10 minute read 10 Sep 2019
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Seven themes impacting the future of payments

By

Sean Viergutz

EY North America Wholesale Banking Technology Head

Payments leader in banking and capital markets. Results-driven. Environmental advocate. Family-oriented.

10 minute read 10 Sep 2019

Understanding the themes transforming payments can help banks make strategic investment decisions and emerge as winners. 

Tap. Touch. Speak. Grab and go. The way we make payments is changing faster than any other area of financial services. New technology and changing customer expectations are shattering the status quo and ushering in a growing number of new players that are challenging the traditional role of banks. 

Winners in the future payments ecosystem will be those that make the right decisions today. Understanding these seven key themes reshaping payments will help leaders make those decisions and determine how best to differentiate themselves in this fast-changing landscape. 

Man paying through smartphone
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Chapter 1

Fast forward to the future of payments

Seven themes driven by technology advances and consumer demands.

Theme 1: Payments are becoming invisible

Customers now expect a seamless shopping experience and will be frustrated by payments solutions that require enrollment, entry of payment data, and/or additional effort of any kind. This demand for a frictionless payment experience is defining the emergence of the next-generation of these experiences where lines between shopping, purchasing, and paying continue to blur with the payments system operating in the background.

Invisible payments make life easier for consumers, but more complex for payments providers. Increased security measures, including tokenization and strong authentication, are needed when payments products are embedded in devices and vehicles. And, delivering a truly seamless experience will require the digital integration and interoperability of networks and terminals at each touchpoint in the payments lifecycle. 

When payments are invisible, maintaining a strong brand is more difficult for banks. Remaining competitive requires mirroring the innovation of rival FinTechs through market-differentiating partnerships. For example, payments players are focusing more on the customer experience, ease of doing commerce, and removing friction by embedding the payment in the transaction, similar to Amazon Go’s “Just Walk Out” shopping where customers can skip the checkout line. We also see partnerships between payment networks and other companies to embed payments using Internet of Things (IoT). For example, MasterCard, IBM and General Motors are creating in-car payments systems using vehicle consoles and voice-enabled assistants to provide frictionless payments.

These blurred lines, digital wallets, payments in the background and the ecosystem of involved parties will give rise to more Starbucks types of omnichannel models which combine a mobile app, a loyalty program, gamification, and a frictionless payment method. More fused loyalty and payments capabilities will enhance the customer experience.

Theme 2: Artificial intelligence and machine learning will play a larger role in the end-to-end payments lifecycle

According to the IDC, by the end of 2019, 40% of digital transformation and 100% of IoT initiatives will be supported by artificial intelligence (AI).1 The banking sector will invest US$5.6b on AI this year – the second highest industry spend after retail, with payments a key target of this spend. The use of AI and machine learning (ML) is set to move beyond helping combat fraud and improve operations to providing granular insights across all areas of the payments value chain – informing better decision making, increasing efficiency, improving security, and boosting innovation.

Five key areas will see a significant impact from AI:

Business decision making and marketing: Data analytics, AI and ML can help merchants find, target and retain their most profitable customers and tailor better products that meet their needs.

Customer experience: As technology improves, and security and privacy provisions are enhanced, voice payments and conversation commerce are set to become as widely used as mobile payments. Customers will even use voice commands to manage accounts as the technology becomes a trusted, normalized element of the payments landscape.

Rewards and loyalty: AI will allow merchants to offer dynamic, personalized and portable rewards based on customer preferences and transaction history. Data sharing between payments providers and merchants will allow customers to pay and redeem rewards at point of sale (POS) to further enhance the potential of loyalty-driven revenue.

Process analytics: Data and analytics will reduce both the cost and time needed to settle payment disputes, process chargebacks and settlements and onboard customers. Banks can improve treasury services by using AI and ML to offer intelligent receivables and reconciliation, making it easier to apply incoming payments to outstanding invoices, and by providing better cash forecasting services.

Information security: The technology-driven transformation of payments to fast, real-time and invisible is increasing the need to leverage AI and ML to authenticate payments, detect fraud and protect customers and merchants from cyber breaches. Payments providers with superior security measures can gain a competitive advantage, winning the confidence of customers that increasingly demand to know how their data is protected. 

Theme 3: Business customers will expect more from their banking solution providers

The role of corporate treasurers is expanding – and they expect their banks to change too. Moving away from transaction-based pricing, banks will provide value-added services to differentiate themselves in the market. Treasury services providers will need to adopt and master new digital tools and capabilities if they are to offer corporates the differentiated services they demand. This includes faster onboarding processes enabled by AI and technological solutions and access to accurate, real-time information that helps track payments, develop dynamic cash forecasting, improve reporting, and drive better decision making.

Integrating with clients’ core systems, such as Enterprise Resource Planning (ERP) and Treasury Management Systems (TMS), will be critical to a banks’ ability to do this. We expect more larger treasury service providers to seek partnerships with ERP providers to further improve connectivity.

Theme 4: Open banking will bring friends and foes together

The sharing of data enabled by open banking allows organizations to work together to improve processes across the payments chain – from Know Your Customer (KYC) to fraud, rewards, and marketing. Instead of seeing open banking as a threat to market share, leading banks will seize the opportunity to boost their collaboration with FinTechs and other financial institutions to bring customers the more innovative products they demand.

