The past year has seen as much innovation, disruption and fragmentation in the payments market as in any other financial sector put together. But don’t just take our word for it. Industry experts, including some of our very own trusted advisory board members, put forward their reflections on 2015 and predictions for 2016
Carlos Sanchez, CEO, ipagoo
In payments, every year we see more news, events and disruption attempts, hopefully a sign of growth and maturity. The payment industry is a crowded marketplace, with everybody jostling for position. In this sense we see cross industry alliances, such as smart phone manufacturers and mobile telephony companies with payment providers and many others, since every action in our lives seems to involve a payment for a related service. The future will be very diverse in comparison to today’s ubiquitous card payments. That users will have a variety of ways to pay, depending on the context, seems a sure thing.
The question remains whether the underlying rails on which payments are operated will be allowed to evolve. This would not only simplify access to all new payment providers but would hopefully provide a joined up payments rail on which players could operate.
We should not forget that interoperability is the holy grail of payments, so far only really achieved by card schemes and only then after 50 years of advance without competition. Strong forces need to be at play to enable interoperability in order to make a strong business case to review existing interbanking schemes.
In this sense, the adoption by EU regulators of capped interchange fees in card payments will certainly trigger a review of their model. Card schemes are fairly monopolistic and therefore can enforce their terms. For the time being issuers may end up picking up the bill for the drop in profits expected by the schemes.
This would be bad news for the issuers but not for the industry. Too often we hear of banks rejecting any idea that could potentially jeopardise their share of revenues in the card acquiring market and their healthy profits. That status quo will now change thanks to regulation.
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By GlobalDataI hope this change will have a ripple effect that will begin to change the underlying infrastructure so that Third Party Payments providers flourish for the benefit of us all, bringing simpler and cheaper ways to pay without having to feed a myriad of companies along the value chain as is the case with card payments.
In this context 2016 will see the market entrance of various radical projects that have been developing in the background for the last few years. Radical disruption in this industry cannot be built in a few months by a small group of friends with bright ideas but without significant funding: this is the payments and banking industry, so any significant project requires plenty of capital and serious infrastructure.
Following the trend highlighted earlier, I expect 2016 to be as busy, if not more so, than 2015 but with some fundamental changes. I expect 2016 to see these projects receiving proper VC attention. So far VCs have been pouring money into narrow service ideas, sometimes endorsed by a ´tycoon´.
Media attention and tycoon endorsement has so far been used as a means to predict success rather than to gain a true understanding of the guts of the industry where value is hidden.
So my letter to Father Christmas asks that 2016 be the year that this approach will change and more serious investors will support groundbreaking projects that fundamentally rewrite the infrastructure model of banking, which is the first step in bringing change and a the payments industry is currently going through a period of rapid transition, driven by the pace of innovation, new forms of competition and weightier regulation.
Rich Bialek, CEO Global Technology Partners
Here are five payment trends I will be tracking in 2016 selected on the basis of the stakeholders involved and the immediate and long-term impacts they are likely to have:
China – In 2015 Visa and MasterCard gained the ability to seek licenses to clear domestic Chinese payments, this is the result of a long-running effort to penetrate a market dominated by China Union Pay (CUP) a state-backed incumbent. It is the end of the beginning for Visa and MasterCard in their efforts to develop China. Now we need to see how both companies execute their market strategy over the next 3 to 5 years. CUP holds a dominant domestic market share. It will take time and investment to take share from CUP. Given the size and importance of the China economy Visa and MasterCard must make that investment now and look for a payback in the long term.
Visa Europe – The long anticipated deal is done. Now the hard work of execution must be achieved. Let’s see if the pain of integration pays off in terms of revenue growth. Business development, product, IT, operations, finance, marketing and other functional teams will need to work together effectively. It will be interesting to learn who leads those various functions and what global strategies emerge. And how will MasterCard respond? Will MasterCard be able to take advantage of the organization disruption in Visa Inc. and Visa Europe to make gains in Europe and other markets?
EMV (US) – Implementation has begun albeit at a slow pace. Merchant adoption has been lagging despite the liability shift. That said EMV is a reality in the US. The question is what comes next as we learn that EMV is no panacea for fraud management. Other risk mitigation measures must be developed. These measures will need to be comprehensive addressing more than the point of scale, to encompass payment databases and networks.
