Ok, you may have noticed that I have been into cybersecurity and SWIFT quite a bit recently. But now I am going to head back to PAYMENTS! In August 2015, Consult Hyperion released a report The Future of Payments which describes current developments and outlines how the payments landscape will change in the UK over the next 5 years. With all of the focus on fintech and the UK increasingly being seen as a world leader in this space, this report is an interesting insight into the future of payments arguably beyond the UK shores. I learnt a lot by reading this report and would urge you to read the Consult Hyperion, The Future of Payments for full details – in the meantime, here are my notes:
Customers are driving innovation:
According to Deloitte 76% of adults in Britain own a smartphone, and 53% of us check our phones within 5 minutes of waking up!! That was not in the Consult Hyperion report, but I wanted to understand for myself the impact of smartphone usage. Interesting, huh?!?!
That kind of technology uptake is clearly driving innovation and is an example of just one of the technology based developments in the marketplace. This according to Consult Hyperion has driven the payments industry to take notice, and is resulting in a perfect storm for payments whereby both the technology is ready and so too is the consumer.
Current Payment Trends in the UK:
- Let’s not get carried away though, Cash is king – particularly for low value transactions
- Non-cash transactions are increasing – with debit cards being the most popular non-cash channel
- Cheque usage is declining, but cheque values are increasing
- The study did not capture mobile payment statistics due to the recent launch – but clearly mobile is becoming a viable alternative to cash, cards and cheques
The Evolution of Payments in the UK:
Consult Hyperion outline 3 main drivers:
1. Developments in technology
Smartphones:
- There is an increasing consumer expectation that the smartphone should be able to do everything
- Smartphone innovation is enabling a variety of opportunities and none more so than for payments
- There are 2 key reasons:
- Consumers no longer need to carry their payment cards or payment details with them – this is now enabled through Host Card Emulation (HCE) and Tokenisation – there is a real neat explanation of tokenisation on page 7
- Customer authentication or peace of mind by using biometrics – such as fingerprint technology
- Leading smartphone retailers such as Apple and Samsung are leveraging these developments to enable mobile payments
- Consult Hyperion continue to explain that the evolution of smartphone technology and biometrics will lead to the expansion of wearable technology – already in progress with the Apple Watch
Digital Currencies:
Consult Hyperion acknowledge the benefits of Bitcoin, namely unrestricted global payments, comparatively minimal fees, secure and real time payments. But recognise the ‘conservative’ nature of UK consumers and as a result conclude that Bitcoin is unlikely to take off. But like most other authorities speak about the potential of the underlying blockchain technology – is that a cliché now..??
2. Consumer and business demand
Competition – With the emergence (Apple Pay and Samsung Pay) and growth (PayPal) of new players there is pressure on incumbents (banks and credit card companies) to take note and innovate. This competition to retain and acquire new business, according to Consult Hyperion, is a key driver.
Cost – Of course! In March this year the European Parliament capped interchange fees on credit and debit cards. This is great for newcomers, but not so great for incumbents.
Interestingly Consult Hyperion express caution too, outlining some of the concerns that consumers have with all of the recent technology developments. Key concerns include: privacy, security, freedom to shop anywhere, trust and the infancy of the technology particularly around authentication
3. Regulation
Money laundering and terrorist financing are defining regulation resulting in the Financial Action Task Force recommendations which is driving regulations in:
- Anti-Money Laundering (AML)
- Countering the Funding of Terrorism (CFT)
- Customer Due Diligence (CDD) or mostly commonly Know Your Customer (KYC)
In Europe PSD2 – Payments Services Directive (more on this soon – see page 10 for a quick summary…!) – will clearly influence developments in the European payments space
Closer to home in the UK, the recently established Payment Services Regulator will no doubt also shape the domestic evolution of payments
Key Takeaway – Consult Hyperion outline how the transaction data that providers will need to manage, to adhere with regulatory demands will also enable significant innovation. The data – known as ‘big data’ – will no doubt give businesses unprecedented information about their own operations and more interestingly insights about their customers too.
Payments – The UK versus the Rest of the World:
Consult Hyperion make a couple of comparisons, but it is the US comparison that I found most interesting. Particularly, and remember this is with reference to payments:
- The population size of the US – 5 times larger than the UK – maintains an environment in which many smaller banks and financial service providers are actively competing with one another and as a result collectively failing to achieve critical mass
- There has been a lack of investment in a common infrastructure – for example, the US is only just rolling out chip and PIN
- Contrary to popular opinion, Apple is not necessarily the leading beacon in the payments space – read page 14 for further details
Key Future Payment Trends:
- Non-cash payments will continue to grow
- Payments will become cheaper, faster and more transparent
- there will be improvements in customer identification through biometrics
- Information – or big data – will benefit both the customer and the payment service provider
- API’s will be key and will drive innovation
- Banks will innovate to compete with start ups in their bid to retain customers
- Fintech companies will innovate and exploit niches to attract customers
For consumers:
- Bills that are not paid using a direct debit, are likely to be paid using an App
- Cheques will be scanned by your smartphone, avoiding going into the branch (if it still exists!!)
- Debit or credit card purchases on the high street will be replaced by smartphone purchases
Payments – It’s Personal!
So, that was REALLY interesting. Consult Hyperion covered a lot of ground in 20 pages. In my humble opinion, they missed one key area – social media. Social media is not mentioned at all and is for many of us, the biggest mediums through which we interact with the wider world. Various social media platforms are exploring and releasing payment solutions which should not be ignored. At the time of writing Facebook has over a billion monthly active users and Twitter has 316 million monthly users.
Anyway, payments are changing, but its not happening as fast as the media hype would have you believe. The very nature of a payment is very personal and with the various and exciting developments in technology, we must not forget that in the end people need to trust and feel comfortable with the companies, the authentication process and the information they are sharing. That said, these are exciting times and we shall continue to watch the evolution of payments.