Countdown to the #NewPayments Ecosystem
A Retail Payments Guide to Transformation
Retail payment ecosystems are complex and heading for even more fragmentation, increased competition and faster, more open transaction flows. Let’s cut the hype and reflect on how the hierarchy of payment needs lays the right foundation for payments transformation. To be boringly good at the basics so that you can be excitingly great at innovation, countdown 10 steps to #newpayments in 2018!
10. Don’t lose sleep over scalability
The #newpayments ecosystem will drive growth of all digital payment formats. It’s critical to understand that scalability, availability and security must underpin every new experience. As the industry looks to develop new services to better satisfy customers, it cannot disappoint on the basics. Transformation is a balancing act between innovation, regulation and stability. You need to aggressively respond to changing customer demands, but also regulatory requirements that consume vast parts of your resources, without breaking the business.
Your payments infrastructure is complex. Nevertheless, it must be reliable, a workhorse that underpins large networks, processing billions of transactions every year. As you build new networks, schemes and channels for the future, you need to ensure linear scalability to minimize impact to your operational costs. Banks and payment service providers, say improving infrastructures (93%), and security (88%) are key drivers behind their additional payments investment. You will need to reduce complexity and streamline operational workflows to accelerate time to market, while maintaining the non-functional Requirements that form the baseline of effective payment systems, in other words your #Sleepatnightability.
93% Banks and payment service providers say improving infrastructures (93%) and security (88%) are key drivers behind their additional payments investment
9. Create certainty in your payments
New digital payments will give rise to new sources of exception. Your ability to deal equally well with happy and unhappy payment flows will benefit your margins and differentiate your customer experience.
Exceptions are part of your baseline, with retail payment volumes being so large, there will always be a percentage of failed transactions that require effective resolution. However, inefficient exception management processes increase costs and processing times, and reduce customer satisfaction.
Digital payments tend to generate lower exception rates than for example cheque-based payments, but handling these exceptions can be more difficult to manage, especially if they are real-time. You need to ensure that you build on the experience of your card business with new forms of payment. Delays in payments either reaching their own account or the accounts of vendors and suppliers are among the most cited frustrations of businesses surveyed in the U.S. and Europe. You need to layer on, an intuitive interface to move payments to the background where integration and orchestration can support services that can be used across your entire payments portfolio, breaking channel and product silos and automating exception handling. You need to provide the same visibility and reliability of the end-to-end payments flow whether they are card or non-card, “happy” or “unhappy” transactions.
8. Secure the Future
When we talk payments, we are talking about people’s money. Your trust and reputation depends of safeguarding these transactions. However, the focus on “customer obsession” means that secure must coincide with flexible and a user-friendly authentication process. Banks and payment service providers are faced with an unprecedented range of technologies and form factors, thanks to the digital transformation of commerce. As the number of endpoints grow, so do the opportunities for fraud. We need to leverage the lessons learned from consumer card protection.
Today, the shift is towards contactless and mobile wallets, but with the advent of the Internet of Things, we are likely to see a boom in machine-to-machine micro-transactions. Provisioning and authorization to a wide range of devices will add complexity and potentially impact the availability of payment systems. Real-time payments require real-time fraud prevention. This begins with pre-payment, with payment service providers investing in message encryption, digital certificates and data capture. In a real-time world, it’s not enough to focus fraud prevention on just the payments experience. Fraud prevention has to be considered end-to-end in the same way as customer experience.
You need to protect your reputation by exploiting all avenues for fraud prevention and secure the future. Ensure that tokenization and encryption technologies are adopted to increase payments security and simplify compliance. Achieving security is an ongoing process, requiring continuous enhancements, so focusing on tomorrow’s transactions is strategically important.
There is no doubt that tokenization will play a hugely important role in IoT payments.
7. It is “Friction-right” not “Friction-less” Payments
87% of banks see delivering an enhanced end-user payments experience, specifically in reducing payments friction, as the most important product-level priority in 2017.
However, if you happen to be a fraudster, it’s likely that you are loving all the ways the industry is making it easier for people to pay. The less friction in a payment, the quicker the money moves, and the more opportunity you have to move the money away before anyone notices.
As a payment service provider, you need to balance easy access to #newpayments and smooth transactions with robust fraud defenses. Enhancements to authentication and fraud detection are integral to delivering new payment services. In the new payments ecosystem, strong authentication will no longer be needed for each transaction. If it is performed once, then payments to known receivers can flow freely. What will be key is authentication and authorization management through monitoring of relevant data. The implementation of global account numbers, predictive analytics, actionable alerting rules and behavioral profiling will mean that authentication and authorization can be streamlined to reduce unnecessary, repetitive checks. This will have positive impacts for merchants and their abandoned basket rates — as a smoother purchasing process reduces customer drop-off.
Consumers also value the privacy of their data and see banks as the most trusted provider to safeguard their personal identity and credentials. Historically, non-card customer identification methods were limited to locations where the customer was identified in person. However, this is no longer the case. New delivery channels, such as mobile phones, lend themselves to non-card-based methods of customer identification. You need the ability to define new, non-card-based payment instrument types (e.g., user ID, mobile phone number, customer ID and email address) and remove the requirement of a card number to authorize transactions. Putting the customer in control will be the key to finding just the right amount of friction for the payments transaction to be smooth yet secure.
87% Of Banks See Delivering an Enhanced End-User Payments Experience as the Most Important Product-Level Priority.
