The latest updates on the payments’ evolution in the last three years are depicted here by Innopay’s industry experts.
The payment ecosystem and infrastructure continue to transform through increasing speed, connectivity and increasingly diversified transaction services. Therefore, besides the seven domains, two new domains are introduced. As depicted by domain 8, the infrastructure layer is being innovated as alternative infrastructures are being introduced. At the same time, the payment ecosystem is diversifying its traditional payment services with alternative transaction services.
Figure 1. Interconnected domains in the payment ecosystem
Domain 1: Digitalisation of payment infrastructures
Domain 1 covers the digitalisation of the payment infrastructure. Infrastructure encompasses ‘instruments’ (initiating money transfers via payment methods such as cards and SEPA Credit Transfers (SCT), ‘processing’ (consisting of netting and clearing payments) and ‘settlement’ (settling funds via central banks).
Figure 2. Traditional infrastructure enriched by new infrastructures
Who’s Who in Payments 2020
As depicted in figure 2, a new infrastructure capable of instant processing (on a 24/7/365 basis) of payments is gaining traction on both demand and supply side as it is increasingly positioned as the “new normal”. The traditional payment infrastructure is aimed at batch processing and involves cut-off times (e.g. no processing after 17.00 or on the weekends). The transition to instant payments modernises the systems, lowers cost and enables new services by facilitating per transaction processing, 24/7 and 365 days per year. So far, more than 45 countries have already moved towards faster or real-time payments and at least 25 more are working on it.
While this movement towards faster payments has already been happening for over a decade (eg UK’s Faster Payments system launched in 2008), the more recent launch of the European SEPA SCT Instant scheme and SWIFT’s GPI Instant service marks a development towards cross-border real-time payment services between connected banks (SCT Inst within SEPA, and SWIFT GPI from SEPA to other areas). Given the rise in consumers’ and corporates’ needs for quick settlement globally and the ongoing regulatory ‘push; for faster payments, more banks are expected to follow by implementing instant payment capabilities. Instant payments is an important development for Europe as a key strategic building block to respond to the dominance of card schemes and the increasing popularity of - and growing dependence on - alternative payment networks.
Domain 2: Platforms on top of payment infrastructure
Domain 2 covers payment platforms, which facilitate the ‘purchase’ step in the customer journey of the payer. Besides initiating the required money transfer via connected traditional payment instruments (facilitating ‘payment’), payment platforms enable different variations on the ‘transaction trinity’ (each transaction consists of an agreement, payment and delivery step) as illustrated in figure 3. While agreement and delivery usually are outside the scope of actual payment, payment platforms provide increasingly more options to manage timing and order of payment and delivery to ensure a trusted transaction between payer and payee, for instance withholding payment to the merchant until a product has been delivered to the payer.
Figure 3. Payment Platforms facilitate a variety of ‘purchase’ flows by managing pay and delivery
Payment platforms developed their functional capabilities to support a larger variety of transaction types. Examples include Yandex’s peer-2- peer payments and PayPal’s consumer credit offering.
Next to functional developments, consolidation of platforms is taking place (eg acquisition of Chinese GoPay by PayPal to increase their presence in the Chinese market and relevance for Chinese merchants) as a method to increase reach and volume of payment solutions. Increasing competition between platforms fuels consolidation via mergers and blurs boundaries. In order to stay relevant, players choose different strategic paths, eg acquire capabilities to strengthen geographical footprint, to specialise in specific merchant segments and verticals or expand service portfolio with value-added services. More on this development in domain 4.
Domain 3: Online Banking ePayments
Domain 3 covers the development of banks and banking communities offering online banking services to initiate electronic Payments (OBeP) from one bank account to another. Overall, there were two types of OBeP solutions: monobank solutions and multibank schemes (such as iDEAL).
An important addition is the third-party payment initiation interface as required by the revised Payment Service Directive (PSD2). Banks are mandated to expose at least one interface (and a fallback mechanism, where required) to facilitate payment initiation by licenced third parties. These third parties require a specific PSD2 licence for the role of Payment Initiation Service Provider (PISP), which is a regulated role under PSD2. Note that third party providers initiating payment directly from payment accounts is not a new phenomenon. Players like Sofort and Trustly, for instance, have managed to build strong positions in selected markets with their business models. These players will now be regulated as PISP under PSD2.