For example, Bank of America has partnered with PayPal to allow customers to easily link their credit and debit cards to their PayPal account. This collaboration allows the Bank to earn fees from card transactions and expands PayPal’s network and transactional volume. Other banks are forming payments networks, such as Zelle, that allow them to amplify their digital innovation efforts, including in peer-to-peer (P2P) payments, instead of doing it alone. In 2018, Zelle processed US$119b in payments, compared to US$75b in 2017.2 After multiple failed P2P efforts by banks, the success of Zelle illustrates the power of the network.

Theme 5: Digital identities will create a trusted network

More digital payment channels will make it harder to authenticate identities and increase payments fraud and cybersecurity threats. But digital innovation also offers new ways to mitigate risk. Biometric identification – a photo of a customer’s face, a recording of their voice or a scan of their fingerprint – can make authentication more secure and payments more convenient for customers.

The use of biometrics, in combination with other verified data, can help build digital identity (ID) solutions that help payments providers more efficiently and safely verify customers’ identity.

Collaborative, cross-sector investment in developing these solutions will be critical to both achieve standardization and maximize the potential of digital IDs. Implemented well, these IDs could give rise to a “trust network” where customers control their own data in a stronger ecosystem that is harder to break into. Payments providers that invest in digital IDs, either alone or as part of a network, will reap benefits, including cost savings, revenue growth opportunities, more confidence around compliance and improved customer perception.

Theme 6: All payments will be made in real-time

Globally, there are currently 40 active real-time payment (RTP) schemes, up from 25 in 2017, with more than a dozen set to go live over the next year.3 On-demand payments are fast becoming the new normal, driven by customer expectations, regulatory mandates and digital innovation. Banks are also investing more in the infrastructure upgrades that enable RTP – and they are seeing the benefits in the increased volume and value of payments.

As more use cases emerge for RTP – including wages for gig workers, just-in-time supplier payments and POS – banks will need to keep up with demand, or risk losing out to more nimble FinTechs. RTP at POS could be the real game changer. However, without deep integration and partnerships between providers and merchants, we may not see mass adoption in the near term.

Theme 7: Interoperability of payments across platforms and borders will emerge

The acceleration in payments innovation has been challenged by the difficulty in integrating new payments systems with legacy systems that operate on closed, siloed networks. Maintaining payments industry growth will require a shift toward standardization that enables interoperability across various payment mechanisms, clearing and settlement systems, and liquidity providers. The move to adopt standardized payment format (ISO20022) is promising, but we are unlikely to see the emergence of a common global clearer or a non-card network for some time. Instead, expect to see pockets of regional innovation emerge as players explore different P2P schemes and networks.

As e-commerce continues to grow, achieving cross-border interoperability will be a focus area of investment for both incumbents and emerging providers. Increasing demand from customers to be able to use one payments platform to pay beneficiaries across multiple platforms will be the main driver of growth in cross-border solutions. Providers, such as FinTechs, that offer frictionless global payments solutions will thrive. These pockets of innovation that address global commerce and small business needs will have a direct impact on domestic P2P solutions by pushing forward the need for interoperability.

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Chapter 2

The winners circle

How leaders will emerge in a changing market.

With the payments sector changing at unprecedented speed, making agile decisions on how to adapt can be challenging. Understanding these seven themes reshaping payments can help companies determine how best to focus efforts in the years ahead. Winners in the future payments world will be those organizations that:

  • Integrate with a relentless focus on customer experience: Customers want seamless transactional experiences across multiple channels where payments are invisible, but still secure. Winners will do more than facilitate transactions to offer smart, intuitive digital tools that help customers manage finances and resolve payment disputes.
  • Differentiate with real-time data, AI and ML: Using real-time data, AI and ML to combine transaction and customer data from multiple sources can uncover insights that help create new products, improve customer experience and develop the next generation of highly-personalized loyalty programs. Winners will use real-time data, AI and ML to strengthen authentication, fraud detection and prevention, going beyond rules-based capabilities and into predictive information security practices.
  • Strategically build and partner in open platforms: The future is collaborative. Winners will join forces with other players to leverage information sharing via open banking and consider payments as platform-as-a-service will achieve more than is possible working alone. The next generation of seamlessly integrated payment rails, bank networks and alternative forms of payments will be created by pooling best-in-class services from various providers in a single ecosystem.
  • Invest in infrastructure and security: Modernizing payments platforms and investing in cloud-based infrastructure will allow providers to accelerate innovation, including in RTP, while boosting security. Winners will invest in next-level authentication and authorization, including tokenization, multi-factor authentication, behavioral biometrics, computer vision technology and password-less authentication techniques.

For more on the future of payments, read the related white paper, Fast forward to the future of payments.

This article originally appeared in our #payments newsletter - volume 24.

The primary author for this article is Jennifer Lucas, EY Americas Payments Advisory Leader.

Summary

Technology and customer expectations are key drivers behind these seven themes that are impacting the future of payments. Understanding these themes can help banks and payments providers invest now in the new digital and customer capabilities that will help them emerge as winners. 

About this article

By

Sean Viergutz

EY North America Wholesale Banking Technology Head

Payments leader in banking and capital markets. Results-driven. Environmental advocate. Family-oriented.