Introduction
Continuing the trend of the past few years, 2020 will be all about user convenience, customer experience, and increasing trust. The dynamics of the payments industry will lead to new challenges and opportunities, while companies will keep investing in cloud computing and other digital technologies to more efficiently address evolving customer expectations and mitigate regulatory requirements. Following the previous years’ trend, financial inclusion will continue to be one of the drivers behind business strategies in the payments space. At the same time, competition between closed and open payments platforms and systems will intensify.
This year promises to be an interesting one for all players involved in the payments industry. As it’s always wise to stay connected to the latest trends and developments that can help you make informed decisions, we’ve put together a list with the most important things to watch this year in payments:
1. The Google bank
In November 2019, Google announced that it would start offering smart checking accounts through Google Pay to customers this year. For this initiative, the company aims to collaborate with Citigroup and a credit union at Stanford University. The service would help customers benefit from useful insights and budgeting tools. As CNN points out, what is interesting about this approach is that the financial institutions’ brands would be put on the accounts and banks would be responsible for the financial plumbing and compliance. The push into checking accounts is the latest instance of a Big Tech company moving into the financial services space. Amazon also wants to introduce checking accounts for customers, Facebook is working on its Libra cryptocurrency project, while Apple teamed up with Goldman Sachs last year to launch a credit card.
2. American payment giants enter China
In December last year, PayPal officially finished its acquisition of a Chinese licensed payment company, GoPay, a deal that signaled PayPal’s official entry into China’s USD 27 trillion domestic payments market. The People’s Bank of China approved the acquisition of a 70% equity state in GoPay, allowing PayPal to become the first foreign payment platform to provide online payment services in China. Although local players such as Alipay and WeChat Pay dominate this market, there’s still plenty of room for it to grow. The extent to which PayPal would benefit remains to be seen this year.
American Express is also close to accessing China after the central bank accepted its application to start a bank card clearing business. In November 2019, American Express became the first foreign company to win permission to start preparation for the business after a joint venture with LianLian, a Chinese fintech company.
It was back in June 2015 when the Chinese government allowed foreign bank card clearing providers to obtain licenses by setting up units or acquiring a local company, ending a monopoly by state-run China UnionPay. However, progress in entering the country has been slow so far.
3. ECB considers central bank digital currencies (CBDCs)
At the begging of this year, the European Central Bank, through its president, Christine Lagarde, has shown interest in expanding its role in developing central bank digital currencies (CBDCs), with possible participation from private enterprises. As businesses and individuals make more cross-border payments and expect immediate accessibility of funds, the feasibility and merits of CBDCs are something that the ECB wants to explore.
For this purpose, the ECB initiated a cryptocurrency task force at the end of last year to work closely with Eurozone central banks to understand the benefits and costs of a possible Eurozone CBDC. As CoinDesk points out, global interest in CBDCs came soon after the unveiling of Facebook’s Libra project. People’s Bank of China (PBOC) had a similar reaction; although it had been working on its digital yuan for years, officials started divulging information on it recently.
The topic of CBDCs was also approached during The World Economic Forum debate in Davos, earlier in January, confirming that the creation of a credible and trusted digital currency is under the attention of many global institutions. Industry players underline the necessity of a globally interoperable CBDC, the focus right now being on the underlying network on top of which these assets can function.
4. Standardization
The increasing globalization of payment processing continuously requires new standards or the enforcement of the existing ones to help in better governing the flow of money and protecting customer data. Currently, all companies that accept, process, store, or transmit credit card information must comply with the Payment Card Industry Data Security Standard (PCI DSS). Moreover, payment transactions in the US and the EU are regulated by central authorities. However, the issues emerge when each country has its own domestic schemes and different ways in which money can be sent cross-border.
Public and private efforts around the development of global industry standards to govern payments messaging, interoperability, interfaces, payment engines, and integration will continue in 2020. Each year, industry players expect more progress on developing stronger standards for assessing transaction riskiness, demonstrating traceability in a cross-border payment, and facilitating authentication across different forms of transactions.
5. The Fifth EU Money Laundering Directive (5MLD)
The Fifth EU Money Laundering Directive (5AMLD), which came into force on 10 January 2020, builds on the regulatory regime applied under its predecessor, 4AMLD. As with any AML directive, the impact of 5AMLD will be far-reaching. Although much of 5AMLD consists of updates to 4AMLD, there are some novelties worth paying attention to:
- a legal definition of cryptocurrency, which stipulates an obligation for parties involved in crypto transactions to perform customer due diligence (CDD) and submit suspicious activity reports (SAR);
- the elimination of the anonymity associated with the use of cryptocurrency by giving Financial Intelligence Units (FIU) the authority to obtain the addresses and identities of owners of virtual currencies;
- providers of cryptocurrency exchanges and wallets must be registered with the competent authorities in their jurisdictions.
When it comes to anonymous prepaid cards, 5AMLD reduces the amount of the monthly transaction limit to EUR 150 (from EUR 250), the limit also applying to the sum that can be stored or topped-up on cards. The measure implies identity checks on customers using prepaid cards funded with more than EUR 150.
Moreover, anonymous remote or online transaction limits are reduced to EUR 50, while prepaid cards issued outside the EU are prohibited unless they were issued in a territory enforcing legislation equivalent to the EU’s AML/CFT and KYC standards. This requirement may imply a revision of existing systems and procedures within companies.
6. Strong Customer Authentication (SCA)
The implementation of the second Payment Services Directive (PSD2) will continue to roll out across Europe in 2020, with certain transactions requiring authentication for purchases. Some banks are expected to launch SCA in a gradual fashion over the course of 2020, while others will not go live until the end of this year, partly due to the European Banking Authority’s announced delay in the deadline of PSD2 enforcement to 31 December 2020.
7. The Compliance-as-a-Service (CaaS) model
Due to numerous regulations and directives that are aimed to ensure a level playing field for all players in the payments ecosystem and the security of users’ data, the Compliance-as-a-Service (CaaS) model is gaining popularity among payment companies. This type of service can be configured to keep pace with new mandates and updates, helping companies to maintain their data compliant in real time. Moreover, CaaS can also handle cross-jurisdictional/regional regulatory compliance. More regtech players are expected to tap into the opportunity and offer cloud-based compliance services.
8. Mergers and acquisitions (M&A)
Mergers and acquisitions announcements have always stirred interest, and this is the reason why it’s still worth watching this trend. 2020 has already started with big news: Visa acquired Plaid, a company focusing on the development of APIs that allow consumers to share their data with thousands of apps, for USD 5.3 billion. Along with Mastercard, Visa is actively acquiring payment companies to maintain its market share.
As Deloitte shows, the purpose of recent M&A is centered on adding capabilities and talent to address challenging areas such as cross-border payments and improved end-to-end payment experience, multipayment integration, and B2B payments. Among the end benefits for the companies, gaining scale, expanding reach, acquiring new customers, extending capabilities, and defending competition are some of the most prevalent.
Final thoughts
2020 promises to be an exciting year for anyone that leverages payment solutions. As regulatory bodies are making efforts to regulate the technology giants and big techs to ensure a level playing field for all participants, it is worth watching what other captivating developments the payments ecosystem has in store for 2020.
