The digital revolution has turned many aspects of life upside down, and payments are no exception: the changes have been rapid, drastic, and enthusiastically received by consumers.
Today, many people carry no cash; they pay for everything with their cellphones, either by scanning a bar code, sending a text, or placing the phone on an eftpos terminal and relying on its inbuilt NFC capability.
PwC is forecasting an 80% growth in the number of cashless transactions worldwide from 2020 to 2025, to one trillion globally. It also expects the 2030 number to be three times the number in 2020.
The rapid retreat from cash has had a profound impact on banks, both the long-established traditional players and their newly minted challengers. All are being tipped to review and revamp their roles in the payment chain.
Not only has digital technology revolutionised payments, it has also disrupted funding services and funding mechanisms. Getting access to funds is now much simpler: intermediaries have been disintermediated.
Embedded finance is the new model. It refers to the process by which a service provider, other than a financial services provider, bases its operations on an embedded financial service, for example, a service providing loans or insurance or one that processes payments.
By embedding a financial service, a supplier removes barriers to purchasing goods or services. The consumer does not need a credit or debit card.
For high-value goods or a service, they do not need to first apply for and obtain finance, or to complete any written or online applications. The elimination of these steps, and the time required, reduces the likelihood of a cancelled transaction.
Buy-now-pay-later (BNPL) services are taking this removal of barriers one step further. BNPL services, once the preserve of online retailers and catalogues, have now penetrated bricks and mortar stores at scale. Young consumers with no credit record have been early adopters of this easy, low-cost means of accessing credit.
The stand-out success in the BNPL game is an Australian company and 2014 startup Afterpay. It raised $AUD 300 million in 2016 by listing on the ASX and, late in 2021 was bought by US company Square for a staggering $AUD 39 billion.
In February 2020, Afterpay was said to have more than seven million customers, almost half in Australia and New Zealand, the other half in the US, and 600,000 in the UK.
Not surprisingly, Afterpay’s early success quickly spawned competition from other hopeful startups and from established players. According to comparison site Finder.com.au, there are 15 BNPL operators in Australia, including PayPal and the Commonwealth Bank.
BNPL transactions in Australia were worth about $11.5 billion, 1.7 per cent of credit and debit card transactions, in the year to 30 June 2021, according to Reserve Bank estimates.
One of the reasons for the rapid uptake of BNPL services, and their providers success, is the lack of barriers to their use. BNPL providers can extend credit without the checks and balances that constrain conventional credit providers.
Another payment innovation spawned by digital technology is the smart contract. These use the blockchain to enable two parties to implement a binding agreement instantaneously, without needing to pay lawyers, involve banks or any other intermediary, and without scrutiny by regulators.
The blockchain, of course, is the technology underpinning the most revolutionary financial creation of digital technology: cryptocurrency.
From being purely the province of technophobes, it is now almost mainstream, especially in those parts of the world where traditional banking services are not readily available, such as South America, Africa, and some Asian countries.
All these financial manifestations of digital technology have one thing in common: they disintermediate traditional financial services providers and new sources of funds for consumers.
The established players will not sit back and let this disintermediation continue, but they need to determine their most appropriate responses and then execute on them.
Of course, they will turn to the same digital technologies as used by their new adversaries. They must learn to leverage the same innovations find a role for themselves in the world of friction-free transactions.
To do this they need to integrate their existing systems with the new systems and data sources that underpin these new financial services. This means they need APIs and a platform to support them.
Such a platform must enable them to partner with new fintech companies, reduce their costs and reduce time to market for new financial products. It must allow them to create the secure omnichannel services that customers demand.
Customers should be able to easily switch the channels through which they interact with their bank. This platform should also enable banks to leverage into this new world the strengths and expertise gained from their long-established roles, for example, their skills at fraud detection and mitigation, and mining customer data.
The right platform will enable banks to achieve these goals without resorting to complex integrations and writing masses of code. It will provide an orchestration layer that removes the barriers between silos, and the friction that annoys customers.
If they can successfully deploy such a platform, they gain an immediate advantage over their less nimble competitors. They can innovate more rapidly create more significant differentiation.
A classic example of this approach by an established player is SIBS, the leading payments processor in Portugal. SIBS used an API infrastructure to create a unique customer experience.
It built a highly innovative open banking platform from the ground up that revolutionised the operations of more than 20 financial institutions in Portugal. It also created a digital wallet app and a digital marketplace that banks could offer their customers.
One of Australia’s newer banks, Bank Australia—a former credit union that became Bank Australia in 2015—offers on its website details of all the APIs available to other organisations that, with customers’ permission, enable access to a wide range of information the bank has about the customer, such as a list of the customer’s accounts, details of specific transactions, and account balances.
Digital payments are more than customer convenience. They represent the underpinnings of global growth, facilitating access to new markets, providing the first alternative to cash transactions for the unbanked millions in poor countries and they create new opportunities for traditional banks if those banks can get the right foundations in place and develop their plans for success in this brave new world.
