Part Three of the Accelerating Payments Series
There was a time, not so long ago, when shopping was straightforward – you chose something, then handed over your cash, cheque, or credit card to pay for it, and walked away with your goods. These days, consumers are faced with a dizzying array of payment options, whether they shop in person or online.
Regulation Drives Innovation
The boom in payment service providers (PSPs) and payment options has been driven, to a large extent, by regulation. The second Payment Services Directive (PSD2), for example, which regulates and harmonises payment initiation services and account information services, was intended to boost innovation and smooth the adoption of new technology in banking.
It has succeeded; faster payment volumes increased by almost 20% between 2018 and 2019 in the UK, while total transaction value of digital payments globally is increasing by around 13% every year according to Statista’s Digital Payments report.
The migration of payment systems across the world to the ISO 20022 standard for data exchange has also accelerated change in the payments sector. SWIFT believes that 80% of high-value payments in terms of volume, and 90% in terms of value, will migrate to the standard by 2023.
The key is the rich and structured data embedded in ISO 20022 payments, which can contain valuable insight into how individuals and businesses spend their money. For data-savvy companies, the value of this data more than offsets the cost of payment processing. However, data is only ever any good as long as customers provide it correctly, which is why it is important to adopt automated payment data validation tools.
Infinite Payments Possibilities
We have only scratched the surface of innovation in payments. Embedded payments – such as the inbuilt payment options in apps like Uber – are already well established but could explode as service providers make it easier for merchants to deliver their own branded payment services.
The secure UK messaging service Request to Pay, launched in 2020, has been held up to some extent by the pandemic, but could gain in popularity as the world recovers. The service is promising and, if it gains traction, has the potential to enable small businesses and gig workers to get paid faster, while improving their cashflow and reducing transaction fees. Essentially, the payments process is moving closer and closer to something that more resembles a search engine, leading to a trading opportunity or jump off point. For example, a payment event triggers a data event in which the provided data can be used to determine the potential for a loan at the point of sale. Innovators are getting involved at each point of the payment flow, looking to harness the value of the data captured to develop value-added services. As a result, we are seeing the field getting crowded with more and more players.
The growing array of payment options has coined a new phrase and concept – payment orchestration. Payment orchestration panels allow a PSP to dynamically recommend or select the payment option that best suits the user or merchant’s needs (such as an option that may cost a little more, but which gets the money to its destination more quickly). At the root of the concept is merchants’ need to deliver the best possible customer experience in an increasingly crowded market, whilst keeping costs under control.
Payment orchestration is developing at pace, opening the opportunity for more insight into data through dashboards, reporting and analytics. One interesting consequence is that orchestration panels highlight the performance of specific payment providers – and that is emphasising the need to balance compliance, security, and customer service.
Security Matters
The truth is that any payment solution that can deliver a cost-effective and convenient way to send and receive money will grab people’s attention. But security is still the ultimate concern, and, in this market, it must be delivered without compromising the speed of service.
Compliance obligations must be met, and account holders and bank details must be validated, irrespective of the method of payment. That’s why automated screening is so integral to the rapid innovation of the payments sector – and why close collaboration between financial institutions and fintechs has become so vital to the continued success of both.