Mobile – Apple Pay is important for the US market. I believe it is an important milestone, not the final determinant of how mobile payments develop in the US. For a view on how mobile payments will evolve globally, I suggest looking to Africa rather than Apple Pay for the most material developments in mobile payments in 2016. Bank issuers, developers and marketers in Johannesburg, Lagos, Abidjan, Nairobi and Dakar are bringing innovative mobile payment applications to market opening up payment services to millions of unbanked. To what degree will these applications be adopted and what new transactions, revenue and business models will result?
Bitcoin No, Blockchain Yes – I have seen prior versions of crypto currency dating back to the start of eCommerce, companies such as Cybercash and Digicash in the mid-1990s. Just like those earlier crypto currencies Bitcoin faces serious AML issues that prevent it from becoming a mainstream payment product accepted by central banks. It has also proven to be subject to wild fluctuations in value due to its relatively small size and exposure to speculation. The real opportunity is with the blockchain security technology underlying Bitcoin. Look for more investment in blockchain technology and keep a close eye on who is investing, likely to see more interest from traditional payment stakeholders.
Alex Mifsud, CEO, Ixaris
1. Interchange fees will shake up the European card market
One of the most immediate changes is the European Union regulation on interchange fees. Interchange is paid by merchants to card issuers for the acceptance of card-based transactions, and under new regulation, this fee will drop from near 2% to 0.3% for credit and 0.2% for debit cards.
Most notably for card issuers, the reduction will directly impact their bottom line. With less money to be made, issuers will begin to cut card offerings and benefits for consumers, and instead, look at new ways to generate revenue.
One likely route will be to look outside of the transaction, to generate more revenue. Card issuers may try to form direct relationships with merchants, and through intelligent use of data, for example transaction history, deliver highly targeted promotions to relevant customers. However, the card schemes, who have access to richer data, may just get there first.
2. Regulators will get serious about ‘open’ payments
New players have been encouraged into the payments ecosystem and this has been the catalyst for a ground-shifting change. As it stands the banks, more nimble regulated non-banks and the unregulated cryptocurrency players are all battling it out for supremacy.
However, this competition is not equal or efficient. Banks still retain, and want to protect the broad distribution networks, regulated payment service providers are looking for scale while staying on the right side of compliance, and the cryptocurrency players are seeking legitimacy.
Better outcomes can be achieved through regulators encouraging more collaboration. This ‘open’ approach to payments would be more effective in addressing the residual inefficiencies in payments, and lead to an explosion in more creative payments solutions that are better suited to everyone’s needs.
3. Near real-time payments will start to go global
The success of the UK’s Faster Payments solution will be replicated and in some case exported to other countries. For example FedPayments and Ripple in the US, along with Blockchain-based e-Peso in the Philippines. Also the UK’s Faster Payments is being exported to Thailand.
The benefits of faster payment systems will force many more countries to make plans for adoption and will initially lead to faster payments being the global norm and eventually to faster cross-border payments becoming practical.
4. Convergence of cards and bank payments
Traditionally most non-cash retail payments happen on cards but bank-based models are emerging. Regulators are now mandating that banks accept these developments which will inevitably cannibalise card-based payments.
Bank-based payments have the potential to save costs for retailers by avoiding the interchange fees. However, the reduction in interchange fees means this cost saving is becoming less of a driver. Despite this, the arrival of Apple Pay and a general acceptance amongst consumers for mobile payments is likely to maintain the pressure and build momentum for bank-based payments.
As such, expect the convergence of cards and bank payments to accelerate in 2016.
5. Banks and fintech companies will finally start collaborating
Banks no longer dictate the terms of the industry. With an evolving global economy, traditional banks are under increasing pressure, with more regulation and new competition. 2016 will see banks realise they need to collaborate to survive. Banks and fintech companies will have to work together ad start to forge tangible and meaningful partnerships.
Importantly, banks will realise that they can play a profitable role in deciding, and funding, the winners in fintech. Partnerships, rather than acquisitions, will become the norm, with banks establishing funds and accelerators to support innovation allowing the industry to deliver the promised benefits for everyone.
Ralf Ohlhausen, business development director, PPRO Group
1. Mobile Payments
2016 is set to be a defining year for mobile payment providers. It looks as though Apple Pay is planning a major European launch in 2016; an event which could turn the fragmented mobile payment world upside down.
While setting up a unified payment system overnight would be virtually impossible, Apple Pay will endeavour to push this forward, especially as its competitor, Google is also pushing for the first place in the mobile payment space. In 2016, we will also see mobile payments become less smartphone-dependent. Instead, new technologies including smartwatches, bracelets and even rings will give us the ability to provide payment options.
