As the COVID-19 pandemic shifts the world toward contactless shopping and touch-free transactions, many businesses are asking customers to avoid paying with cash. The pandemic has also brought to the surface inefficiencies in traditional payments for the B2B space, due to cash management and liquidity challenges. So, what is the future of payments? Let’s examine recent changes and their influences, how digital payments will look in the coming months, and how financial institutions can prepare for the future.
What has been changing with digital payments?
The pandemic has been a catalyst for eight rapid changes I have seen in the banking industry over the last six months.
- Growth of service providers – The payment industry is witnessing a growing emergence of a wider group of players and service providers alongside traditional banks. The pandemic has intensified this growth.
- Growth of alternative payment methods – This has been driven by retail customer demand and the diversification of banking services in an increasingly consolidated and competitive market. With the benefits of digital payments extending beyond borders and institutions, at least 70 new eWallet providers have been established in the ASEAN market alone. 60 percent of U.S. customers use mobile devices to make payments, and digital payments in Europe will hit $802 billion in 2020.
- Bank partnerships – Traditional banks are evolving and re-evaluating their services to remain competitive, in addition to partnering with FinTechs, and buying software companies. Standard Chartered Bank, for example, recently launched a virtual bank called Mox in partnership with a number of technology companies, including Trip.com. Traditional banks will continue to partner more exclusively with tech firms to diversify, extend their service offerings, and remain relevant in the 21st Century.
- Remote payments – In 2017, contactless payments in the UK increased by 97 percent to 5.6 billion payments, but that was just a start. In 2020 contactless payments grew 40% according to Mastercard, largely due to the pandemic, and people wanting the benefits of digital payments. We will surely continue to see growth in contactless and instant payments as more people purchase more goods and services online. Many businesses, including Nike, that saw digital sales jump 82 percent from June to August 2020, expect a permanent shift to online sales.
- Payments consolidated with services – More services are available in one place for customers, with integration across the ecosystem. Banks and service providers are working toward making information available to customers through one, rather than multiple, user interface. Utility providers, for example, are enabling bill pay transactions and tying payments with billing and contracts through one centralized portal.
- Regulation and compliance – With more consumers and businesses capitalizing on the benefits of digital payments, the likelihood of fraud and money laundering increases. Heightened awareness of transaction risks and user risks has further pushed the focus for regulations on digital governance, which requires real-time risk profiling and risk calculation before, for example, granting a loan agreement.
- Open banking and greater interoperability between banks – Open banking still faces roadblocks in certain areas of the world, but financial institutions are driven to develop APIs for greater transparency options with bank statements and account transfers. Developing APIs are considered by some to be analogous to opening a traditional bank branch on a major street.
- Increase in real-time payments – Some banks are taking the steps to move forward with real-time payments initiatives where possible. “As transactions switched rapidly from checks to electronic methods, we felt it was important to push the development of this new payment rail to help clients manage their businesses,” Reetika Grewel, Head of Commercial Banking Digital, JP Morgan Chase.
Why are these changes occurring?
The future of payments is being influenced by multiple factors:
- Globalization of supply chains is increasing despite environmental and societal challenges.
- More people and businesses want the benefits of digital payments than ever before.
- People expect rapid responses and instant gratification.
- The role of banks has shifted to transaction processor rather than a monolithic entity.
- A drive toward digital inclusion is enabling banking capabilities where banking hasn’t existed before, with new modes of engagement between banks and their customers.
- Inefficiencies in payment processing have been under scrutiny by banks wishing to maintain corporate clients.
What will payments look like in the next year or so?
I believe we can expect to see continued growth in globally-available payment services from providers outside customers’ regions, along with increased innovation, diversification, acquisitions and choices. Indeed, businesses will have more cost-competitive choices due to the strong competition between banks and payment service providers.
