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). 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. 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. 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.