2. Security
In 2016, tokenisation and biometric authentication will have a strong influence on the payment industry. Tokenisation is an extremely interesting method of securing credit card data, as the credit card numbers are substituted by tokens.
While the original number is stored securely on a tokenisation server, only the tokens are used throughout the payment process. This means that no harm can be done if the tokens are stolen, and therefore makes it a secure process.
Due to the lack of widespread tokenisation standards, this technology is still in its infancy, but despite this, we anticipate a shift in the market throughout 2016.
When it comes to authenticating payment processes, there are several new inventions in the pipeline for 2016. The most recently used methods include password, PIN, and fingerprint, and these all have one thing in common; they are weak so two-factor authentication is increasingly used to improve security.
User-friendly methods — including, for example, new biometric processes like voice recognition, keystroke detection, finger vein scanners and pulse recognition — are set to become increasingly significant and set to increase both security and convenience.
3. International E-Commerce
Merchants who are looking for e-commerce success will need to create an international strategy. Expanding e-commerce activity across borders involves more than translating websites and establishing efficient logistics.
It’s also vital that merchants offer shoppers their preferred local payment method. Asia, Eastern Europe and Latin America are currently the most interesting markets for European online retailers, and as card penetration tends to be lower there, it’s important that providers know their way around alternative payment methods in these regions.
Merchants should consider which markets are particularly suited to international strategies and simulate potential market launch models with partners such as payment service providers.
4. Regulatory Changes
The first Payment Services Directive (PSD) from 2007 is still in force, and defines the rules for payment services within the EU single market. It stipulates, for example, that payments must be completed no more than one day after a payment order is processed. After a tough two-year negotiation period, the EU has now, finally, agreed on a second payment services directive (PSD2).
The proposed revision defines several priorities, one of which involves strengthening the security requirements for online payments by improving customer authentication in order to combat fraud. PSD2 will also provide a legal framework to stimulate competition. This framework will facilitate market entry for new providers and allow the development of innovative mobile and Internet payment methods. It will also force banks to grant such providers access to their crown jewels: the accounts.
The European Banking Authority (EBA) is set to develop more detailed guidelines and regulatory standards for applying the directive. Although enshrining these in national legislation in all EU countries will take a further two years, payment industries should begin preparing themselves now for implementation and start taking steps by 2016.
5. Cash on the Retreat
Is the end of cash approaching? Some countries in Europe are certainly cutting down on the usage of cash. In Sweden for example, it is now almost impossible to use cash to pay for bus tickets. Acceptable payment methods include customer cards, credit cards, and payments via smartphone apps.
Even traditional cash-based bakeries no longer exist in Sweden and instead, now display signs requesting that customers use cashless payment methods for even the smallest amounts. The situation in Denmark is similar; there, the government is currently debating whether or not to release smaller retailers from the obligation of having to accept cash as a payment method.
The decline in cashless payments, however, is currently more of a theory among economists. In Germany, for example, around 80 per cent of retail sales are still transacted in cash. If, however, we look at sales revenue, cash makes up just 53.3 per cent, a figure set to drop further in 2016.
Cash is on the retreat, and alternative payment methods are advancing. Among the multitude of technologies (like cards, apps, wearables) available today, cash is, however, still very high on the list. It’s an essential element in the mix and fears that cash is dying out any time soon are therefore (as yet) unfounded.
Christoph Tutsh, founder and CEO, ONPEX (Online Payment Exchange)
What we saw in 2015
– Bitcoin/cryptocurrency – At the beginning of 2015 cryptocurrencies started moving into the mainstream. It was in the latter half of the year that the legal status of bitcoin and other cryptocurrencies was confirmed and more and more payments providers are accepting cryptocurrency payments.
– Mobile payments – Mobile commerce is booming. Figures from earlier this year suggested a 77.8% growth on mobile commerce on 2014. To put this into perspective, retail from desktop computers grew only 2% . Mobile is now the consumer plaform of choice.
– EMV liability shift – The 1st of October saw the EMV liability shift in the US and this, ironically, was one of the predictions that many might not have, if not wrong, certainly mistimed. The predicted wave of CNP fraud has yet to materialise and this, is largely, because despite the fanfare of publicity, the US wasn’t ready for the liability shift. It could be years before the US is fully EMV compliant.
– Fraud prevention – 2015 saw data breaches like never before. High profile data breaches, some by hackers others, it would seem, by governments, focused the minds of the industry, and consumers in general on security and fraud prevention. What went from being a something we took for granted in our financial technology became something that new technology is being built around.
