Hidden Payments: Technology Opportunities for Corporates
Today, over 15% of all retail transactions are cashless and they represent 40% of the transactional value of retail payments across the world. Until a few years back most of these transactions were made through cards issued by the banks. But today, innovative companies are offering customers with solutions such as cards, e-wallets, mobile payments, cryptocurrencies, etc. that are largely independent of banks.
The first payment card can be traced back to the local “Charg-It” card introduced by John Biggins in 1946. The Franklin National Bank in New York introduced the first bank-issued credit card in 1951. Today, cards represent over 60% of non-cash transactions and the total number of cards in circulation globally is expected to touch 20.56bn by 2017. Closed loop cards were one of the first hidden payment systems and they have led to the innovation of several other solutions, such as Prepaid Cards, Gift Cards, Contactless Cards and Virtual Cards.
Payment aggregation is a processing arrangement in which an aggregator processes the transactions on behalf of many smaller businesses or customers belonging to its portfolio. PayPal is one of the oldest payment aggregators with over 152m active accounts. In the third quarter of 2014, PayPal created US$1.74bn in revenue and saw its payment volume grow 35% year over year on non-eBay sites. Companies such as Apple, Amazon, Google and Facebook have also joined the payment aggregator bandwagon. Also, startups such as Stripe and Square are growing very rapidly. These companies are trying to make retail and person-to-person (p2p) transactions much simpler and hassle free.
Mobile devices have just made payments through mobile much easier and safer.
M-Pesa was launched in Kenya by SafariCom in 2007. Six years hence, 74% of the Kenyan adults use this service to make payments and over 31% of the Kenyan gross domestic product (GDP) was processed through the mobile service provider. With the success of the m-Pesa implementation in Kenya, the service has been rolled out in 72 countries and over 100m people have been enrolled in these services.
PayPal is betting big on a Bluetooth-powered payment system in what it dubs totally contactless payment. Payments cannot get more convenient as transactions can be seamlessly concluded with a beacon installed in-store, communicating with the customer’s mobile app.
Of course, no development in mobile payments is more significant at this point than the advent of Apple Pay. With over a million activations, Apple pay has more accounts than the next 3 competitors combined. Apple Pay’s success will determine whether near-field communication (NFC) payments truly take-off or not.
Cryptocurrencies are digital currencies in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds. Operating independently of a central bank, cryptocurrencies were introduced in the market in 2008 and they have been reasonably successful. There are about 1138 cryptocoins with a market capital of US$5.79bn, but the focus is on bitcoin as it represents 93% of the market capital.
There are arguments that cryptocurrencies comprise a very small percentage of total payment transactions. But that is not the right comparison. To understand the real power of these, coins we have to compare them against non-bank transactions. Bitcoins stand at eighth spot in terms of transaction value ahead of Western Union and at 9th in terms of transaction volume. The average bitcoin transaction value is eight times more than that of Western Union. These currencies have some unique features that make them very attractive to the users – they offer anonymity, they are inflation-resistant, they are not monitored or controlled by any government agency, etc. The concern that the central banks and governments have about this currency is about the transactions it is used for and the impact it could have on traditional currencies.
Hidden payments will grow rapidly through transactions via mobile and digital wallets. Banks on the other hand will take a hit on the total number of transactions that are processed through them. The telecom players will play a major role in countries where banking is less evolved and technology companies will determine the growth of hidden payments in countries where banking is much evolved. Mobiles can very soon become a replacement for physical wallets depending on the speed at which technology companies can come up with a protocol for cross-platform payments. Cryptocurrencies have enjoyed the acceptance of the technology group and in the years to come, they are likely to be more regulated. With banks accepting them, these currencies might growth at an exponential rate.