From acquiring to fraud, the role of big tech, mobile wallets and faster payments – PCM’s James Wood asks industry leaders to play Gypsy Rosie Lee and read what’s on the cards for the year ahead…
It’s been quite a year – and one we’ll all be glad to see come to an end, whatever we do in life – unless that’s manufacturing hand sanitizer. While the initial impacts of the current pandemic are widely understood, in terms of the rapid growth of contactless transactions, mobile payments and a steep drop in the use of cash, the longer-term effects of COVID-19 on payments are yet to become apparent.
It’s most commonly said that COVID-19 has acted as a trend accelerator in our business or, as Visa CEO Al Kelly puts it, “there’s been five years of change in the last six months.” Hard to argue with that – looking ahead, though, one wonders whether the frenetic pace of change we’ve seen this year will continue. We spoke to industry leaders around the world to find out what happens next.
Mobile wallets: rising market share
We’ve heard this story before: mobile wallets are set to replace cards, and by 2025, we’ll be looking mainly at a wallet-and-cash landscape. That’s one of the boldest claims, made earlier this year by Deutsche Bank.
Of late, doubt has been cast on this narrative, with October 2020 data from The Strawhecker Group for Visa suggesting that 69 percent of US consumers won’t be getting a mobile wallet simply because they don’t want or need one. Other sources have claimed that most consumers, especially outside the 18-34 demographic, are too concerned about fraud risk and misuse of their data to switch from cards to wallets.
Despite such doubts, many industry leaders remain convinced that wallet technologies are the future. John Edison, Head of Financial Crime and Compliance at Oracle, says we’ll see an inflection point in mobile wallet use across Asia in 2021, alongside two other factors that are going to see wallets proliferate: “First, we’ll see the emergence of new standards for wallet use, which will lead to commercial, off-the-shelf wallet products being used by everyone from retail chains to FinTechs. And that will lead to a second factor influencing wallet adoption – the proliferation of non-financial players like Big Tech coming into the payments market.”
Chris Kronenthal, President and CTO at FreedomPay, agrees that non-financial players are set to make big inroads into payments, and says we’ll see merchants start to band together to offer wallets with loyalty schemes that run across verticals.
JP Morgan has recently launched a loyalty points exchange programme for merchants, enabling them to switch on points exchange with other merchants’ schemes. Kronenthal says the implications of this move for payments infrastructure are profound: “Merchants are going to be looking for common platforms that enable them to hop on and off depending on the payment method used. The big schemes like Visa and Mastercard have noticed this trend, and they are developing open type-agnostic payment architectures.”
If merchants are going to be banding together to create their own schemes, then another major threat to established banks and service companies is “Big Tech” companies like Apple, Facebook, Google and Amazon.
While their intent to make inroads into payments has been clear for some time – most recently through Apple’s Credit Card or Google’s current account with Citigroup – received wisdom says these tech firms are going to struggle with the regulatory hurdles of becoming recognised as legitimate payments actors in their own right.
Big Tech: enemy or partner?
At one extreme of the argument stands Facebook’s Libra – nothing less than their own digital currency, envisaged as a “tethered” coin with options to cash in and out via a basket of the world’s fiat currencies, including the pound, euro, dollar and Swiss franc.
If successful (the argument runs), Facebook would create a payments platform for their 1.6 billion users worldwide and handle acquiring, transaction and settlement at relatively low cost and very high speed using their own currency. At the same time, their access to rich customer data would enhance security.
However, a number of snags have hit the Libra project since launch, including partners like Visa, Mastercard, eBay and Stripe dropping out of the consortium. Predictably, regulators have raised concerns about monopolistic practices and data privacy, and all told the Libra initiative appears at this time to be struggling.
Wayne Busch, president of NTT Data Services’ Financial division, believes that it’s more likely we’ll see big tech adopting the partnership approach they’ve already used to make greater inroads into the acceptance market for solutions like Apple Pay and Google Pay, while at the same time partnering with innovative fintechs and banks on real-time payments and online settlement.
“We can expect to see a ‘co-opetion” situation between Big Tech and the banks which will create online payment and settlement mechanisms that focus on low consumer friction.”
Real Time/Alt payments go large
Whether it’s online or in-person, reducing friction during the payment and settlement processes is firmly in the industry’s sights for next year. The proliferation of real-time payment systems (RTPs) from 2021 onwards (see “Market Analysis” page 10) will go a long way to reducing consumer frustrations: but RTPs won’t just be a consumer story. “If anything, there’s greater demand for instant payments and settlements from small corporates than from consumers”, says Busch. “Certainly in the US market, the demand for commercial RTP solutions outstrips that of the consumer.”
Other low-friction payment methods set to break out in 2021 include QR codes and so-called “alt” payments such as Trustly’s account-to-account payment technology. Mohammad Khan, president and cofounder at Omnyway Inc., predicts that while contactless will account for 60 percent of in-store transactions by the middle of 2021, QR codes will represent between five percent and 10 percent of that total, up from less than one percent today.
“Regulators should do more to catch up with market reality when it comes to real-time payments.”
If the arrival of real-time payment and settlement by whatever means is with us domestically, then the adoption of RTPs internationally would still appear to be in its infancy. Although some domestic systems, such as those between Australia and Hong Kong or India and the UAE, are gearing up for international RTPs, wider adoption seems some way off. Another worrisome aspect of RTPs is clarification around responsibilities for dispute resolution and fraud loss – an area in which regulation should be doing more to catch up with market reality.
