Payments come under scrutiny

Amid a rapidly transforming environment, payments volumes continue to surge, writes Heather McKenzie

By Jon Watkins


Global payments revenues reached $1.9 trillion in 2017, a rise of 11% over the year before, McKinsey’s Global Payments Report has found. McKinsey predicts the global market will surpass $2 trillion in 2018 and $3 trillion within five years.

Much of the growth during 2017 was fuelled by the Asia Pacific region, which accounts for nearly half of global payments revenues at $900 billion. Less than six years ago the region accounted for only one quarter of global revenues.

This growth in revenues may seem surprising, says the report, given the continued pressure on payments fees emanating from increased competition and regulatory actions, and the low-interest rate environment in many developed economies. However, the trend makes sense, says McKinsey, when the “healthy underlying fundamentals” including the growth in electronic transactions and digital commerce along with increasing cross-border activity are considered.

“This rapid growth makes payments an expanding and increasingly important component of the broader banking industry,” states the report. “After an extended period in which payments generated roughly 30% of overall banking revenues, this metric has turned sharply upward.”

The growth of the payments component also points to the imperative for financial institutions to develop and continually refresh sound payments strategies to remain competitive in a market being reshaped by technology, new competition, and customer demands, says the report.

World Payments Report 2018 (WPR 2018), which is published by Capgemini and BNP Paribas, also urges banks to review their payments strategies. The annual report focuses on non-cash transactions, which are forecast to grow by 12.7% through to 2021. Booming developing markets will drive double-digit volume growth over the next three years, the report adds.

Developing markets now account for one third of all non-cash transactions globally and are projected to grow by 21.6% during 2016-2021. Emerging Asia is projected to lead this growth with 28.8% growth during the period. By 2021, developing markets will account for about half of all non-cash transactions worldwide and will bring the current dominance of mature markets (which now account for 66.3% of global volumes) to an end. During the past decade, mature markets have lost a 20% market share to developing markets.

Disruption of the payments landscape is accelerating and becoming more complex, says the report, as fintechs and bigtechs (such as Alipay, Tencent, Google, Amazon, etc.) enter the scene. These companies are seeking to capture opportunities in burgeoning schemes such as e-wallets. However, in a pre-Sibos meeting on finance and trade, delegates heard from one global head of cash management that while these companies are a threat, they don’t necessarily want to become banks. However, they are targeting banking as a service in a different manner from banks. Payments services are being developed to support consumers’ lifestyle decisions. Banks should cooperate with the fintechs and bigtechs to create solutions for consumers – the B2B environment is rapidly becoming a B2B2C one.

According to WPR 2018, bigtechs have taken the lead in e-wallets. Total 2016 e-wallet transactions were estimated at 41.8 billion (8.6% of all non-cash transactions), with bigtechs accounting for 71% or 29.7 billion transactions. Payments’ incumbents have been somewhat slow to react to this disruption, but, to retain their competitive edge in the market, they should fast-track development of new payments ecosystems. Collaboration and participation from the broader financial services community and large payment users is vital.

The financial services community, including public-sector organisations, regulators and third parties must work together and determine their roles in the new payments landscape. Bank-led initiatives alone will not be enough to ensure smooth, balanced and robust ecosystem development, says the report. By orchestrating payment services, banks could shift from standard services to more customised and contextual value-driven offerings to gain more value from orchestration. These value-driven offerings, especially in transaction banking areas such as cash aggregation, cash forecasting, cash position advisory and automated treasury will also equip corporate treasurers with the means to move beyond a tactical or operational role and towards a more strategic one for their companies.

The drivers of payments transformation in Europe are investigated by Swift in a white paper, The Transformation of the European payments landscape. The paper explains that digitisation is driving expectations for fast, frictionless and borderless payments that are embedded in transaction chains and ecosystems, whether for retail purchases or business transactions.

Technology, while offering financial institutions opportunities for innovation and efficiency, also presents opportunities to competitors such as fintechs, global retail giants, card networks and digital start-up banks to challenge incumbent providers and existing business models

“The financial industry is going through a period profound change,” says Alain Raes, chief executive EMEA and Asia Pacific at Swift says. “In this evolving landscape, market infrastructures and financial institutions are having to renew their infrastructure and reshape their business models to meet customer expectations and capitalise on new opportunities.” Swift would support its members in these renewal projects, he added.

Another payments-focused report, from Accuity, focuses on the technical aspects of payments. The 2018 Payments Industry Report surveyed more than 100 financial institutions and payment service providers. Against an increasingly complex cross-border payments landscape, the survey found that the majority of respondents provide customers with the validation of key payment data elements before remittance. Many organisations have invested significantly to automate this process.

More than one third of respondents claimed that their customers expected their payments provider to complete such validations on their behalf, and bear the costs of payments failure. “In the digital, real-time economy, customers now insist that payment providers send payments at a lower cost, into more markets, and with greater certainty,” said Sarkis Akmakjian, senior director at Accuity.

The report also disclosed that 52% of payment providers experience payment failure rates of less than 1% and almost all respondents (90%) cite a payments failure rate under 5%. This is attributable to the way in which payment processors have embraced new technologies to differentiate themselves from other players in this increasingly competitive market, says the report. The trend indicates firms have pivoted to focus more on customer satisfaction and are now delivering the fast, accurate and reliable payments demanded by their clients.

 

 

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