Traditional payment systems are undergoing a paradigm shift underpinned by new technology, innovation, rising customer expectations, mobile and internet penetration, and new infrastructure regulations. All these global megatrends are transforming and shaping the payments ecosystem.
The global COVID-19 pandemic has also created a catalyst for change that is expected to perpetuate the growth of digital payments for years to come. Customers and businesses are increasingly relying more on digital options when it comes to the buying and selling of goods and services.
These are some of the material highlights from an analysis issued today by PwC’s Strategy& division on the value of payments. The analysis forms part of a report on the Convergence of Payments – PwC Payment Trend Series #2.
Chantal Maritz Strategy& Payments Transformation Lead at PwC says:
“In this analysis, we delve into the value of a payment as it has transformed, from a traditional medium used to complete an exchange of goods or services, into a cornerstone of the new digital economy. The traditional way to pay has been disrupted, progressing payments beyond the conventional model into a new paradigm. The new opportunity lies within the context of a payment. Payments provide insights into managing your business better, understanding your customers more deeply and operating in a more efficient, effective and innovative manner.
“Payments have become a strategic priority for organisations that are serious about being relevant in the payments ecosystem and broader digital economy.”
How does value creation change with digital payments?
Key Takeaway #1: Frictionless payments are no longer enough
Value creation has shifted across the entire payments ecosystem. One of the most noticeable observations is the introduction of frictionless payments. Traditional payment systems are out of date and can’t keep up with the demands from a digitally focused economy. Payments have largely undergone a major transformation doing away with many of the frictions (from card payments to contactless card and mobile payments).
Most organisations want the payment experience to be as seamless as possible for their customers. To differentiate themselves in the market, companies are also focused on developing better products and services while incorporating seamless payments into a holistic end-to-end customer experience. For example, Uber, deliberately relegates the payments experience into the background so customers can focus on their core intention for interacting with the app — getting to their destination or simply enjoying a meal. Other household names such as Airbnb, Amazon, Apple, Facebook, LINE, Meituan and WeChat have also successfully incorporated elements of this approach.
Key takeaway #2: Rise of Payment-as-a-Service and the entrenchment of banks
Our second observation stems from the results of the latest rounds of acquisitions by payment intermediaries. Some of the biggest players in the payments industry are creating value by offering a multitude of payment solutions, least-cost routing options and value-added services that can cater to the needs of small merchants and global multinational companies alike.
An emerging model from this new flexibility is Payment-as-a-Service (PaaS). This model allows merchants and other participants in the payments ecosystem to use local, regional and global payment options by interacting with a single interface. The value of this model lies in the removal of complexities, improved processes and differentiated experiences. Most banks now have platform solutions that are integrated into their core banking systems via application programming interfaces (APIs) from PaaS providers.
Together with the rise of PaaS providers in the payments ecosystem, banks have become more firmly grounded as the ultimate store of value owners. Banks ensure regulatory and financial compliance, and in most cases are owners of the underlying clearing ‘rails’ that make it possible to move funds from one institution to the other. As the level of digital payments activity continues to grow, compliance with anti-money laundering (AML) legislation and KYC and fraud management requirements continue to be scrutinised by regulators to ensure that customers are protected.
Key takeaway #3: Use of contextual data leading to changing risk models
The third observation is the growing focus on access, use and management of payments data across the payments ecosystem. The growing abundance of data within payments is enabling greater transparency and discovery of more creditworthy businesses to offer loans to. With greater access to credit, these businesses can scale up to employ more people, leading to greater contributions in tax revenue and consumption within an economy.
The future role of payments in the economy
Payments will continue to play a crucial role in our everyday lives. As the digital economy expands, payments will be a key enabler for digital financial services. The scope and scale of financial services will be more than just a movement of the transaction value, it becomes a value equation where payment transaction + insights + trust = value creation within the value chain.
Digital payments have been evolving over the past decade with rapid acceleration in digital offerings available to consumers. From physical credit cards to prepaid debit cards and now with electronic payment services such as PayPal, Payoneer, Google and Amazon Pay rapidly increasing across the world, it is only a matter of time before digital payments make physical paper money obsolete. In some countries such as Sweden, paying with cash is becoming increasingly difficult with most transactions being digital. Beyond the horizon, several countries such as China are also exploring the concept of central bank digital currencies — a digital payment token that is issued and fully backed by a central bank and is legal tender.
“Banks, governments, non-traditional financial service providers and financial technology firms must work together to enable this transition to a digital value creating financial services ecosystem to further enhance their social licence, to build trust and to make sure that the most vulnerable are protected.”
“To stay relevant, never mind successful, payment providers have to be agile and anticipate change at all times — what is a differentiator today will become table stakes tomorrow.”
Serious players within the payments ecosystem will have to keep up with changing customer expectations, regulatory changes, technology advancements and persistent innovations by new entrants together with greater societal purpose for financial inclusion of the previously excluded and underserved segments.