– Markets of interest: China and Brazil – For ONPEX, we put focus on China and Brazil this year. China is, of course, a booming market, indeed, it is the booming market for payments. Yet, at the other side of the world, so is Brazil and the wider Latin America.
The global growth of mobile has democratized e-commerce as never before. So, in markets such as China and Brazil, consumers who might not have the resources to access a laptop or Wi-Fi certainly have the resources to access 3G and a smartphone – putting commerce in the palm of their hands.
What we can expect in 2016
– Blockchain – As cryptocurrencies were hyped in 2015, 2016 will see the growth of blockchain technology to regulate and assure cryptocurrencies. More than this, though, the potential of blockchain to work with other payment methods and currencies is significant.
– Omni-channel conversion – Ecommerce and, latterly, mobile commerce has made consumers more demanding. And rightly so. Part of this means that customers are increasingly demanding to pay on the platform they want, with the payment method they want and in the currency they want. In 2016, more and more merchants will start to offer Omni-channel payments as they keep up with demand.
– Data Security: Identity and Authentication – The fear of data breaches means that there is more demand for secure, identity based authentication. From ID scanning to biometrics, we will see more development and more products coming to market. But, will they be able to offer the unobtrusive authentication that consumers want?
– Banks vs. Fintech or Banks and Fintech – Just like 2015, 2016 will see a vast increase in Fintech companies that are popping out of the group. However, the majority of Fintech companies see Banks as old dinosaurs and their aim is to replace them. However, Fintechs fail to realise that they cannot survive without banks.
– Fintech faces regulation – As just stated above, Fintech startups are increasing rapidly. The majority are not recognizing the massive regulations that they have to face. Regulation is simply a must.
Go east! – Asia, Australia and New Zealand- fertile grounds for fintech and fertile grounds for commerce. We predict great things for these regions.
Mike Pierides, Partner, Marco Santori, Counsel, and Sarah Atkinson, Associate at Pillsbury Law
2015 look back
In the UK, the April launch of the new Payment Systems Regulator (PSR) was a development which of itself indicated the increasing focus on payments as a standalone sector, and is a signal of further changes to come. The PSR operates independently of the other banking regulators in the UK, and has its own statutory objectives including the promotion of competition in the sector.
The PSR’s impact will of course take a number of years to be determined, however opening up access to new market players will be at the center of much of what it does. For example, we expect the PSR to take a more prescriptive approach to indirect access terms and services than the sector currently has under Payments UK’s (the sector’s trade body) voluntary code.
Faster Payment transactions continued to grow in 2015, and the PSR announced its support for initiatives which encourage and progress development of technical solutions to facilitate access to payment systems. In December 2014, Faster Payments published its ‘New Access Model’ which set out plans for a technology accreditation programme.
Whilst the PSR has stated that it believes that the industry is best placed to design and develop solutions to facilitate technical access to payment systems and is not prescriptive in its approach, it will nevertheless encourage commercial operators to develop service propositions, therefore we anticipate an increasingly competitive market pursuant to which payment service providers will not require access through "traditional" sponsor banks.
Generally, 2015 saw a continued move towards the opening up of the sector to a larger number of participants. This includes the continued growth of "fin tech" entrants such as Transferwise, and new service intermediaries who overlay the existing payments and banking system. Apple Pay arrived in the UK, storing bank details on users’ mobile phones and making it easier to pay for goods. Innovations in technology of course continue to drive many of the changes in the sector, both in terms of the services being provided and the identity of the providers.
Probably the most disruptive technological development in 2015 has been blockchain technology. Blockchain, once implemented, would in theory remove the requirement that the parties to a transaction use a trusted intermediary. It does so by replacing the intermediary’s central database with a distributed consensus mechanism which would enable all parties on the network to take part in verifying and confirming the transactions that take place on it.
Less than two years ago, banks, securities exchanges and financial services companies looked at Bitcoin with disdain because of its currency use in connection with now-defunct internet dark markets like the Silk Road. Now, nearly every large bank in the world has begun to dedicate significant financial resources, brainpower and political will to developing the blockchain platform for use within their organisations.
2016 look forward
The direction of travel will continue to be towards more entrants and overlay services within the payments sector. This should be influenced by the Payment Services Regulator (PSR) which has amongst its central statutory objectives the promotion of competition in the sector.
The terms of sponsor banks for indirect access and the indirect access service provided are coming under increasing scrutiny, by the sector’s trade body as well as the PSR. We can expect a greater emphasis on better and clearer terms of service, and an improvement in the way in which sponsor backs and the non-bank indirect payment service providers engage, as a result of directions issued by the PSR as well as by trade guidance issued by Payments UK.
