Sunday, 24 January 2010

Innovations & Trends in Payments : Gazing into 2020

The decade gone by has been a fairly exciting & tumultous for the world in the realms of retail finance. Banking penetration has exploded, card payments continue to flourish in the developed and developing economies, the mobile remains the talk of the town, Internet as a significant enabler for access and transaction transmission is becoming a reality.

The impact of electronic payments on economic growth has been proven repeatedly. Coupled with explosion in new frontier financing including microfinance, the onus on retail payments to grab the opportunity and leap frog remains.

However, giant unconventional leaps has not been the hallmark of the banking industry, which has typically believed in incremental and linear innovation and adoption. Regulation, economics, trust and sunk investments have stymied innovation and rebellious outbreaks from the non banking sector. However, as we gaze into the crystal ball, what lies ahead in the next decade might just surprise us

1. Micropayments Go Electronic : Paypal laid the path and led the charge in the last decade. The Internet made switching costs for micro-payments an economically viable reality, ensuring no compromise on the transactional trust in the process. Mobile, transit, prepaid, contactless, biometric and a host of other applications and approaches is going to make this the decade of "Electronic Micropayments"

2. Microfinance Goes Into Course Correction : The excitement over microfinance is palpable and understandable. A few institutions in this space have reached large scale and even gone public. Repayment rates appear to remain stable across Asia, Africa and Americas, with low delinquencies.

The challenge for microfinance is going to be in processes, talent, scaling profitably and increasing regulation. MFIs need to brace for regulators & governments placing caps on interest rates & charges, covering the potential customer delinquency risk caused by droughts, famines and other natural disasters. New portfolio and risk management techniques would need to emerge quickly to enable MFIs to steer clear from a significant market correction.

3. Debit & Prepaid Card Payments Explode : Asia will lead the charge on debit usage. As debit card platforms open out for remote payments, an increasing number of customers will benefit from the convenience of using card payments and differentiate from the credit extension facilities offered by credit based instruments. Coupled with an increasing familiarity with prepaid payment concepts and exploding acceptance channels, both formats would soon overtake credit. ( Am sure this one is open for much debate!)

4. Card Acceptance Gets Cheaper : POS & ATM devices have almost bottomed out on their price curve, and card acceptance services leveraging
the mobile or its connectivity would make card acceptance drastically cheaper. Card issuance across mag stripe and chip would continue to dominate the payments landscape, hence reliance and need for card acceptance infrastructure and devices would remain.

5. Credit Scores Go Global : As the global workforce moving across geographies gains scale, sharing of credit scores across boundaries will become a reality. So dont be surprised if your FICO follows you to your next assignment in Venezuela!

6. Domestic Payment Networks Proliferate : Global economies will establish and adopt domestic payment networks along the lines of NETS & China Union Pay, to create a more cost effective & flexible payments DNA.

7. Payments Get Tax Rebates : Increasing number of nations will incentivise electronic payment usage to counter parallel grey economies and money laundering activities

Lets connect in 2020 and see where we stand.

The Decade’s 12 Greatest Developments in Payments recently published a listing of the Top 12 developments & trends in the Payments Industry over the last decade.
(There's been a deluge of lists published over the last couple of months, but this one is quite a decent analysis)

Key Excerpts below:

#12 AmEx Goes Global

American Express transformed itself from a largely American go-it-alone card company into a global network with 128 bank partners in 127 countries (based on its 2008 10-k) including the United States. Read the full post here

#11 How the World War on Interchange Fees Transformed the Card Industry

A global war on interchange fees raged during most of the decade and will continue into the next. We'll have to wait until next decade to find out who wins the war. But the war itself has already led to massive ramifications for the card business around the globe.

#10 Collateral Damage from the Financial Crisis: Consolidation and Regulation

The CARD Act has transformed the card business in the United States and that's why it is number 10 on my list of the great developments in the card industry in the last decade along with the further consolidation that resulted from the crisis.

#9 Shanghai Surprise

The fact that in a decade China has achieved such rapid growth of the card business and expanded globally is remarkable. As always, China has both opened up a vast new market and unleashed new competitors onto the global scene.

#8 The Mag Stripe Lives On

Some of the greatest developments in the last decade were the failure of massive efforts to displace the humble magstripe card. It is also serves as a reminder that innovations in payments have to make people and merchants significantly better off to gain traction.

#7 How the ACH System in the U.S. is Encouraging Electronic Payments Innovation

A major factor in what you might call the greening of the payments industry has been the growth of the Automated Clearing House (ACH) system for directly debiting and crediting depository accounts.

#6 What Has a Bigger Head and Longer Tail? Card Issuing

Its head has gotten bigger and the tail longer and skinner. I'm not talking about a scary monster but about the distribution of purchasing volume for the credit and debit card issuers in the United States.

#5 Innovation Driven by Prepaid Cards

The use of prepaid cards has exploded during the first decade of this century and they have enabled many types of payment innovation from whipping through transit lines to helping disaster victims to transferring money to mom in Mumbai.

#4 The New Kid on the Block: PayPal

Starting a new payment system is incredibly difficult. Many try, few succeed. MasterCard and Visa did it in the 1960s. No one did it in the 1970s at least in the US. Sears brilliantly did it with Discover in the 1980s. The 1990s was a miss. For this decade the only company that entered the exclusive club of major payment systems was PayPal.

#3 Debit Takes the Plastic Throne in the U.S.

Debit cards helped make prepaid card possible and may lead to significant changes in banking relationships if decoupled debit cards take off. Debit cards have led to an enormous change over the decade in how Americans use plastic.

#2 The Marriage of Mobile and Payments Make the World a Better Place

Mobile illustrates just how this industry can drive progress and really make the world a better place. I also think that it is a harbinger of a revolution that will take place over the next decade.

#1 MasterCard and Visa Go Public

MasterCard and Visa emerged as publicly traded financial powerhouses after four decades of working for associations of banks. Their transformation marks a radical shift from the past and will most likely define the shape of the payment ecosystem for decades to come.