6. Make everything real-time, all the time
Real-time payments are the new normal. However, this is not just about delivering faster ways to pay, it is about creating new value-added services around these instant payments. The challenge is to become a real-time bank or payment service provider, and this means breaking out of the siloed mindset. When a bank’s entire operations are real-time, this requires protecting the core, can raise liquidity considerations, and changes authentication and authorization processes. Real-time presents opportunities for payments that require increased flexibility, availability and immediacy of funds.
There are many real-time benefits to the consumer and merchant value chain from immediate insurance claim disbursements, to instant supplier payments, to enable faster delivery of consumer goods, capture of supplier discounts, instant remuneration to freelance workers and enhanced liquidity management. Instant payments are the key to unlocking working capital from supply chains and support merchants and businesses to achieve their growth plans.
A 2016 global analysis of live schemes projects real-time payments volumes in developed countries will soar with 30%-50% annual growth in the first five years.
You need to prepare your foundations for real-time, so that layering on these value-added services doesn’t break your payments business. Real-time fraud is one consideration, but scalability is crucial when we look at the predicted increase in transaction volumes. With real-time payments, the operational reliability of systems becomes a mission-critical utility of your proposition. Tolerance for any loss of availability is not acceptable, and the solution needs to be true 24x7, all year round. You need a payment solution that is designed for real-time, leverages new payments standards, such as ISO 20022 and allows you to monetize non-financial transactions with data enriched payment services.
66% Of Banks in Markets with Live Real-Time Infrastructure View This as a Revenue Driver for Their Institution.
5. Fast forward payments innovation and support agile
The #NewPayments ecosystem brings new competitors/partners and requires more flexible production environments. We all need to be driven by the idea of responding to market needs more quickly. This means building for agility, adopting flexible team working practices and flattening the organization. We need to fail fast and pivot more easily, while maintaining the trust of our customers. This culture must be supported by agile IT operations which are:
• Modular – Configurable and open, delivering more personalized payment types and channels
• Lower cost – Based on less expensive platforms or on a cloud-based delivery model
• Scalable – Driving higher transactions on lower-cost platforms and reduced cost per item
This IT environment is supported by a culture that is adaptive to change (as employees are a major part of this journey). However, it also needs to be deployed in an environment, such as Linux, that substantially reduces production costs. In a world that is moving ever-faster, payment service providers must ensure they can innovate at scale, delivering on the digital experience customers now expect in their everyday life. The ability to introduce new minimum viable product (MVP) fast, on a rolling basis, and operate multiple DevOp squads in parallel will be a key competitive advantage.
4. Opt for open innovation
The New Payments Ecosystem is part of the much broader digital economy. That means that as you digitize your payment operations, you are going to be connected to a whole set of additional services. Whether you are bound by new regulations leveling the playing field or expect to compete more aggressively in your market using open-API technologies, customers demand new digital experiences. The speed of innovation is accelerating and “doing it alone” is not always a viable solution today.
Many payment services can be enhanced through co-innovation with partners; using an “open” philosophy. In the past, payments used to be technology first, today they can be context-based leading to a seamless experience. The use case possibilities are endless within an open ecosystem. It forces us to challenge every process and workflow. Payment service providers can build greater trust in the new ecosystem and enhance the value of new services.
3. Manage, connect, simplify
In an Open API-enabled #newpayments ecosystem, the connect part of the equation is actually the simplest piece. It’s the management of this new model that poses the most risk, and the most reward - if done right. With a modern, smart payments infrastructure you can connect your systems to more than just payments. However, you need to be able to manage the flow of a variety of data sources, at high volumes, and high velocity, in real time. Your current payment systems may not be equipped to deal with Big Data in real time, so you need to protect the infrastructure, while building for the new.
A smart payments integration layer can leverage your existing systems, while positioning you to turn open payments into new revenue streams. Workarounds to manage market changes are no longer viable due to the scope and speed of change. The addition of the middleware layer actually simplifies the digital transformation process. You need the ability to connect with the API management gateway of your choice, but also to introduce new payment offerings faster. With a simplified approach to Open APIs, you can accelerate the delivery of new digital user experiences to your customers and offer real-time, any-to-any, digital-native services that will outperform your competition, without breaking your business.
2. Prepare for “cardless”
Although physical cards remain the main non-cash payments format, consumer habits are changing. You need to prepare for the rise of the digital tokens. In addition, the growing shift towards account-to-account payments creates even more opportunities for offering new payment methods. From devices to wearables, machine-to-machine payments to the growing use of QR codes, co-existence of formats and a complex range of usage are likely to add complexity to consumer payment systems.
Change is constant, keeping it simple is hard. It requires you to handle all message formats and incorporate new development methodologies to improve availability lead times. A smart payments engine allows some services to be exposed, as well as leverages standardized common processes across real-time and batch transactions. It makes fast, simple and secure payments possible, connecting more ways to pay with more payment capabilities.
1. Be “digital-native”
Payments are changing. Thanks to Darwin, we know that in all ecosystems, it is not the strongest participant that survives, it is the one that is most adaptable to change. New competition and changes in regulation have not yet displaced the role or function of traditional consumer payments providers, but it has disrupted the status quo. It forces you to introduce transformative strategies based on multi-year plans to deliver on the digital and open payments vision.
Going full “digital-native” is a different journey for everyone, how you undertake it largely depends on your core value proposition. Regardless of the intensity of your transformation, only focusing on delivering front-end innovation is no longer a sustainable path. In other words, delivering high availability, transaction throughput, scalability and security needs to be protected as part of the journey. The hierarchy of payments need reminds us that we have to be boringly good at the basics to be excitingly great at innovation, only then can we deliver on the opportunities of the #NewPayments ecosystem.