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The changing face of payments in the digital era

The changing face of payments in the digital era

Banking and financial services

Read time: 10 min

The world of payments is constantly evolving, with innovations happening around the globe. These innovations in financial technologies bring several challenges and opportunities for incumbents. Hence navigating these uncertain times needs a payment strategy backed by data and the agility to change course when required. This blog will highlight some significant payment innovations to help key payment stakeholders align and validate their market positioning.

This is the first in a series of blogs on payments. In the subsequent blogs, we will dive into individual topics that shape the payment industry.

  1. Real-time payments (RTP) – RTP is an easy and faster way of payment where funds are available to the payee in seconds. Several countries have implemented domestic networks for RTP transactions. The notable ones are Faster Payments (UK), IMPS. UPI (India), Zelle and FedNow (USA). RTP is the underlying rail for numerous innovative overlay services accessible through mobile phones like QR codes, proxy payments, wallet transfers, and near-field communication (NFC) payments.

    The ISO 20022 standard leveraged in RTP transactions leads to more data transferred as part of the transaction message, thereby providing enormous data monetization opportunities. RTP is also changing how cross-border payments are processed. Country-specific RTP networks are getting extended to regional unions. An example is the European Union (EU) planning to have a single RTP network for all member countries. Meanwhile, Malaysia’s DuitNow is trying to extend its network to Singapore’s PayNow and Thailand’s PromptPay for seamless real-time cross-border payments.

  2. Open banking – Open banking as a regulatory framework is enforcing banks to share data with authorized third parties to offer new products to customers. The payment services directive 2 (PSD2) regulation in the EU aims to make the payments ecosystem safer, cheaper, and more open for consumers. Banks allow access to data through application programming interfaces (APIs) for third parties to build lending and payment solutions beneficial for customers.

    With open banking, managing recurring payments, personal finance, and syndicated loans will become easier as customer experience is at the center of all innovative products and offerings enabled by open APIs. Open banking is also making traditional intermediaries irrelevant. Correspondent banking networks (CBN) are slowly becoming redundant as remittance companies can now directly send money overseas through API-based connectivity with the originating and recipient banks.

  3. Digital currencies and coins – Digital currencies and coins have grown in popularity recently, with 80% of central banks worldwide expressing interest in central bank digital currencies (CBDC). Nearly half of them are already working on early prototypes. Stable coins like Tether are digital currencies backed by an asset or fiat currency. In contrast, Bitcoin is a cryptocurrency that derives value from its scarcity. While some cryptos are mined, others can be pre-issued digital tokens like Ripple’s XRP.

    CBDCs will likely become a gamechanger in the future, addressing the credibility of cryptos and bringing in standardization in the fragmented digital currency industry. It will significantly lower costs for payment providers and consumers and dramatically change how payments are settled and cross-border payments are executed.

  4. Connected devices and the internet of payments – The most significant consumer-facing innovation would be IoT-based payments. Like the evolution of payments through mobile devices, payments through wearables, cars, and at-home devices will gain popularity.

    The advent of tokenization, cloud computing, and high-tech sensors combined with data on customer preference fuels innovations beyond our imagination. Connected cars, smart refrigerators, automated self-checkout, and smart replenishment are a few of the innovative use cases. However, uncertain regulatory frameworks and issues in fixing the liability for any fraud or disputes related to machine-initiated payment transactions are delaying the adoption of these innovations.

  5. Emerging payments – New, more manageable, cheaper, and more accessible technologies are paving the way for new payment modes that are more convenient for customers. Technological innovation in proximity payments enabled by near-field communication (NFC), radio frequency identification (RFID), Bluetooth low energy (BLE), sound waves, and QR codes is aiding different use cases for push, pull, and merchant payments. Another trend that is quickly growing is buy now, pay later (BNPL), introduced by Silicon Valley firms like Affirm, making a significant impact in the space.

    These newer payment methods combined with the increased mobile phone penetration are a game changer to address the financial inclusion issue in developing and emerging economies. Customer-focused and convenience-led payment solutions through smartphones are the key factors to innovations.

  6. Big tech in payments – The big technology giants of our times have in-depth information about every consumer and their needs. Hyper-personalization is not only limited to shopping preferences but also impacts payment solutions. Latest technologies like neuro-linguistic programming (NLP), artificial intelligence and machine learning (AI/ML), analytics, and blockchain, along with big data, are enabling the tech giants of the world to provide innovative and seamless payment solutions challenging traditional payment providers. The big tech companies are likely to build integrated commerce and payment platforms such as WhatsApp Pay and Amazon Pay to leverage the existing distribution they have created and further their reach.

  7. Payment security – Security is vital in payments. With increasing fraud, innovators and regulators in the payment world are looking for solutions to keep customers’ trust in payment networks. The growing cybercrime activities will raise merchant awareness and increased spending on payment security, incentivizing service providers to build innovative solutions without adversely impacting the customer experience. A few innovations in payment security are tokenization, encryption, multi-factor authentication, and biometrics. Merchant plugins such as 3D Secure (3DS), one-time password (OTP), fingerprint scanning, iris scanning, and similar others are used along with advanced AI/ML algorithms to detect fraud and provide additional layers of security to authenticate transactions.

Rapid innovation leads to reduced products and services lifecycles. Products becoming outdated very quickly poses a big challenge for legacy payment systems. Hence traditional banks and financial institutions are in a challenging situation where they have to constantly adopt new payment innovations or risk significant loss of market share. The future of payment ecosystems lies in implementing an architecture that is cloud-ready, open-source, configurable, API-driven, containerized, and extensible. It should take any payment message as input and send out messages in the required formats of the outgoing payment network. It should support dynamic TPS and be available 24/7 without any downtime. Since banks will still own the relationship with customers, the task becomes identifying the right collaboration opportunities with fintech to build solutions that their customers want.

Banking and financial services

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