Published: September 29, 2014
The global payments business is being significantly and rapidly reshaped by a number of market forces and developments. Indeed, such changes are already in motion, and will usher in a new era of payments by 2020. Dominic Broom, Head of Treasury Services EMEA at BNY Mellon, examines these drivers and the need for banks to act now, if they are to grasp the opportunities on offer in the evolving world of global payments.
The payments environment in 2020 will look considerably different from that which we know today. Although change is multifaceted, a number of key factors are responsible, and the speed and extent to which they are altering the payments business is expected to gather momentum.
Firstly, post-crisis regulations and compliance continue to dominate headlines, and their current and future impact on the payments space shows no sign of dissipating. Secondly, the payments market is becoming increasingly competitive, transformed by a variety of new players entering the market and introducing innovative payments solutions. Thirdly, economic growth in emerging markets is leading to a geographic shift in payment flows, and is driving cross-border transaction volumes to ever greater heights. Finally, technological innovation is fuelling new payment possibilities – with regard to efficiency, accessibility, immediacy and reach – and influencing the way in which payment solutions are delivered.
Of course, all this presents both opportunity and challenges, and banks must be alert to these trends – and their wider implications – if they are to grasp the opportunities that the growing transactions market will present up to and beyond 2020.
Ongoing regulatory evolution will continue to impact the payments business in the coming years. In addition to those developments that are already in train, such as those around Basel III, the industry will also need to enhance oversight and control in line with growing cross-border payment flows. Indeed, cross-border transaction volumes are set to more than double from 9.9 billion in 2012 to 20.7 billion by 2022, requiring providers to navigate not only the complexities of global and local regulatory environments, but also the disparity between regional interpretations, as well as differing currencies, practices and payment formats.
While regulation provides the structure necessary to ensure the financial environment functions effectively and securely, its implementation will remain a challenge in terms of the cost and effort involved, and the mitigation of any unintended knock-on effects. That said, regulatory changes can be a great driver of innovation – giving the opportunity to reassess both internal and industry-wide practices, and ultimately create more beneficial conditions for banks and corporates alike.
The recent introduction of the Single European Payments Area (SEPA), for example, has been a huge forward stride towards achieving greater payment convergence. Through SEPA, payment borders have effectively been eradicated, and electronic euro transfers throughout the European Union (EU) can now be made with the ease of a local transfer. Furthermore, through rationalisation of processes and relationships (theoretically, corporates can now use just the one bank account for the whole of the SEPA zone), costs can be reduced and cash management improved.
Despite requiring significant implementation efforts, the transformational benefits created by SEPA could encourage other global regions to introduce similar integration initiatives. This would further facilitate payments and increase convergence – although differing political objectives will likely obstruct comprehensive global convergence of payment standards for some time to come.
Advantages aside, there is no denying that the recent barrage of new regulations has put a great deal of pressure on banks. This in turn has raised concerns that the strain on their resources and cash reserves could result in all-important investment into the development of new payment solutions and solutions being delayed: thereby hindering banks’ ability to respond effectively to transformational changes in the market.[[[PAGE]]]
In fact, it could even be argued that the regulatory constraints placed on banks in the wake of the financial crisis (particularly increased capital requirements) have helped to open the door to the second significant development: the emergence of a host of non-bank service providers.
The role of non-bank payment providers in the payments business has increased considerably in recent years, and their presence across all client segments and geographic locations is expected to expand as we approach 2020. These new market entrants – from online payments providers and virtual marketplaces, to large technology and social media companies – are venturing into the payments business and vying to offer choices based on client needs and expectations. Speed, convenience, visibility and greater choice of access channels are the order of the day.
The success that non-traditional payment providers can enjoy has been evidenced by PayPal, an online payments provider that is experiencing a huge upsurge in its global customer base, and which is now also entering the trade lending market. In the third quarter of 2013 alone, nearly five million new PayPal accounts were opened; the total value of transactions processed was US$44 bn (growth of 25% year-on-year); customers made 729 million transactions; and PayPal’s total market revenue was US$1.6 bn (20% year-on-year growth).
If other big players in the technology and social media space currently seeking entry to the payments market (such as Amazon, Google and Apple) can capitalise on their substantial customer bases and present attractive, secure payment propositions, the potential scale of their impact on the payments space is immense.
Already, customers across the retail, commercial and corporate spaces are increasingly perceptive of new payment methods; exploring the routes of ‘non-traditional’ suppliers, sources and channels, thanks to their ability – unconstrained by bank-related regulation – to offer innovative, customer-convenient payment methods.
Such interest is particularly true for small and medium-sized enterprises (SMEs). Historically underserved, SMEs are now benefiting from the fact that new non-bank providers are offering access to products previously only available to large corporates. In fact, a recent study of mid-market businesses revealed that not only are 79% of respondents now positively inclined towards non-bank lenders, but 61% are already using their services.
These new market participants are providing some stiff competition to more established payment services providers and as non-banks aren’t currently subjected to the same levels of regulatory compliance, there is concern that the regulatory pressures placed on banks may put them at an unfair disadvantage. However, as non-banks’ presence in the payments space is increasingly felt, their risk potential will grow – in turn attracting greater focus from central banks and regulators. It is therefore likely that regulatory standards between banks and non-banks will become more aligned by 2020.
