The Future of Global Payments
The evolution of payments has gone into overdrive.
What is money? We humans have developed lots of variations, ranging from shells to gold. But paying for stuff we want is increasingly becoming abstract: a token lodged in the cloud.
Recent growth in the payments industry has been huge. Payment revenues are set to grow by 8 percent a year for the next five years, according to a recent report by McKinsey, taking annual revenue to $2.3 trillion and accounting for 43 percent of all banking‐service revenue, compared to only 34 percent in 2009.
So what is driving such growth? One driver is the fast‐growing economies of the world; the Asia‐Pacific region will comprise 56 percent of the global increase in revenues over the next five years, according to McKinsey, with China alone accounting for 40 percent of global growth.
A second key factor is the bewilderingly fast changes in technology. From the comparative simplicity of magstrips to the intricacies of chip cards and blockchain, technology is changing how we pay for goods and services. It requires the payments industry, which has a back office of surprisingly complicated administration and legality, to be flexible and nimble as they approach digitization.
That is not always easy. Established players such as high street banks have legacy systems and legacy culture that can hinder the kind of new thinking required to move forward. There are plenty of new non‐bank players developing customer‐facing apps that redefine our relationship with the payments industry, while new digital currencies such as bitcoin are redefining money. Global investments in financial services start‐ups swelled from $3 billion in 2013 to $12 billion in 2014, according to analysis from CB Insights – some of which came from established financial services firms trying to drive innovation in their own business, according to an Accenture report. It found that American Express, BBVA, HSBC, Santander and Sberbank have all developed corporate investment vehicles over the last four years, each with at least $100 million to invest, while in February 2015 AXA, the insurance and investment management firm, launched a €200‐million fund to act as “an accelerating force for start‐up companies” in its areas of business.
Customers are becoming increasingly demanding about their requirements in the way of services and information, and wanting greater flexibility and immediacy in their payments. Meanwhile, the smartphone is changing the landscape beyond all recognition, leading us to interact with phone providers rather than the financial services industry.
The established players are also upping their game – provided they can work collaboratively with each other and with national governments. One example is the development of real‐time payments (sometimes known as instant payments), where financial transactions take place instantly – a huge change from the old‐fashioned clearing system where back‐office staff toiled for days to match up payments and receipts.
Real‐time payments are now happening across the world, often at the behest of government regulators looking to promote economic growth and improve customer services. In the UK, the banking initiative FPS is reducing the time taken for payments of up to £250,000. In Poland, the Elixir Express system, launched in 2012, enables inter‐bank transfers in seconds. Singapore has the Fast and Secure Transfers initiative; Denmark the Nets RealTime24/7 system; India the Immediate Payment Service; while the European Central Bank and European Banking Authority have been pushing instant payments since 2014 through their open forum initiative.
McKinsey forecasts real‐time payments adding $80 billion in revenues by 2018, as electronic transactions replace cash. E‐commerce is also forecast to grow – in the UK, the world leader in e‐commerce, it will expand by about 10 percent for the next two years, with online sales reaching 19.3 percent of all retail sales by 2019, according to predictions by eMarketer. It is a superb opportunity for banks to move away from old legacy systems, and develop cross‐border transfers in a brave new world where financial transactions rise above the limits of a country’s borders. In many ways the system is a return to the immediacy of cash, but without the risks inherent in a physical form of money.