Five Payments Trends to Watch in 2018 [Part 2]
The New Payments Ecosystem Is Here. The floodgates are opening with PSD2 and UK Open Banking coming into force, bringing an onslaught of new competitors and potential partners. Whether evolution is mandated or market-driven, banks and processors are facing a critical year in their long-term success.
Following on from the first installment, where we talked real-time payments and open banking, I sat down with three more of our own experts on the New Payments Ecosystem. Here are their views on the trends to watch in 2018 and how to make digital transformation decisions that solve for the now… and lay the foundations for the future.
3. Tokenization: The Missing Link in the Evolution of Payments
Silvia Mensdorff – Director of Customer Value, Europe
A payment is a payment, is a payment. In the past the payment experience was limited by technology, but now payments are driven by customer experience. Whether that customer is a consumer or a business, they want a seamless experience across any kind of payment. That means you must be able to meet all payment types; new, old, and (as of today) undefined. The answer to that is tokenization – the missing link between technology and experience.
Tokenization is a key link to delivering on the promises of open banking; it’s about making it seamless for the customer by providing an easy authentication process that protects them without burdening the experience. Opening up the payments ecosystem for innovation provides new potential entry points for fraudsters. The benefits of tokenization in combating potential new weaknesses has been evidenced, in safeguarding the payments data in the mobile channel. Thanks to that secure, fast, and seamless mobile experience, this new payment type has taken off.
But tokenization offers greater opportunity that just securing the payment – it’s about finding a way to make your existing investment in payments solutions work harder. If your back-office system manages card transactions via tokens, it can manage the new payments in the same way, for example extending the value-add services around post-transaction alternative financing.
In fact, the mobile channel can be leveraged really effectively in this way, making use of geo-based offers and promotions delivered to the smart device with secure payments enabled by biometrics built in, and utilizing installments or low-interest loans to drive consumer spending at the point of sale. A missing link that drives innovation and ROI – hurray for tokenization!
4. Driving Instant Payments with Open APIs
Barry Kislingbury – Director of Solution Consulting, Faster Payments
One of the biggest factors in the imminent ubiquity of real-time payments is going to be the open payments ecosystem. Overlay services on immediate payments rails will provide new business cases for merchants, corporates and SMEs alike – focused on the ease of transacting and the customer experience. And improved control for payers and payees through Request for Pay (RfP) and confirmation of Payee (CoP) will significantly contribute to increased transaction volumes that are up to 10 times, or perhaps even 100 times greater, than they are today.
The UK Faster Payments Scheme is targeting 2019 for its RfP service, and the EBA is expected to launch ‘Request to Pay’ in November 2018. The Clearing House in the U.S. launched a similar service in 2017. Of course, ‘Request to Pay’ (also called real-time debit by some) and Open Banking (APIs/PSD2) will provide a platform for innovation and further drive the adoption of immediate payments.
Designed to provide a flexible way for payments to be made and received, the new service could include warnings and notifications for consumers and businesses regarding upcoming bills, and allow them to change payment dates and amounts to suit their situation. 53 percent of consumers want more knowledge about upcoming Direct Debits, and RfP can provide this certainty in payments.
The use cases are clear when it comes to improved customer experience and resulting loyalty, as well as the potential to drive consumer spending. But RfP also holds the potential to generate revenues; small businesses have to chase £26.8bn per year in late payments at a cost of around £10.8bn, and in the UK £750m goes unclaimed each year in gift aid for charities. 10 percent of charities find the current cost of gift aid claims are higher than the amount received. RfP could provide a new solution to these issues.
I believe that RfP has the potential to truly make immediate payments the new norm. Payment players need to consider how they will augment overlay services when they solve for real-time, because this is where they can drive transaction volume growth and ultimately grow their business. Instant payments aren’t a new banking silo, they are part of a holistic approach to the new paradigm of real-time banking, going hand-in-hand with open banking. And they need to be addressed in 2018 if you want to be poised for success.
5. Innovation in Authentication
Lu Zurawski – Solution Practice Lead, Open Banking
Open payments are here at last! Or to be more specific, PSD2 came into effect (on January 13th 2018), though key aspects of the new regulation will not be enforced for another 18 months. The industry is awaiting the Regulatory Technical Standards (RTS) on Strong Customer Authentication (SCA) and secure communication. Although this particular area of a hefty new regulation may not sound like a natural hotbed for innovation, we will in fact see great new payments ideas, as the demand for SCA necessitates clever ways to back customer-centric payments experiences with explicit consent and authentication.
We are reaching a tipping point, where transaction protection elements (like PINs and 3D Secure) layered onto traditional payment products may be too cumbersome for the new fast, open (yet secure) payments ecosystem. It’s likely they will be replaced by a new approach, and soon.
Emerging markets are a great example of the need to innovate on authentication and authorization, but also respond to customer preference. In Latin America the introduction and adoption of mobile wallets was accompanied by a range of secure payments services, with QR codes in the mix but six digit one-time passcodes appearing to win-out. This contrasts with China, where 600 million active WeChat and AliPay users have created #QRCodeContagion.
The payments industry needs to innovate on new ways to approve and authenticate, but also new flows for this process that leverage the overlay services introduced by open banking. For example, we could utilize the existing one-time passcode technology, but improve the customer experience by weaving in Request for Pay to create a new form of payment approval based on explicit authentication requests.
Developing a way to integrate and orchestrate these new payments services and flows across your business will be a game-changer in 2018.
Historically payments as an industry has moved rather slowly, but like all technology sectors we’re experiencing far more concentrated and wide-reaching change than ever before. The need to adapt ahead of the curve is crucial.
The evidence from our industry experts points towards the end of payments silos, both inside your organization and in the external ecosystem. The way that banks, processors, merchants and fintechs address this convergence may differ, but the real danger lies in doing nothing.
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