Payments industry transition post Covid-19

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Covid-19 aftershocks on the global economy affected the payments industry across multiple dimensions, pushing firms to adapt. With business models already challenged, black swan pandemic shockwaves adversely impacted revenue as economic activity tanked. Expectations are that COVID-19 will spark more than a 5% contraction of global GDP, as many markets slip into recession.

Covid-19 interrupted otherwise steady growth of global non-cash transaction volumes, although enthusiasm for digital payments may offset the decline. with trade activity falling sharply and consumption hindered because of lockdowns and other restrictions, the global economic outlook appears bleak. Several countries may slip into recession with visible signs of rebound not likely until late 2021. The impact of the recession on GDP will continue to be felt for years, with GDP levels in the largest advanced economies expected to remain around 3% to 4% below their pre-virus trend path by the middle of this decade.

Despite the pandemic’s long shadow, increased adoption of digital payment method is expected, especially in growing markets such as APAC and MEA. Look for a whopping 19% 2019–23 CAGR driven by high growth markets (India and China). Also, on track for growth are MEA (14%) and Europe (9%). Developing CEE countries (Romania, Poland, the Czech Republic) and non-Euro Zone (Russia, Turkey) will play critical roles in Europe.

On a high level, below are some of the impacts of Covid-19 observed in the payments domain.

  1. Covid-19 encouraged digitally non-savvy retail customers to consider new ways to pay.
  2. Corporate treasurers look to digital as an antidote to B2B payments challenges and inefficiencies.
  3. Corporates trust and loyalty to banks contingent upon value added offerings.
  4. Retailers add payments to their value propositions as a strategic advantage.

The industry is transitioning as disruption shows no sign of letting up…

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  1. Growing adoption of cloud, APIs, and centralized payments processing.
  2. Rise in ecommerce and alternate payment methods.
  3. Proliferation of contactless and digital wallets.
  1. Open banking regulations / PSD2.
  2. Interoperability and standardization initiatives.
  3. Data privacy and customer authentication.
  1. Increased competition from new and digital entrants.
  2. Business model threat and revenue loss due to industry consolidation.
  3. Loss of customer mind share to non-traditional players.
  1. B2B shifting gears to digital
  2. Evolving payments habits and changing customer behavior.
  3. Accelerated move from cash to digital.

What are the priority areas for payments firms ?

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  1. Provide seamless experience as invisible payments are on the rise.
  2. Fraud reduction.
  3. Build trust to ensure customer loyalty.
  4. Develop digital capabilities for business sustainability.
  5. Engage with B2B customers through technology.
  1. Technology transformation is the need of the hour.
  2. Push to reduce cost of payments, reorienting from Capex to Opex.
  3. Build resilient systems, especially to counter business and operational risk
  4. Focus on self-help portals/automation for corporate customers
  5. Improve straight through processing (STP) and real-time capabilities
  1. Focus on monetizing payments data.
  2. Evolving towards value added services (integrated budgeting for corporates, shared utility infrastructure)

The stakes have never been higher, and banks are wagering on payments modernization and a new take on technology

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ISO 20022: Currently, 30% of banks (125 out of the original onboarded 450 banks) have implemented ISO 20022. The deadline, which was originally in November 2021, has now been pushed to the end of 2022, on SWIFT cross-border payments and cash management functions. The expectation is that most global high-value payments volumes will be done via SWIFT standards by 2025, after which SWIFT MT messages will be decommissioned. In the event of not being able to migrate, the impact on a vast range range of bank functions, from payments processing systems to foreign exchange, treasury, billing, screening, trade finance, and other operational areas, will be significant.

Instant Payments: Globally, over 46 countries have already implemented or are in the process of implementing instant payment schemes, and as use cases increase, adoption will grow. Instant payments business cases will become more significant in the post COVID-19 scenario. Benefits from use cases such as request-to-pay smart contracts execution, and connection to regional systems such as P27 may be lost if payments do not become a top priority.

