The rise of technology has raised customer expectations about the products and services they want, and how these should be delivered. When we can communicate via instant messaging and buy groceries with one tap, we expect payments to be immediate, or close to it. And in many countries, including the UK and Singapore, near-real-time payments are the new norm, with governments, banks and payment providers working to enable these systems. These countries share common characteristics, including significant economies of scale, a dominant currency, an open economy and enabling new regulation, such as Europe’s Revised Payment Service Directive (PSD2) that requires banks to share customer data with third-party payment providers.
As economies become more globalized, countries with near-real-time payment structures will gain a strong competitive advantage. In countries with outdated payment systems, innovation is an economic priority — before local providers lose out to global payment giants such as PayPal, Apple Pay and Facebook Pay.
Differences and drivers for modernization of payments infrastructures
Innovation: Payments is a key driver of financial inclusion, money velocity and the protection of the local markets currency.
Transparency: In less efficient economies, the payments system is not always transparent in fees, settlement times or the common rules of adoption.
Efficiency: Cash is still widely used, as it is more efficient (e.g., processing times, costs) due to a lack of standardization and integration of the payment infrastructure.
Leadership: In the payments domain leadership is missing. There is a demand to stimulate, and regulate the payment infrastructure.
Roadblocks to payments innovation
How can economies with outdated infrastructure leapfrog to more advanced payment systems? Innovation can only occur under the right circumstances. And in many markets, key challenges may slow the pace of change:
- A weak financial business case: Payments innovation is driven by volume and economies of scale, with providers receiving a fee per transaction. In economies that lack the scale and volume for this to be profitable, providers may consider alternative business models, such as fixed fees or government subsidies, before attempting payment innovation.
- Technical challenges: Outdated legacy systems, insufficient technical infrastructures, or capability and resource restrictions can hinder innovation.
- Users unwilling to change: Modifying customer behavior will require adopting new payment solutions tailored to cultural attitudes. For example, in some countries, direct debit is a preferred payment method while, in others, people dislike “losing control” over their outgoing money.
- Leadership mandate: Should government, banks, regulators or others drive payment innovation? In many regions, this lack of role clarity, or a formal oversight function to enforce payment rules and regulations, is a big stumbling block to changing payment systems.
Key questions to guide payment design
Innovative payment infrastructures are those that meet current users’ needs — and are flexible enough to adapt to future developments. When designing new systems, countries with outdated systems should consider these critical questions:
What principles should guide payments innovation? Countries should set principles that address target use cases, system capabilities, governance structure, appropriate economic model, security concerns and existing systems. Principles will vary from country to country, depending on circumstances.
What is the most cost-effective clearing and settlement solution? The financial and knowledge investment needed to establish an effective clearing and settlement system may be beyond the capabilities of smaller economies. In these cases, a better solution may be to join a central or regional clearing and settlement hub, where the vendor offers a payment infrastructure for multiple payment rails (separately), processed in one central location. TARGET 2, which operates across Europe, is one example, though smaller countries could establish their own, private hub.
Can instant payments lead to other instant functionalities? Offering near-real-time payment functions enables many new use cases for consumers and reduces their need for cash. Sweden leads the world in moving toward a cashless society, leveraging the widespread adoption of real-time payments in that country. But, it’s worth noting that this will require significant effort and commitment from all stakeholders in the payments chain if innovation is to succeed and deliver the desired return on investment.
How do we balance regulation and innovation? The right regulatory balance can be difficult. While it’s critical that payment systems are safe and secure, a “locked down” environment may restrict innovative new players from entering the market. Economies that resist new entrants are unlikely to see innovation move from the status quo.
Which international standards are most essential? Developing new payment systems that are future-proof and fit for a global economy will require careful consideration of appropriate regulatory standards, including ISO20022 and Europe’s PSD2.
Modern payment structures are essential for modern economies
As customer demands change rapidly, many economies must rethink how payment infrastructures can fast-track, not slow down, their growth. Modernizing payment systems is no quick fix, but those that ask the right questions when approaching change can make the right choices in payment design and benefit from a stronger economic future.