How the internet is changing the face of payments

15 May 2017

Mohamed Horani, Chief Executive Officer, HPS

Global warming is not the only symptom of an economic growth model that has demonstrated its limits. Other symptoms appear, most notable of which is unemployment that has revealed itself as a structural phenomenon, and poverty, considered the most important and profound crisis of the contemporary world.

Faced with this situation, digitization now becomes a historical opportunity and offers an unprecedented chance to construct more viable and sustainable economic models. Digital offers a deposit of a new sharing economy: The collaborative economy.

The emergence of the collaborative economy

Digital revolution has enabled global citizens to organise themselves in social networks and in communities thanks to internet platforms where every individual acts equally with his peers. This organisation has permitted the amelioration of collective creativity and has favoured the mutualisation of goods, tools, and spaces.

The internet is not solely a communication tool, but is mainly a collaborative tool of value creation. It has already permitted the civil society to organise itself and create products and systems as complex as Wikipedia or Linux.

A collaborative economy invents new means of production and consumption. According to PricewaterhouseCoopers, the global market of collaborative economy will go from €12 billion in 2015 to around €270 billion by 2025. These numbers remain modest, but the transition towards a new more equitable and beneficial economy has already been initiated.

The dream of a world without cash

The electronic payment industry is one of the sectors that are the most affected by digital transformation. The number of cards, which was at 13.45 Billion in 2011, has gone up to more than 18 Billion in 2016. The number of users of mobile payment was of 250 million in 2013 and should reach around 450 million in 2017.

According to the 2016 “World Payment Report” edited by Cap Gemini the cash to GDP ratio has increased in the primary markets, even though some exceptions were noted, such as the Nordic countries. According to the same report, the card remains the payment instrument that has the strongest growth, namely 11.8% in 2014. During that same period, check payments regressed by 10.8%.

On the basis of the current use models, cash is to remain an important payment instrument in the near future, even in the markets offering advanced electronic payment methods. Cash continues to be attractive thanks to its numerous advantages to the paying individual, mainly anonymity, absence of fees, real-time exchange, and instantaneous re-usage. Hence the advent of the instantaneous payment concept that is in the process of deployment in many countries.

Sweden and Denmark are in the works of successfully overthrowing cash. Indeed, 80% of the payments are already non-cash. These two Nordic countries have launched advanced initiatives in 2016 by creating a new ecosystem that integrates new actors specialized in micro-payments, all of which was done in the hopes of facilitating the transition and make the exchanges between the merchants and consumers more fluid.

Payments: A market in full reconfiguration

Thanks to digitization, clients are now more connected, better informed, and more exigent than ever before. Consumers want faster financial services that are easier to use and less expensive.

The three main ruptures in the payment market are:

  • The primacy of customer relations, a customer that is more mature when faced with new technologies and increasingly more volatile and disloyal;
  • The monetisation of customer behaviour data that is becoming highly strategic. Only payment permits to gather this data in the moment of the transaction;
  • The tendency of integrating acts of purchase and of payment in order to improve and optimise customer experience.

The dream of the industrial personalisation of payment services is in the process of becoming reality. Every customer is a unique segment. The data that permits an impressive knowledge of each customer, his private life, his tastes, his uses and interests, are in the heart of the customer experience battle.

Furthermore, the financial crisis that detonated in 2008 has affected the entire global economy and broke the trust of the customers in an opaque financial system. However, households absolutely want to safeguard their savings and prefer the security offered by the banks, albeit not optimal.

All of these factors have favoured a reconfiguration of the payment market that is composed of three categories of actors:

  • The traditional actors, namely the banks, reined in by structural and regulatory burdens that disable them from efficiently responding to the new consumption modes of their customers;
  • Fintech companies, agile entities in-between the traditional financial sector and the new digital uses that offer innovative payment services with disruptive business models;
  • Technological actors, telecom operators, and e-business giants that use their core business and user data collected from their customers to offer personalised payment services, one click away, with a unique customer experience.

The banks’ reaction towards Fintech and the other new entrants is underway. Some are investing in or buying Fintech companies, while others set incubation programs and/or open their banking systems by creating partnerships with the Fintech companies and implementing open APIs for the other market actors.

It is evident that it would be more beneficial to the market to avoid an inconsiderate rivalry. The three categories of actors must unite their forces to fight against the common economy: Cash.

The new entrants would need to bring the agility and competitiveness necessary to deploy innovative business models. The banks and the other traditional actors would need to succeed in their digital transformation and bring to the other actors, in the framework of alliances and partnerships, their business expertise and capital-trust with their customers that is much more sizable than that of the new entrants’ customers.

Electronic payment and “Blockchain” technology

Where are we on the technological front?

Every year in the month of October, Gartner publish a report on 10 main technological trends. The predictions of the American research and advisory firm for 2017 reveals a science-fiction-like near future. These trends are organised around three big themes:

  • The first that regroups the three first trends focuses on artificial intelligence and machine learning.
  • The second, which deals with the three following trends, tackles the interactions between the physical and digital worlds.
  • Lastly, the final theme that federates the four past trends approaches the link between platforms and services to offer intelligent digital solutions.

Amid the 10 technological trends identified by Gartner, the blockchain represents the promise of adding trust in non-secure environments and permitting a transparent access to the information contained in the chain. According to Gartner, blockchain technology is foreseen to have a certain future, but will remain for a while a field of experimentation.  In the spirit of following the trend, we have already initiated the migration of a PowerCARD module towards this technology, which is the interbank transactions’ clearing and settlement module.

All that we see today, despite its impressive nature, is nothing compared to what awaits us in the decades to come. Information and communication technologies have enabled the implementation of very complex mind-machine interfaces, in robotics and in prostheses, but also in new doping molecules that can act directly on human physiology. These technological revolutions also raise many ethical, philosophical and regulatory questions that the industry will have to address over the coming decade.

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