Open banking: Payments are the highest priority domain for banks to monetize their API propositions. Currently, about 35% are deriving value from data exchange APIs, 25% from from transaction APIs, but only 10% from ecosystem-based propositions. Although some banks have leveraged open banking to help meet the dynamic customer needs, the progress is sluggish. To create a more modular environment, the bank will require integration across the entire legacy network, as well as integration with partner systems, networks, and other external services — those offered as “as-a-service” solutions. When constructed as an open platform, APIs become interchangeable components that can link to existing offers, enhance services, and even become new products.

Real-time gross settlement (RTGS) upgrades: Multiple cross-border and regional RTGS systems are being implemented, such as pan-GCC, SAD RTGS, and ASEAN RTGS. PAN regional initiatives such as the Nordic P27 and European Payments Initiative (EPI) are fueling the need for back-end rationalization. The P27 system, expected to launch in 2021, will replace eight national legacy systems to handle multi-currency payments.

Other modernization initiatives: The UK and Canada have rolled out national payments infrastructure modernization programs. While the UK’s New Payment Architecture (NPA) is on course to be entirely live by 2030, the ISO 20022 migration of NPA aligns with SWIFT’s 2021 deadline.

What’s the catch here ? — Banks are changing roles from traditional suppliers to ecosystem players in a bid to defend market share from existing ecosystem players (e.g., BigTechs and Challenger banks) and ward off competition from vertical specialists (e.g., FinTechs leveraging from platform models). With the right strategy, banks can emerge as an engaged partner for customers, versus a pure player with incremental innovation and a lack of scale to cross -sell.

Payments landscape vista: A new take on who, where, and what

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Convenience, speed, and seamlessness define the requirements of today’s digital end users. The payments proposition is changing from a standalone product to becoming part of customers end-to-end experience journey, in which the payment enables a bigger agenda for both retail and wholesale customers.

Technology has transferred the act of playing to, ultimately, make it invisible, as end users expectations evolve from Pay to Invisible Pay. Within the evolving payments framework:

  1. Pay: Represents the traditional dimension in which conventional methods are used to complete transactions.
  2. Fast Pay: Offers technology-enabled payments processed instantly with immediate confirmation and account transfers.
  3. Easy Pay: Delivers robust transactional security based on improved identification and authentication to make it simpler for customers to make digital payments.
  4. Invisible Pay: Is the aspirational end state in which payments are transacted in the back-end without direct customer involvement — for seamless authorization and a friction free experience.

As customers evolve, service providers transcend three transformative stages — Abide, Adopt, and Adapt — to bolster their customer engagement.

  1. Abide: Describes business-as-usual payment players that offer traditional methods using off-the-shelf instruments.
  2. Adopt: Is a growth stage when firms take on technology, regulatory, and efficiency initiatives to meet compliance parameters, become agile, and open the door to third-party partnerships that bring new market opportunities and customer segments within reach.
  3. Adapt: Is the phase in which firms enthusiastically embrace processes and activities to bring themselves in full alignment with customers/end users. Adaptive firms engage fully within their customers payments journey and offer value propositions beyond payments.
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What’s the catch here ? — As firms explore competitive advantages, digital transformation offers a direct route to the invisible pay end state. However, for each transaction type, engagement model reinvention is the essence of transformation versus mere digital execution of the transaction.

Policy making and implementation will play a crucial role in the evolution of the industry. As players innovate and new entrants disrupt the market, multiple standards, payment systems, and methods may lead to fragmentation. Harmonization and standard-setting are more critical than ever as regulators strive to maintain optimal balance and not stifle innovation.

As payments stakeholders accept their best-fit roles, the evolving landscape is rich with opportunities. Novel and innovative players that prioritize digital mastery and align with customers expectations are poised to become frontrunners within the ecosystem of tomorrow.

Product Manager @ FAB | Payments | Fintech | E-Wallet | Cards | Remittance