIPS; Hong Kong and other domestic schemes; and real-time payment rails, some already live, such as TCH RTP and EBA Clearing’s RT1.
Another potential impact on the increase of the usage of cross-border payments is the recent initiative of Europe’s top banks, backed by the European Central Bank, which explores the development of a rival payment system to challenge the dominance of Visa and Mastercard, and the threat from Chinese and US Big Tech companies. Backed by 20 French and German banks, the Pan European Payment System Initiative (Pepsi) aims to cover all types of cashless transactions.
A similar initiative that hit the headlines in late October 2019, centered this time on an interbank messaging system, is the development of an alternative to SWIFT by China, Russia, and India. Reportedly, the Russian financial messaging system SPFS will be connected with the Chinese and Indian interbank payment systems. Iran has also expressed interest in joining the network.
Deepening customer relationship through digital wallets
With the constant increase of ecommerce and m-commerce, payment industry players have continued implementing mobile wallets in 2019 with the aim to leverage transaction data to provide value-driven offerings. Innovations such as APIs, Near Field Communication (NFC), or QR-codes have simplified the integration of mobile wallets, while with the PSD2, open banking, and real-time payments, mobile wallets could emerge as an alternative to cards. One of the multiple benefits of digital wallets, for merchants and consumers alike, is reduced fees, interchange fees being bypassed. Moreover, merchants gain instant availability of payments and simplified reconciliation.
When it comes to digital wallets, 2019 has proven a busy year. In November 2019, German lawmakers have passed new legislation that would force Apple to open up its mobile payment system to rival providers, as part of an anti-money laundering law. The German bill, which will come into force in 2020, requires operators of electronic money infrastructures to offer access to rivals for a reasonable fee. As industry experts suggest, from a technical perspective, Apple could open its Secure Element and connect via Trusted Service Manager (TSM) to banks as service providers, banks being able to get an iOS API to access and manage these services. Next to Apple Pay, there would be bank apps to allow a card to be used and managed for Near Field Communication (NFC) for payments. Another scenario would imply Apple introducing a host card emulation (like Android HCE), allowing an iOS app to emulate a card. In the settings, the user could select which app communicates with the terminal.
Another initiative with potential impact on the US mobile payments landscape was announced in April 2019. The US Federal Reserve shared its plans for a real-time payments system that would make money transfers available almost immediately. The FedNow Service, which is set to launch in 2023 or 2024, would compete with the existing private real-time payments system established by a group of large banks in the country in 2017.
Furthermore, this year saw the expansion in the availability of 5G mobile network services, which will drive the global usage of mobile payments for different types of transactions, including payments. Several 5G networks are already live across Asia, Europe, the Americas, and other parts of the world. The real surge of activity is set for 2020 when most telcos and mobile network operators (MNOs) around the world will start launching 5G services. These networks will also connect tablets and laptops to the IoT, including wearable devices like smartwatches, earphones, activity bands, virtual reality headsets, smart glasses, which can also support mobile payments.
Big Techs hit back
Big Tech companies have continued their foray into payments to enhance the user experience and create a holistic customer engagement ultimately. The extent to which their “reimagining finance” could be seen as a potential threat to incumbent players – as Big Techs’ technological resources and customer reach are immense – is something worth watching for the next years. Moreover, voice assistants from Apple, Amazon, and Google have given rise to a new channel for conducting transactions. eMarketer even states that the use of voice assistants has already reached a “critical mass”; in 2019, the use surged by up 9.5% over last year. By comparison, the use of voice assistants grew 27% in 2018 and 24% in 2017.
An important advancement in the financial sector from the Big Techs this year was Facebook’s plan for a cryptocurrency, Libra, to be developed by a consortium of global companies. In terms of market opportunity, countries with less developed retail bank operations and low card usage could use Libra to reduce the number of unbanked and underbanked people. The remittances market is fraught with regulatory challenges, and a centralized transaction system could prove of great help. Moreover, Libra might also find success in developing countries that use alternative forms of currency, such as the dollar or euro.
Another important Big Tech foray into the financial market is the launch of Apple card, for customers in the US, who can apply for it through the Wallet app on iPhone in minutes and start using it with Apple Pay in stores, in apps, and on websites.
As industry experts have pointed out, the card is designed to counteract some of the Millenials’ reasons for avoiding credit cards, promising no fees and deep integration with the iPhone.
Many trends and developments in 2019 are not essentially new, but they have gained in importance or have reached their full potential to disrupt the market this year. 2019’s trends are, more than ever, customer-centric, as they are focused on increased security, personalization, and reducing friction. As Big Techs continue their incursion into the financial space, challenging incumbent players, this sets the stage for more competition and eventually for more value-added services for consumers.
- Global Payments Report 2019: Amid sustained growth, accelerating challenges demand bold actions, McKinsey & Company
- Payments Report 2018, Edgar, Dunn, & Company
- Top-10 Trends in Payments: 2019, Capgemini