Other developments in this domain are the customer journey improvements for customers by both non-banks and banks, as illustrated by figure 4. Banks are now developing their monobank solutions with improved journeys themselves such as in-app person-2-person (P2P) payments.
Another interesting development is using OBeP at the physical POS – banks and non-banks are developing propositions to enable POS payments through the mobile banking app. For example, Payconiq is developing POS payment propositions (directly linked to payment accounts with various banks in the BeNeLux and Germany) through QR codes that can be scanned via the Payconiq mobile app. Other examples include TWINT (CH), MobilePay (Nordics) and Bizum (ES).
Figure 4: P2P payments simplify the customer journey for payments between consumers
Domain 4: Payment Service Providers offering simplicity to merchants
Domain 4 covers the role of Payment Service Providers (PSPs), and mainly focuses on aggregating payment methods and offering easy access to these methods for payment acceptance by merchants.
The PSPs market for core payment transaction processing services is maturing, evidenced by the increasing price pressure faced by hundreds of incumbent PSPs and the strong drive towards consolidation. Staying on top of the game is challenging with the ever-evolving consumer and merchant payment needs. PSPs are pursuing various strategic paths to cope with the changing market dynamics:
We also observe the market entry of new parties that integrate the diverse service portfolio of the various PSPs in the world, effectively aggregating PSPs (which were originally aggregating services on their own). Examples include ProcessOut, Alpha fintech, ZooZ, Ixopay and Spreedly. Services typically include optimisation of transaction routing (selecting best fitting PSP for any given transaction), dashboarding key indicators across PSPs and aggregated reconciliation services.
Figure 5: Growth strategy 2: Pre- and Post-payment Services being explored before, during and after payment
Domain 5: Mobile revolution
The rise of mobile as a consumer channel for payments initiation is the focus of domain 5. The Mobile app has replaced the online web banking environment as the preferred channel for interaction with the bank, as illustrated in figure 6.
The consumers’ mobile preference has led to the rise of challenger banks that have a dedicated focus on the mobile channel. Banks such as N26, Revolut and Bunq do not have physical branches for consumers, virtually all banking services are accessible via an app-only approach. These mobile banks have entered the market with compelling customer-centric payment and banking propositions (B2C). Some of these challenger banks are seeking to leverage their technology assets by developing new business propositions (B2B). Examples include Fidor, Monzo and Starling bank that are aiming for business customers with their B2B banking propositions.
Figure 6: Traditional channels are replaced by new mobile-only channels
This editorial is also featured in our Who's Who in Payments 2020 – Complete Overview of Key Payment Providers, a report presenting a comprehensive overview of the key solution providers in the payments space, as well as educational insights into the size of the market and the development of the payments ecosystem.
Annabel Keulen is business analyst at INNOPAY. She focuses on strategic projects around PSD2 and Open Banking for various financial service providers and non-financial organisations. Annabel works actively on INNOPAY’s TPP Radar to keep track of new TPPs entering the market and the emergence of new value propositions.
Christian van Ramshorst is senior consultant at INNOPAY with a focus on solution design. He combines a background in strategic design with experience in various multi-stakeholder projects such as design of identity schemes, data sharing schemes and collaborative payment services. Christian pragmatically combines business, technology and regulation perspectives when developing suitable solutions for all stakeholdersinvolved.
Lex Franken is Senior Manager at INNOPAY. He has extensive experience in project management, co-creation projects in multi-stakeholder settings, and implementation of solutions in the Banking & Payment sector. Lex was involved in the support & development of the Dutch interbank schemes iDEAL (payments) iDIN (identity) and Incassomachtigen (electronic mandates for direct debits).
Mounaim Cortet is a Senior Manager strategy at INNOPAY, and Lead for the PSD2 and Open Banking practice. He works on strategic innovation challenges in banking covering digital payments, identity and data sharing. He supports business executives from various financial institutions to navigate the changing payments landscape and develop new insights to (re-)define their business (model) and operational strategy to stay relevant in the emerging Open Banking era.
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