Where to now?

Where to now? Where to now?

It’s commonly assumed that COVID-19 sparked a dramatic directional shift in payments. But it was already happening, say Ray Brash from PPS and 11:FS’ Simon Taylor, as they predict more twists and turns ahead

The rules of the payments game have changed, with the next generation of consumers more likely to have grown up playing Minecraft over Monopoly. Instead of coins, notes and cheques, digital finance is now the default.

Today’s consumer places more worth on experience and getting the best deal over loyalty, so traditional financial services need to keep up. And, while COVID-19 has undeniably accelerated changes to payments, major shifts were already under way, pre-pandemic. So, where are we now, how did we get here and, more importantly, what could lie ahead?

The first ‘real shift’ was characterised by the arrival of operators like online payment processor Stripe, and Square, which offers both online and in-store processing, in 2009/2010. These changed the payment acceptance landscape to make it developer-friendly and software and Cloud native by default, says Simon Taylor, co-founder and chief product officer at challenger consultancy 11:FS.

“When payments became API-first, it didn’t mean doing what we used to do with XML, it meant being API-first businesses,” he explains. “[Stripe and Square] unlocked a whole world of innovation for developers. And when you empower developers, new, amazing things start to happen.”

“From our perspective, electronic money was designed to allow payments to be used by non-banks in business applications,” he says. “That’s where the first pre-paid cards came from, and where guys like Monzo, Monese and Revolut all started – as e-money institutions. It was a way of getting into payments without being a full bank.”

Did COVID-19 change the conversation around payments? Not necessarily.

“The future was already here; it’s just not evenly distributed. What the pandemic did was just make everything faster, similar to a lot of inflection points in history, whether it’s television, radio or the internet,” explains Taylor. “All of them were there before they had hockey-stick growth.

All of the same suppliers, ecosystem and infrastructure were there underneath, but developers could suddenly use them in a way that made more sense, in modern software stacks. “I think a lot of the innovation we’ve seen on the acceptance side has come from that,” he adds.

A similar trend can be seen on the payment execution side, with companies like e-money institution, digital banking, issuer and payments processor, PPS; payment processing solutions platform GPS (Global Processing Services), and digital banking service fintechs like Railsbank, also focussing on developers, says Taylor. The entrepreneurs and builders of these new experiences changed the default, the expectation and what people needed to do.

PPS CEO Ray Brash agrees that ‘the tech has usually been sitting around for years and then someone decides how they can move in’. Mobile phones, for example, were not a form of payment mechanism for quite some time – until banks realised it was the single most important way they would talk to their customers.

Regulators have also played a role in accelerating the move away from analogue, particularly for companies such as PPS, says Brash.

Direction of travel:

The payments compass points to digital all the way

“Possibly the best examples are the iPhone and BlackBerry. You sort of had this weird period where everyone went ‘oh, you know, that’s great and we should look at it, but it’s not a serious thing’. Then it flipped overnight to become the only thing that mattered, and it concentrated minds.”

Brash is in line with prevailing opinion that the pandemic didn’t so much drive change, as hasten it.

“I think the players that were ready with a 100 per cent digital offer, saw demand for services increase during the pandemic. It probably gave them a bit of a capital boost, in terms of numbers. But I don’t think it changed payments specifically,” he says.

The UK, for example, saw contactless payments limits raised to £100 during the pandemic. But, in many ways, that was irrelevant, when services such as Apple Pay and Android Pay have no maximum transaction limit, he observes.

Players with a 100 per cent digital offer, saw demand for their services increase in the pandemic. But I don’t think it changed payments specifically

Ray Brash, PPS

“Clearly, there are parts of society that were not digitally savvy, people who had to suddenly become cognisant of what a contactless payment was, because retailers were asking for it. But there was [already] a momentum that’s been there for 10 years.”

A QUESTION OF CHOICE

Across the world there’s been an explosion of payment types in recent years – from card transactions to e-wallet ‘super-apps’ like Alipay – and merchants are looking to provide their customers with as much choice of execution at the checkout as possible, keeping traditional acquirers very much on their toes.

Will all this eventually consolidate? “Maybe,” says Taylor. “But, at the moment, it seems like the more of these options a merchant has on its website, the more sales it’s getting. And, when you throw open banking into the mix, as well, with PISPs [payment initiation service providers], innovations around payment types at checkout are exploding globally. It’s becoming a real battleground.”

Users worldwide tend to hone in on ease, observes Brash: “Consumers want to be able to pay conveniently and get out of the website checkout experience as quickly as they can.”

But, while that might be a universal desire on the part of the consumer and change looks inevitable, that change is not necessarily uniform – providers still need to be aware of regional needs and nuances. One huge determining factor that tends to vary wildly across markets, is the level of security and regulation surrounding the payments process. Standards in South America, for example, are very different to those that payment processors have to work with in Europe.

Underlying technology is also key to how payment solutions work and there will likely continue to be a divergence in that across markets, as illustrated by mobile phone-based money transfer service M-Pesa, which is well-established in Africa but an attempt to launch it in Romania was short-lived.

Culture and market context also matter. Consumers in Indochina and Southeast Asia, for instance, place great emphasis on getting a good deal and value for money – more so than in the US and Europe – and that tends to define their payments preferences.

“How this manifests itself is with loyalty, rewards and offers,” says Taylor. “The consumer is quite happy to have five or six apps on their phone and flip between them for the best deal. And the apps are happy to promote different offers, because it supports customer acquisition, brings people through the door and is, therefore, seen as a cost of doing business.”

One emerging alternative payments rail that’s making real headway, thanks to dramatic growth over the past two years in all regions, is buy now, pay later (BNPL).

“That’s because BNPL isn’t a point-of-sale lending solution; it’s a shopping app that also does lending,” says Taylor. “These folks aggregate many different merchants, help you find new offers and new places to buy, manage delivery risk, and you can send things back. Why wouldn’t I use that app, when I see it at checkout, for everything? So, I think we might start to see innovations come from that corner of the world.”

Buy now, pay later solutions also have an added advantage over cards in that they directly connect buyers and sellers, enabling the latter to learn about the former’s spending preferences. Indeed, what BNPL providers are really selling to the merchant is more sales, says Taylor. “And I think that’s been something missing from some of the incumbent banks, historically, which have been selling payment acceptance,” he adds.

With so much choice at their fingertips, those banks’ retail customers, too, are far more likely to shop around for services.

“My kids’ generation will expect to switch, and they will be brutal,” predicts Brash. “That is the generation that is going to move payments and financial services forward, because the market is going to have to be super-competitive and it will have to adapt to them.”

Taylor agrees, particularly in the US and Europe, where younger consumers are far less likely to own a home and have less average income over their lifetime than their parents enjoyed, so their choices are much more likely to be driven by value propositions.

There’s going to be a massive intergenerational wealth shift and a massive shift in who the core suppliers and market winners are. And I don’t know if that fact has really landed yet with a lot of providers

Simon Taylor, 11:FS

“People make fun of this generation for buying too much avocado toast. They don’t make fun of them for their rents and the price of property being too high, because the generation before them lived off low interest rates and the asset boom,” says Taylor.

“There’s going to be a massive intergenerational wealth shift and I think, with that, there’s going to be a massive shift in who the core suppliers are and who the market winners are,” he predicts.

“I don’t know if that fact has really landed yet with a lot of providers.”