Coronavirus and the future of payments
By Peter Ryan, head of payments, Europe, Infosys Finacle
By Peter Ryan, head of payments, Europe, Infosys Finacle
The coronavirus has been a mixed bag for the payments industry. Lower confidence and income means fewer purchases (and payments) on the one hand, but on the other, the fear of infection is driving rapid adoption of “clean” contactless payments. In the UK, the limit for in-store contactless spending was increased to £45 from £30 from 1st April; even Germany, which still likes cash, doubled the contactless card spending limit from €25 to €50. Other European countries have also raised the limit in their respective markets. In the United States, where contactless and digital payments have risen sharply – mobile banking usage at the four largest banks has increased to 72 percent of customers from 63 percent last year – there are concerns that ATMs and bank branches may become obsolete.
At the same time, the pandemic has delayed the adoption of certain types of payment initiatives, such as the PSD2 Strong Customer Authentication in the UK for e-commerce, which will now take effect in September 2021 instead of March 2021. Similarly, there was a temporary delay in the publication of U.K.’s “Request to Pay” framework because of the coronavirus.
Commercial payment processing, which requires a fair amount of manual intervention, has also slowed down. This is driving businesses towards digital payments, which can be processed on the cloud.
Overall, the trend is to go digital across the payments cycle, including onboarding, processing and reporting.
Blockchain for some
Blockchain is one of the technologies that can facilitate digital payments. However, it suffers from certain limitations – distributed ledger technology is slower than a centralised system, and has a larger carbon footprint owing to the multiplicity of nodes. This renders it unsuitable for high volume – low value transactions, such as domestic real-time payments. However, high value – low volume payments, such as cross-border remittances, are a different matter. Last November, a digital technology markets analyst predicted that blockchain-based cross-border business-to-business payments would exceed $4.4trn by 2024.
Moves, such as the announcement of a stable coin from the Libra Association, may indeed lend momentum to blockchain adoption. Some use cases: The Bank of England is investigating some aspects of blockchain functionality such as Atomic Settlement through smart contracts as part of its real-time gross settlement strategy. Ant Financial has launched a proprietary platform called OpenChain that allows small and micro enterprises to access innovative Blockchain tools.
Cash hangs on
The pandemic is raising questions about the future of cash. The coronavirus has halved the use of cash in the UK accelerating the existing trend to greater use of digital or contactless payments. Indeed the World Health Organisation recommended the use of contactless payments, which has supported the policies of many governments to move from cash to digital payments to increase financial inclusion, increase payment transparency and provide people with a credit history.
That being said, some groups are apprehensive about going cashless. The vulnerable and the old, rely on it, New York City, and among others in the US, have legislated to ban cashless brick and mortar businesses. There are also those who believe cash helps them budget their expenses better. In addition there were record withdrawals of cash in both the eurozone and Russia at the start of the pandemic as people worried about banks going bankrupt.
Central banks have their own concerns about cashless societies, particularly due to the impact on monetary policy. Increasingly central banks lack the tools to impact the economy (negative interest rates being the most obvious feature).
Therefore the likes of Sweden’s Riksbank – and also the Bank of England, Bank of Japan and Monetary Authority of Singapore – are contemplating the possibility of central bank issued digital currency, which would allow customers to continue to hold digital cash, with the assurance that it enjoyed the central bank’s guarantee. This would also mean that the central banks would recoup some of the lost influence over their national economies. In a cashless society commercial banks act as intermediaries between the central banks and the consumer economy.
Payments, already undergoing rapid change, will continue to see innovation in the future. The ongoing migration of payment systems to the ISO 20022 standard will continue. This has already happened in some regions, such as Australia, Switzerland and the eurozone, and the UK and even SWIFT are in the process of migration. ISO 20022 payments are data-rich, so provide deeper insights into how individuals and businesses are spending their money. Since the data is valuable, it offsets some of the cost of payment processing. The (data) opportunity appears so attractive that many large tech firms, including Google and Facebook, are increasing their involvement in the banking space.
Another innovation is embedded payments. Some use cases, for example, ride sharing apps with inbuilt payment options (Uber), or ecommerce platform payments (Amazon), are already well established. As the Internet of Things takes hold, embedded payments will expand, also into the B2B space.
Request to Pay is yet another exciting innovation. While it has been delayed by the pandemic, corporate banks are showing interest in it, especially its ability to provide automatic reconciliation between a payment and invoice.
When the coronavirus recedes, digital payments will resume their march forward.
Peter Ryan is head of payments, Europe at Infosys Finacle