Why the Payments Landscape Needs a Reboot

Consider the following everyday scenarios:

•  Out and about at the weekend while carrying only a basic mobile, you are called by a friend with an urgent request for money.
•  When playing your favourite game on your brand new tablet you realise that you need to “buy a few lives”.
•  While watching the World Cup on a state-of-the-art internet TV, your cable pre-paid account balance goes over the limit.
•  Standing at the checkout in a shopping mall, you suddenly realise you have your car keys and smartphone – but no wallet.

In each of the above instances:

• You need to make a payment using a device or medium that is different from traditional payment mechanisms, such as cash, card or internet-enabled PC.
• You may even have to make a payment using a basic mobile without any internet connection.
• The payment has to be transacted outside normal banking hours, such as the weekend or late at night.
• The payment has to be settled almost immediately.

As advances in technology steadily reduces our patience with any delay, it is no surprise that businesses and consumers alike expect a service from their bank which caters to all of these various payment needs. However, in the global payments landscape most of the services above remain exceptions rather than offered as a matter of course. There are five basic reasons for this deficiency:

1. Only a handful of countries have either implemented or plan to implement a real time – or near-real time – payments system.
2. Near field communication (NFC)-based payments using smart phones or other devices have yet to be adopted wholeheartedly by both retailers and consumers.
3. Short messaging service (SMS) payments using mobiles have not yet caught on fully with the general public.
4. Friends and followers of social media have yet to embrace payments via Facebook or Twitter.
5. Virtual currencies such as Bitcoin have yet to go mainstream and are not regulated.

Using the Opportunity

Whatever the reason for this lack of progress, more than one third of the world’s population is expected to be using smart phones by 2018 and by the end of the decade an estimated 90% will have access to at least a basic mobile phone. Banks, financial institutions (FIs) and governments can no longer treat these as ‘good-to-have’ rather than essential services. Indeed, a considered approach can convert this into an opportunity to achieve much higher objectives, such as:

Financial Inclusion by bringing the unbanked population into an organised banking framework: Offering banking services to those who use a mobile or smart phone but not banks is one way of doing it, as envisaged by the proposed payments banks in India. This offers a logical solution, as total mobile subscriptions far outnumber the total for bank accounts.

With respect to money, although there is an inherent lack of trust in entities other than banks the anticipated volume to be generated by tapping the payment needs of this unbanked section is huge. This has probably been the motivation for telecom majors and large retailers among others to apply for a banking licence. Figure 1 below outlines how a payments bank can speed up a typical transaction life cycle is elaborated in figure 1.

Figure 1: Typical transactions versus Payment Bank Transactions

Increasing Revenue: Around the clock, the cocktail of social media, smart phones and tablets is changing the way an entire generation interacts with the digital world and also among themselves. Yet payments through social media are at a very nascent stage. Once the security concerns have been ironed out, this can become a major playground for players in the payments industry. Payments by Twitter, introduced by American Expressed and more recently by ICICI bank in India shows that major tractions can be expected in this arena sooner rather than later.

Revamping of the domestic payments infrastructure: By merging a few services such as real time, near-real time and mobile payments, countries may be able to revamp their legacy payments infrastructures in one go. To improve robustness and future scalability, many countries are even adopting the ISO20022-based messaging formats. The proposed near-real time credit transfer, direct debits and bill payment schemes in Bahrain is an excellent example. The scope for such an implementation will, no doubt, be extremely challenging. However, lessons learned from the successful implementation of regional initiatives like the single euro payments area (SEPA), Faster Payments and Singapore’s G3 Immediate Payments, mean there is no better time than now.

Further reduce dependency on cash: Governments and banks have various reasons to aim towards minimising cash transactions. NFC-enabled smart phones can play a big role in achieving this with proximity payments. Yet, surprisingly these payments have not caught the imagination of either consumers or retailers. There are many reasons why businesses are shying away from embracing this technology. But the entry of Apple with the NFC-enabled iPhone6 has introduced both a note of seriousness and much needed practicality to this mechanism.

These objectives can be achieved only when innovation in every aspect of a payments system matches the expectations of an ever-demanding consumer. For banks and FIs, this means an open mind in understanding consumer behaviour and segregating their service offerings in response. For regulators and central banks, this means taking some tough decisions. For customers, this means much faster and easier access to funds and payments anywhere and anytime without even having to leave the couch to switch on the PC.