The third major factor influencing payment formats, types and directions, is the ongoing recalibration of economies across the globe, with shifting global demographics playing a vital part in shaping future payment flows. Indeed, the global middle class population is predicted to soar by a staggering 150%, to five billion by 2030. With emerging markets, particularly Asia, the driving force, ever-greater trade, capital and investment-related payment flows are being fuelled to and from these regions.
For example, at the turn of the century, the US and Western Europe accounted for approximately 69% of global financial assets– but by 2020, this figure is expected to drop to just 46%. In contrast, China – which held only 3% of global financial assets in 2000 – is likely to see its share rise dramatically to 17% by 2020.
As commercial influence subsequently shifts to leading emerging economies, cross-border investment flows, securities and capital markets-related transactions and foreign currency-related settlement will all be in some degree of flux. But these shifts will significantly drive the volume of transactions – particularly cross-border payments. Facilitating effective and efficient cross-border transactions (and providing flexible solutions in terms of currencies, geographies and channels) will therefore be a huge priority in the coming years.
Last but by no means least is the change wrought by the rapid pace of technological innovation – a factor that has already transformed the way in which we conduct payments. Customer expectations for accessibility, immediacy and flexibility on the retail side are increasingly translating into client demand on the corporate side, as a tech savvy generation of business leaders starts to take over regions of global commerce The evolution of mobile smartphone and tablet technologies – capable of enabling complex transactions in a relatively secure technical environment – will also continue to play a significant role in the evolution of payments and banks need to be ready to meet these challenges.[[[PAGE]]]
Currently, the pace of technological development differs between emerging and developing economies – although not in the way one might expect. Without the constraints of a legacy payments infrastructure, emerging markets are ‘leapfrogging’ their more developed counterparts, with cutting-edge electronic platforms progressing quickly to fill the gap.
In this respect, China leads the way, with 66% of the population reporting having recently used a mobile payment to settle a transaction (followed by India at 64%, and South Africa at 48%). Such figures are well ahead of France and Canada, where only 13 and 15% respectively reported doing so. (Figure 1)
This trend doesn’t just apply to mobile technology. The UAE is expected to become the first country in the world to have a fully integrated digital payments platform supported by all banks operating in the country by the end of 2015, thereby bringing the future of global payments to the present day.
While uptake of new payment technologies has been more modest in the US and Europe, it is expected that by 2020 these markets will have caught up. In fact, in the future of payments, convergence will be far more prominent, with integrated platforms and payment formats, and greater alignment of the retail and corporate payment experience.
An example of this can be seen in the recent advances in the field of trade finance. This relatively traditional sector – paper-based for hundreds of years – has been transformed by recent technological advances such as the data-driven Bank Payment Obligation and electronic bills of lading, proving that even the most conservative of business lines can progress significantly with the help of technology and data-based transaction models.
The global payments evolution is already under way, presenting an array of challenges and opportunities. If banks are to thrive in the new payments space, they must act now. This is of particular importance in this era of new market participants, as not only do banks face the threat of being overtaken by existing competitors if they fail to do so, they also risk being out-competed by the growing number of non-bank payment providers.
In order to maintain a sustainable competitive advantage, a strategy that is client-driven (rather than product-driven) is key. The first step for banks is to ensure they are alert to all the various dynamics currently reshaping the global payments business, and use this knowledge to anticipate and react to changing market trends and client needs.
Banks must also focus their response on providing clients with compelling value-added payment and payment-proximate offerings. The days when payments were viewed simply as standardised utility products have long gone, and the value-added elements that banks can offer (around areas such as trade-related financing and risk mitigation, data reporting, forecasting and business analytics) are particularly relevant and attractive in today’s competitive market. Offering options that offer strategic value can improve clients’ overall experience of a transaction, rather than just the payment itself.
With so many factors influencing payments – factors that are constantly in flux – implementing strategies and solutions that are flexible and able to adapt to the shifting environment, will remain a huge competitive advantage. For instance, as payments become increasingly global and clients of all kinds demand greater levels of convenience and speed banks must be able to provide efficient, secure multi-currency solutions that can address evolving market requirements and clients’ changing business needs.[[[PAGE]]]
A further strategic manoeuvre that some banks are exploring is the formation of new partnerships and alliances –with both specialist (non-competing) global providers within financial services and also with nimble non-banks – in order to creative strengths and tap in to new types of opportunity. The value of these relationships can extend much further than simply sharing products; leveraging the knowledge and experience garnered from different sectors and industries can add a whole new level of service, thereby enhancing clients’ transaction experience and providing real added value.
As we embark on our journey towards the future of payments, banks’ success in the transforming payments world hinges on implementing a strategy that has client needs at its core. It is only by developing value-added propositions and establishing strategic partnerships which enhance the overall payments experience, that banks will be able to set themselves apart from their competitors in this increasingly crowded payments space, and grasp the burgeoning opportunities on offer.
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