Acquiring and acceptance – a heated battle
So far, our gaze into the future predicts intense competition for consumer adoption, with wallets, alt payments, cards and QR codes all vying for attention. An arguably even more intense war is coming in the acquiring and processing segments – especially for mid-market service providers.
At one level, this should be no surprise given the spate of mega-mergers in this space during 2019 and 2020 which have left smaller firms struggling to catch up. Deals such as FIS Global’s acquisition of WorldPay and Fiserv buying First Data – not to mention Visa buying Plaid and Earthport, and Mastercard acquiring Nets’ Account-to-Account payments business – has meant that mid-size processors have had to either specialise or consider banding together.
“Expect demand for the online acceptance of more payment options to rocket in 2021.”
As consumers come to expect electronic payment everywhere – including street food vendors and parking machines – micro-merchants are going to question the fees they’re asked to pay for acquiring and processing through the internet. Steve Viegas, VP of payment partnerships at PPRO, says retailers will expect more of their payment partners: “Retailers are going to be asking where they can go next for growth. We’ll see the rise of the “amazon effect”: simple, one-touch solutions for payment. Merchants will ask whether their payment partner can go with them on their journey.”
The good news is that there will be a bigger market for PSPs and AISPs to go after. Experts consulted for this article expect demand for online acceptance of a wider range of payment options to rocket in 2021 – and a similar trend in “soft” POS solutions for micromerchants.
Igal Rotem, CEO at Credorax, notes that merchants “are going to choose the easiest and most cost-effective solution. They’ll be looking for painless and fast customer onboarding, and they might switch between infrastructure players depending on the transaction ticket size and the fees charged.” Taken together, these factors mean next year looks like an interesting ride for payments services companies of all kinds.
Instalments: fad or fixture?
Instalments have been very much this year’s model when it comes to payment options. Long popular in South America and in South-Eastern Europe, the rise of digital commerce has seen instalments grow in popularity in Western Europe and North America, with companies like Sweden’s Klarna and Australia’s AfterPay leading the market.
AfterPay has around eight million users across the US, UK, Australia and New Zealand and revenues of more than A$500 million, while Klarna handles more than $35 billion of business across 13 European markets and the US. For Alex Marsh, head of Klarna UK, instalments are beneficial for the wider economy: “Consumers can spread the cost of purchases for free. For the wider economy, we open up the advantages of credit – but in a way that’s controlled and manageable.”
This recent growth in instalments is part of a trend towards a blurring of the distinction between debit and credit payments. The question now isn’t so much whether consumers pay debit or credit, but what happens after sale: do consumers spend money they have, or borrow? And if they borrow, does that happen via credit or instalments?
With credit products getting more expensive for banks to offer, expect to see the growth in instalments continue. Although they help merchants, acquirers and issuers to grow business volumes and offer more services in the short to medium term, longer term it’s possible that instalment payments could lead to a credit bubble as credit cards did in the 1980s and 1990s.
Buying into cross-border
Cross-border payments are set to continue rising in the new year – driven in part (like everything else) by COVID, but also by a suite of new approaches by national systems, and regulations that promise to make cross-border payments easier, if not necessarily faster.
PPRO’s Steve Viegas says: “With people isolated at home, we can see they’re taking a closer look at their shopping and payment options. Cross-border purchases are becoming increasingly common, and we’ve seen global cross-border e-commerce rise by around half so far this year. National payment systems like iDEAL in the Netherlands and Belgium’s bancontact are introducing more options to enable international payments, like QR-codes.”
SWIFT has recently launched its SWIFTgpi service, which is designed to improve the speed and visibility of international B2B payments. From a regulatory perspective, the EU will introduce its second cross-border payment regulation (CBPR2) from 19 April 2021, which is designed to ensure a level playing field in terms of costs and settlement times for cross-border payments across the bloc.
While all of these changes are welcome, one fundamental problem in cross-border commerce remains settlement times within individual financial institutions, which can vary from immediate or overnight settlement to days, depending on the institution and market.
Fraud – code red
COVID-19 has led to a huge increase in e-commerce. Alongside this massive growth in a relatively new channel we’ve seen a concomitant rise in fraud, with Account Takeover (ATO) fraud up a whopping 282 percent in 2020, rising almost twice as fast as digital commerce, up 150 percent.
Martin Sweeney, CEO at digital fraud prevention specialists Ravelin, says this increase in online fraud will continue into 2021: “We are heading into one of the great recessions in 2021, and in such circumstances marginal populations often turn to crime. Unfortunately this means the recent increase in fraud attempts is likely to continue. When it comes to ATO, larger merchants are disproportionately affected as the likelihood of a match for false credentials on their systems is higher.”
Sweeney also thinks we’ll see first-party fraud types – in which people claim goods did not arrive, or attempt to abuse promotional offers – rise alongside ATO, user impersonation and other kinds of online fraud.
Rising fraud raises another real issue: the risk that call centres and dispute resolution systems get swamped. New research from Pindrop and Forrester suggests that 65 percent of banks are struggling to keep up with the high level of fraud complaints, with 57 percent reporting a rise in fraud disputes since the start of the pandemic.
Despite all these challenges, we have to hope late 2021 sees solid growth resume. Happy new year – and thank you for reading.