Currently around the world, transaction volumes are reaching critical mass with over 50 real-time domestic instant payment initiatives and two major Pan-European initiatives. Although corporations can make payments globally to suppliers now, in the next several years, we will see more price-competitive offerings. For example, Bankgirot was recently acquired by the Swedish Financial Supervisory Authority P27. Together, they will be able to “take the lead in building the world’s first integrated cross-border and cross-currency payments region, facilitating the needs of banks, consumers and society at large.”
How can financial services institutions prepare for the future?
Innovation and integration are key to preparing for the future. FinTechs, Challenger banks, and payment services providers (PSP) are arguably more capable of innovating in short timeframes than traditional banks. The pandemic has been a wake-up call for traditional banks to re-assess their cultures and overinflated processes while striving to present consolidated and real-time financial services to consumers that are not limited to payments.
According to the CEO of a small, innovative bank in Europe:
“Everything now is becoming real-time, including lending. This goes not only for the delivery of the funds, but also for the decision-making — both should happen almost instantaneously. The application process is also becoming seamless. Compare this to the way lending has been done for ages and is still done in many markets. Think of all the packs of documents needed, the army of bank clerks involved. The digital footprint we now leave all the time provides lenders with live data. Ultimately, this changes the way banks serve their customers’ needs.”
Some of the ways institutions can prepare for tomorrow:
- Innovate with new products and propositions that follow the customer’s journey.
- Deliver compelling user experiences to lock in behavioural changes, such as viewing integrated financial services in one portal.
- Deliver more flexible pay-as-you-go pricing models.
- Focus on remote, contactless, digital payments and overlay services.
- Continue to reduce their physical footprint (bank branches) and redeploy staff as digital adoption levels rise.
- Create a leaner and scalable cost base by 25 percent or more.
- Maintain control in three key areas to ensure they are future-proof and relevant: bank accounts, balance sheets, and guardians of digital ID.
- Increase interoperability between traditional bank legacy and open APIs to enable faster banking processes, while standardizing and commoditizing APIs.
- Drive applications to the cloud in strategic ways to improve efficiency and save costs.
The future requires an innovative shift to open APIs and digital operating models, and integration is essential for this to happen. If banks are going to lend solely through APIs in the future, then they must achieve full digital transformation.
To prepare for the future of payments, financial institutions must redesign and increase their digital footprint with better front-end channels. Legacy systems weren’t built for real-time payment processing and the current market demands. Innovation for the future requires digital capability, and SEEBURGER can help with that.
SEEBURGER is ready to help you accelerate your payments efforts with an agile, secure and scalable business integration platform, SEEBURGER Business Integration Suite (BIS), that is built on 30 years of evolving best practices. We have helped over 10,000 global customers connect their IT systems, applications, cloud services and mobile apps to create high-performance solutions, launch new, innovative business models, and supercharge their modernization strategies.
Learn more about Smarter Payments Integration with Real-Time Fraud Detection!
To learn more, contact us or visit seeburger.com/solutions/fsi.
 “Capgemini World Payments Report 2020: 38% discover new payment provider during Covid-19 lockdown,” Finextra.com, October 6, 2020.
 “European digital payments market to hit €689.04 bln transaction value in 2020,” thepaypers.com, March 23, 2020.
 “Contactless tech helps debit card use in UK,” Anmar Frangoul, cnbc.com, June 18, 2018.
 “Contactless payments jump 40% as shoppers fear germs on cash and credit cards, Mastercard says,” Kate Rooney, cnbc.com, April 29, 2020.
 “Nike expects permanent shift to online sales,” bbc.com/news/business, September 23, 2020.
 “What Did You Change?” pymnts.com, September 2020.
 “P27 acquires Bankgirot, the Swedish mass payment clearing house behind Swish,” finextra.com, October 6, 2020.
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Written by: Peter ValckxPeter Valckx is an experienced data integration specialist. With over 15 years of data integration experience in financial institutions, he takes pride in providing the best integration solutions available. As Vice President of Sales his goal is to empower organizations integrating B2B processes such as Payments, API, EDI and MFT. Peter has been with SEEBURGER since 2011.