Its been an incredible 2015 and many commentators are now looking ahead to forecast what payments trends will be prominent in 2016. Readers of this blog will know that i follow McKinsey quite a bit and back in October they wrote an article – 16 in 2016: Trailblazing trends in global payments – which i will provide an overview of in this post. Following are the top 16 payments trends as outlined by McKinsey
Payments Trends for 2016:
1\ In App Digital Payments will Disrupt Cash
McKinsey describe how mobile devices are “digital containers” and the medium through which we communicate, plan our work and social lives, shop, health, and travel from A to B. From a payments trends perspective then, its no surprise then that “in app” will become the “new battleground for both online and in-store shopping”.
The key benefits of in-app purchases according to McKinsey are:
- Convenience – By offering personal and automated payment options for the consumer anytime and anywhere
- Control – Allowing the customer to better manage what they spend
- Value – Better value through personalised offers based on where the customer is and what they may be interested in
2\ Collaborative Multichannel Solutions will Win the Day
Following on from point 1, McKinsey describe how merchants will have to partner with numerous companies and deliver integrated and multi-channel payments solutions. Specifically, McKinsey call out the importance of digital wallets and explain how personalised offers, loyalty points will help to win over customers. At the same time the report highlights the challenges around privacy.
3\ EMV will Drive Mobile Payments
In Europe EMV or chip and PIN payments have been universally available for quite a while now, and McKinsey describe how the migration to EMV will result in the exponential growth of contactless payments in other regions.
4\ Digital Innovators will Dominate P2P Payments
Risk-adverse traditional banks are being displaced by innovative tech companies such as PayPal, AliPay, TransferWise and Venmo in the P2P (peer to peer) space. The innovative new-comers are recognising the following benefits of being in the P2P space:
- Cross selling opportunities
- Marketing insights
- High margins within SMEs (small and medium sized enterprises)
- Favourable currency exchange rates for cross border payments
5\ Big Data, Big Benefits
McKinsey highlight some of the the challenges incumbents face adopting new technologies that facilitate big data analytics, such as implementing:
- Cloud-based data warehousing solutions
- Application program interfaces (APIs)
- Nimbleness around solution development and launch
These technologies, according to McKinsey, enable data to be acquired and analysed offering opportunities for cross selling and data rich consumer and enterprise applications.
6\ Loyalty Programs will grow
Payment companies are at the heart of many merchant loyalty programs. McKinsey describe 4 main types of loyalty programs:
- Segment oriented loyalty programs
- Personalised offers
- Geographical-targetting
- Multi-merchant collaboration
7\ Regulation will drive Innovation
When it comes to payments trends, this one is pretty important! Regulation will enable companies, particularly Third Party Processors (TPPs), to compete with traditional banks in the payment processing and customer data space. McKinsey cite the European interchange fee and PSD2 regulation as examples that will continue to disrupt the payments space in 2016
8\ Merchant Point of Sales (POS) Solutions Turn to the Cloud
Its obvious, eh? There is no need for merchants to host complex and expensive hardware in-house, when there are plenty of cloud based solutions out there. Interestingly though McKinsey share how payments processors want to both:
- Own the payments platform and the merchant interface
- But also enable others providers to extend their services through the use of APIs
9\ Payments go Real Time
McKinsey propose that non-bank technology companies are driving innovation and setting new industry benchmarks for payment processing speed, efficiency, accessibility and cost. This non-bank commitment and consumer demand is contributing to various real time payments initiatives:
- 22 countries upgrading their domestic payment infrastructures to real time
- Some countries in Europe are already live with real time payments and the EPC is actively pursuing the idea for SEPA payments
- A revamping of the Canadian and US payment infrastructures
10\ Cyber attacks Continue
McKinsey cite costs and reputational damage as key reasons why cyber security investment is peaking right now, and suggest that tokenisation (substituting the payment card details with another anonymous number) is an important deterrent for the payments industry.
This payments trends is something that will continue to play on the minds of consumers as they undoubtedly will migrate to mobile payments solutions.
11\ Revenue Models for Payments are Changing
Banks have traditionally made money from interest on the daily balances on their books. But now, incumbents are needing to look at what the tech companies are doing and at least consider their pricing models. Check out the McKinsey table on page 22 of the report for further details, but in short these are the prevailing models out there
- Fee per transaction – examples include iTunes and Amazon
- Subscription fee – examples include Netflix and WhatsApp
- Free – Facebook, Google
12\ The Potential for Blockchain
The momentum around blockchain is gathering at an extraordinary pace. The concept of an authenticated history and payment (to name one) processing without a middleman is truly disruptive. This is what McKinsey are saying blockchain could do:
- Replace existing proprietary ledgers
- Increase transaction transparency
- Enable settlement visibility
- Reduce costs
- Significantly change existing clearing, custody, and cash management models
13\ Pure Digital Banks are Changing Mindsets
McKinsey give the examples of Atom, the UK’s first digital bank, and explain how they are changing the way people think about challenger banks. Bricks and mortar branches are no longer the flavour of the day, and McKinsey quote the RBS CEO Ross McEwan ““Our busiest branch in 2014 is the 7:01 [train] from Reading to Paddington”.
14\ The Importance of the Customer Experience
McKinsey illustrate the different approaches being adopted:
- Some banks are going on the offensive and trying to protect their core business
- Other banks and technology companies are building market “share through compelling customer experiences”
- Non-bank tech companies use payments as another channel through which to “provide an end to end offering”
15\ Partnerships will Increase
McKinsey illustrate the importance of partnerships through a pretty insightful table outlining the journey consumers take when purchasing online and the decisions and players involved. Checkout the table on page 9 of the report, but in the meantime here is a very high level summary:
- Search (pre-visit)
- Evaluate (decision)
- Buy
- Bond (post visit)
16\ Mergers and Acquisitions will Increase
McKinsey describe how “payments has become the epicentre of fintech innovation” with almost 5000 fintech companies in the payments space. As a result acquisition is a good way for incumbents to not only acquire innovative solutions, but also bring in fresh perspectives into often traditionally slow and heavy organisations that are clearly recognising the need for change