Digital technology has revolutionised the payments industry in a very short time, but you ain’t seen nothing yet.
In a relatively short space of time payments has gone from a relatively little considered aspect of financial services to one of the most exciting, diverse and challenging sectors around. Arriving on the scene at the same time has been a number of developments including digital technology and the pandemic which are transforming the payments landscape. The big question is where will this all go and what do the next few years hold?
The payments revolution
It was in 1994 when the first online payment was made. Until then it was a slow paper based processed dominated by financial institutions. Sending payments could be a lengthy and cumbersome process. Fast forward a few decades and in 2021, digital payments have become the norm. Around 80% of mobile phone users have completed at least one electronic transaction.
Digital technology has introduced faster, real time payments bringing more speed and convenience to the sector than ever before. COVID-19 has moved things on a pace, forcing an acceleration onto online payments and encouraging those who might previously have been reluctant into the space. Looking to the future, a host of new developments are converging which means the decade to 2030 could see even more innovation than ever.
New players
Since the financial crisis in 2008, we have seen a quiet revolution in the payments sector. Before tat time, payments were mainly bank led events. However, the rise of online payment platforms such as Paypal and the introduction to the sector of big tech giants such as apple and Google, provided a host of additional services to customers than the traditional banks could provide. These new players are faster, more agile and often more affordable than traditional counterparts. Today, when people talk about financial institutions, they don’t just mean banks.
The rise of cryptocurrency has created a new dynamic. These have been greeted with a mix of horror and enthusiasm from various parties. From early scepticism many governments are getting in on the act, introducing new regulations to protect customers and making plans to issue their own digital versions of their own currencies.
As cryptocurrencies such as bitcoin become a more common and accepted part of life, we’re seeing people start to use them as regular currency. Making transfers via block chain technology is quicker, more private and is often regarded as being more secure than traditional avenues. As such many people are using bitcoin and other leading currencies to purchase goods and services, especially internationally.
One of the big uncertainties in this respect will be the attitude of emerging regulations. These generally lag behind technological developments, and when they catch up they often serve to stifle innovation. Nevertheless, they are necessary to bring trust and reliability to the sector. The challenge for regulators will be to adopt a light touch approach which provides the protections customers need, while encouraging innovators bringing valuable additional services to the market.
Faster payments
In this new digital environment, speed is everything. The advent of faster payments has transformed expectations even when moving money overseas. While once upon a time customers might have accepted delays of days or more, or high transaction fees, now they expect fast, real time and low cost international transactions. Today almost 60 nations have now enabled real time payments with annual values getting close to $100bn. These real time payments can be executed almost instantly, are non-revokable and provide 24 hour access, 265 days a year. The speed with which these transactions are completed means fraud and identity checks have to be completed more or less instantly bringing more transparency into the sector, and enabling faster communication between the relevant parties.
Rise of the digital banks
It’s fair to say the traditional big banks had things their own way for a long time. All that is now changing as a new breed of fintechs and challenger banks rise to compete with the old guard. These small companies are agile, flexible and innovative. They are often able to offer services faster and more affordably than traditional banks which struggle with infrastructure and compliance costs.
Many of these innovators are based entirely online. This gives them a number of advantages not least of which are the cost benefits of not having to operate hundreds or retail outlets around the country. This enables them to offer more cost effective services which meet the evolving customer demands.
In addition, banks are weighed down by out of data legacy technology and infrastructure. So large are these institutions that overhauling these systems is a difficult, expensive and sometimes impossible task. It’s a bit like asking an oil tanker to do a 180. This takes an enormous amount of times, while their small fintech challenges move around them like little jet skis. In a world in which agility and flexibility are vital, the traditional banking sector often finds itself outmatched.
Security
There are a few areas in which these banks have a crucial advantage – security, reputation and reliability. The rise of technology in the financial landscape brings with it risks. People need to know they can trust any systems over which they transfer money. New players will have to work hard to build up that track record and establish that trust with the customer.
That task is made all the more difficult thanks to the rising tide of cyber crime and finance fraud. Digital payments creates risks and opportunities for fraudsters. Money launderers and fraudsters are capitalising on the growing enthusiasm for digital payments and cryptocurrencies to hide fraudulent transactions.
Cyber criminals are targeting financial institutions, not all of which will have adequately adapted their cyber security mechanisms of the evolving landscape. With high volumes of highly sensitive transactions being made online, the pressure is ramping up for all parties in this sector to get on top of their payments and to implement disaster recovery protocols in the event of a breach.
For any business operating in this sector, security will be crucial. Even small enterprises can tap enormous opportunities through faster digital payments, but these have to be safe and secure. For this reason it’s crucial to have a financial partner which understands the challenges facing small enterprises and can help you to navigate this complex, challenging and exciting landscape.
