The payments industry has witnessed a tectonic shift in recent years with the advent of new digital technologies such as blockchain and cryptocurrencies. Almost everything can be bought cashless now with digital payments replacing physical financial instruments. Since then, consumers have completely changed the way they purchase. Digital payments are way ahead in terms of adoption and consumption. Latin America and Africa have the most digital transactions per capita while APAC is close third.
Financial institutions and businesses have taken cognizance of the fact that digital payments are the way to go. Almost all banks render virtual payment services to its customers and all businesses accept it. ‘Cash only’ has become a thing of the past.
The shift was slow and gradual. Financial institutions showed a lot of inertia when it came to changing business models or adopting new technologies. It took decades for them to move out of physical documentation systems, albeit it is still followed in some of the countries as a part of compliance. Now, in 2022, there are enterprises who are enabling customers to avail financial instruments in under 5 minutes through a completely paperless experience. The user can now apply for loans, cards, deposits, and make payments with a click of a button.
With the introduction of digital payment instruments such as UPI-based Gpay, PayTM, etc. in India, the payments industry has seen an exponential rise in UPI transactions against cash and cards. According to the latest data released by the National Payments Corporation of India (NPCI), the UPI platform recorded 6.8 billion transactions in September 2022 amounting to INR 11.17 trillion. On a year-on-year (YoY) basis, volume of transactions was up 85 percent and value went up 70 percent. The growth in UPI transactions mirrors the upward trajectory of the overall digital transactions in the economy. Payments ecosystem has undergone a radical change with introduction of BNPL ‘buy now, pay later’ offerings, cryptocurrencies, and other digital payment instruments.
Digital technology proliferation has also made a huge impact on fintech and technology providers. At the end of 2021, the fintech industry was valued at USD 3.56 trillion with expectations to grow at a compound annual growth rate of 23.58% between 2021 and 2025.
Need for Unified Identification
Today, the payments ecosystem is not unified. Each entity or payment instrument has its own way of processing and authenticating a transaction. Traditional access and authentication techniques include government ID, mobile number, email ID, institution customer ID, etc, whereas the future of digital will be unified at all layers. Each individual will have one unique payments ID – a digital attribute/ credentials that can be used at all point-of-sale, payment gateways across the globe. For instance, a unique ID that is identified across all payment platforms will enable organizations to create omni-channel payment ecosystem and accelerate purchases. With the help of blockchain, financial institutions such as banks can trace transactions of an individual faster than ever with the help of their unique ID. This will replace all our existing required credentials such as bank ID, account number, mobile number, UPI ID etc. with one unique payments ID for all kinds of payments.
Digital IDs will involve a deeper collaboration between financial institutions, government bodies, regulators, and fintechs globally. Eventually, new regulations and standards will be introduced to regulate the new ecosystem, and foster interoperability and compatibility.
Age of Superapps
Large enterprises are already leveraging superapps to create an ecosystem around the customer so that awareness, interest, desire, and action (purchase) happens on the app itself, resulting in an ultra-convenient experience for merchants and consumers alike. PayPal recently launched its own Superapp, offering a combination of financial tools, including a digital wallet, direct deposit, bill pay, peer-to-peer payments, e-commerce, and crypto capabilities.
Think Global, Act Local
Local fintech and FI companies have contributed immensely in understanding the local requirements and mandates for payments as opposed to global ones. UnionPay in China, RuPay in India, MIR in Russia and now EPI in Europe are all providing consumers with payment platforms that specifically address regional needs.
Eric Marts, Principal Marketing Manager of Financial Services at Red Hat, thinks that “payments, which require an active thought process from its users, will change overtime. For instance, think of the electricity in your home – you probably don’t care how it’s distributed as long as it’s safe and available when needed. The same applies to money: the easier you can access it, the better. You might not even know which bank is providing the services.”
With seamless and unified access and authentication models, payment will soon become an integrated process of the overall experience rather than being a cautious and external one. The world will gradually move towards frictionless payments where you invest more time in choosing the product and less time paying.
It will also bring customers closer to their brands. Retail chains such as Starbucks have a superapp that lets you order ahead, pay contactless, and skip the line. V-commerce (pay by car) is picking up pace, where consumers can pay for everything along their drive via their in-built car app. Automobile companies are racing to build the most convenient and interwoven super app for experience as well as payments.
Over 2 billion people remain unbanked worldwide, with millions more not using their bank accounts on a regular basis. This is not just a developing market issue, nor an issue solely for the developing world. In India, the rural sector holds critical importance for the socio-economic development of the country. Government of India has launched multiple initiatives to drive digital banking in rural areas. To bridge the digital divide, they launched a scheme called Digital Finance for Rural India: Creating Awareness and Access through Common Service Centers (CSCs) to push digital services such as IMPS, UPI, Mobile banking, POS machines, etc. Fintech and banking institutions both have a role to play in facilitating a fairer financial future for everyone.
The pandemic has further proliferated digital adoption in the payments industry, thereby, disrupting the banking and cards industry. Fintech players and their digital payment offerings have resulted in significant erosion of the FIs’ pie in the transaction market. Financial institutions must embrace the change in order to stay relevant. They must shift with time and create digital offerings on top of traditional ones. Soon, we will see a complete eradication of physical currency in a world where payments will be seamlessly woven into the fabric of customer experience.