The move towards greater direct access, in particular to Faster Payments, through accreditation of technology providers will also continue. The support from the PSR for accreditation programmes and its proposals to improve technical access will continue to encourage existing operators and new entrants to develop and progress new service offerings. The ‘New Access Model’ White Paper was published by the Faster Payments Scheme Limited in December 2014, however, the accreditation programme has been progressing through 2015, on completion of which four technology providers will be accredited: AccessPay, Aevi, Compass Plus and Dovetail.
Increased competition is likely to be seen in the tap-to-pay mobile payments market; in the ‘Next Generation of Payments Attitudes to Payments Research Report 2015’ report issued in September, Vocalink commented on the potential opportunity for banks to enter this market, benefitting from the trust customers have in their banks. In October, US bank Capital One became the first US bank to release a tap-to-pay functionality in its Android application and further banks are expected to follow.
As banks and financial institutions invest money in blockchain technology, there may well be a re-emphasis on crypto currency technology. Blockchain, as a database behind crypto currencies, can itself be implemented to create a so-called "private" or "permissioned" blockchain that may be used by trusted or semi-trusted members of the general public who are granted access to the network. There are cases for uses of blockchain without crypto currency, in particular in B2B and bank to bank transactions, including in the payments arena by replacing settling transactions between a network of semi-trusted financial institutions. However a crypto currency itself does away with the need for centrally controlled and regulated money supply, and its application in the world of banking and payments could be truly disruptive to existing systems and institutions.
Finally, it’s a fair guess that the cyber resilience of technology solutions and overall corporate organisations to attacks will no doubt come into further focus in 2016. This is, unfortunately, a topical issue, as global geopolitical issues, in addition to "regular" financial crime, may no doubt lead to greater pressures on banking and payments systems.
Francesco Burelli, partner, Innovalue
The financial services industry has continued to be swept along by a wave of innovation during 2015 and this will continue in the New Year. Overall the industry is subject to change on a number of trends, not exhaustively: the entrance of new players and the opening of new segments, the ongoing convergence of physical and online driven by technology and Omni-channel consumers, industry consolidation and, in Europe, a radical shift in card payment economics driven by Interchange reduction and the incoming PSD2.
A number of banks have exited the acquiring business in favour of monoline acquirers during 2015, more are likely to follow through in 2016 as the business requires ever growing scale, hard-to-come-by skills and increasing specialisation. With the drastic fall of card revenue due to regulatory intervention in Europe, we are likely to see the polarisation between consumer credit focused providers and the re-emergence of European payment issuing/processing consortiums.
2016 will likely see an unprecedented reintroduction/increase of card fees to European consumers as the unintended consequences of populistic regulatory intervention. This has been developed under the push of merchant lobbies using regulators as way to reduce their costs and that ultimately will see the consumer worse off and potentially rebalancing their payment behaviour in a mix of higher transaction value but less numerous ATM cash withdrawals, card at POS and adoption of new payment methods.
Mobile
Mobile is and will continue its development in a range of fragmented solutions and interfaces from which critical mass is likely to be driven by Apple Pay and Android-based payment value propositions. As 2015 has continued to see ongoing developments in the context of digital convergence, there is a radical emerging convergence trend between retail and interbanking payments infrastructure that had the potential to change the industry as we know it through the development of Retail Real-time Payment Solutions (RRPS).
Amid RRPS developments, competition for consumers, merchants and corporate choice will intensify with payers like Swift and payment processors attacking the card schemes domain. The battle for the consumer and merchant interface will remain intense as it has been during 2015, with incumbent players like card schemes, banks, issuers, acquirers all battling for relevance and trying to avoid being pushed into a "dumb-pipe" category by PSP and fintech new entrants.
2015 has been a year of intense and growing M&A activity from an industry as well as institutional investor’s perspective. I would expect the number of large scale deals, of the kind that may put two industry giants like VocaLink and SIA together, to increase as a conse¬quence of scale requirement but, more importantly, as a consequence of retail and interbanking payments convergence.
The card payment value chain has been evolving in the last few years with the client/supplier relationship changing into an "everybody competing with everybody else" environment. As retail and interbanking payments converge, this high intensity competition will increase further in the incoming years driving the industry to a turning point in which parts of the business that have for a long time been taken for granted by the industry at large, such as government payments and ATM clearing and settlement set-up, are going to be some of the large-scale driving factors that will determine winners and losers.
