Payment landscape 2020: faster, connected & diversified - Part 2

Domain 6: Online continents

Domain 6 covers the rise of online platforms (GAFA & BAT) for social interaction and commerce. With increased presence in every daily aspect of consumers, these platforms offer their own dedicated payment solutions integrated into their respective platform offerings as depicted in figure 7.

Globalisation provides a need for consumers to transact outside of their own regional scopes. Online platforms are offering services that simplify onboarding to payment systems outside the consumer’s own region (e.g. Alipay offers a wallet solution for non-Chinese consumers to simplify their financial transactions in Chinese commerce markets). Similarly, online platforms are driving acceptance of their payment solutions beyond their core market, driving reach, and ultimately, conversion for merchants.

Being present during every step in the consumer’s daily life provides for rich data, enabling sophisticated payment solutions that align with consumer needs beyond the current ‘buying process’. In turn, providing payment services to consumers increases the platform’s access to consumer data and strengthens its capability in providing relevant value-added services.

Figure 7: What position will online platforms claim in the financial system and how will this impact the role and relevance of traditional payment institutions

Domain 7: Payment solutions; previously wallets

Previously, domain 7 covered wallets (aggregating cards) aimed at reducing checkout complexity for consumers. Recently, new payment solutions have entered the market and the wallet domain has expanded beyond card aggregation: P2P payments have really taken off, PSD2 payment services are increasingly emerging and wallets incorporate non-payment related services to further support consumers.

At first, P2P payments were off to a relatively slow start. Consumers were not very willing to pay for this type of service, especially since they were comparing it with payments via OBeP or via Payment platforms, which are considered (virtually) free of charge. However, the popularity of P2P payments is increasing since service providers are reducing (or even removing) costs. They do this by taking the approach of a marketing tool and thus absorbing any additional transaction costs-to push adoption by consumers.

As a next step (towards a profitable business model), these service providers are now looking to move their (free) consumer payment solutions towards the business domain (C2B), capitalising their large customer base to create a revenue model by offering paid services to business customers. For example, the Dutch Tikkie has been a catalyst for the Dutch P2P market (absorbing iDEAL costs normally paid for by merchants), promptly followed by individual banks’ P2P offerings (as briefly discussed in domain 3). Tikkie has expanded to the business domain, offering C2B services to generate revenue and a viable business model. Another example is Venmo (owned by PayPal), an American P2P payment solution that started off by absorbing transaction costs to create a user base. It now generates revenue by enabling payments to merchants (and charging transaction fees to merchants).

PSD2 enables consumers to initiate a payment from a licenced third-party application. This can develop in a ‘wallet’ solution, in which the consumer is able to initiate payments from different accounts through a single application. However, a lack of standardisation in PSD2 interfaces among banks on a European (and often national) level slows down service providers willing to offer such payment account ‘wallet’ solutions, as it increases cost, complexity and implementation time to create sufficiently high reach. To off-set this burden and complexity we see various technical service providers emerging that take care of the connectivity.

Recent developments in wallets show incorporation of payments with non-payment related services, such as in-app storage for loyalty and discount cards (e.g. apps such as OK and Reward Cards). This further simplifies the customer journey beyond payments. Domain 9 further covers this development of non-payment services.

Figure 8: Payment solutions move beyond card payments in simplified check-out processes

Domain 8: Alternative transaction infrastructure

The evolution of the payment landscape as described in domains 2 to 7 always had the initial payment infrastructure from domain 1 as the backbone for innovation. Nowadays the payment infrastructure itself is the subject of innovation, facing potential disruption. While traditional players have initiated new infrastructure initiatives such as instant payments, and are looking at the possibilities that technology such as blockchain can bring to the financial system, non-traditional players are also looking into the development of infrastructure that may heavily impact the traditional financial system.

Non-traditional players are introducing alternatives to the traditional transaction infrastructure, creating a system in which ‘service providers’ exchange value on behalf of payer and payee through different transaction infrastructures (as depicted in figure 9). This is happening for several reasons, such as to reduce dependency on traditional financial players, capitalise on existing functionalities, accelerate innovation and to shift trust and governance away from organisations and towards a trusted infrastructure instead.

Figure 9: Operation of infrastructure is done by ‘service providers’ in the payer and payee domain (as opposed to traditional issuers and acquirers)

Alternative transaction infrastructure based on blockchain and cryptocurrency has been around for some years now. In certain situations, this proves valuable (eg recent hyperinflation of Venezuela’s national currency), but general adoption as the payment mechanism for everyday purposes is moving slow. A more recent example is the Libra consortium, an alternative transaction infrastructure currently facing heavy scrutiny by governments and central banks for its disruptive potential to the traditional financial system (next to security and governance concerns). At the same time, regulatory authorities are also starting to initiate their own initiatives in the domain of alternative infrastructures; in response to the initiation of Libra, China’s national bank is accelerating their development of a digital Yuan (DECP). DECP would offer ‘controllable’ anonymity and the functionality to replace paper money. Opinions on the viability and desirability of alternative transaction infrastructure vary and the coming years are expected to reveal the real potential of these infrastructures.

Domain 9: Alternative services

The traditional payment infrastructure serves as the foundation for payment-related services. A variety of services exist in a certain layer, but in the end, they result in a traditional payment such as SCT or card transaction.  

In the quest for new business models, financial institutions have found new applications for their payment infrastructure. Their interconnected network of trusted and regulated entities, specialised in the exchange of structured data, proves valuable for different types of services besides payments. 

Examples on how the existing payment infrastructure can be used for other applications and services include the sharing of personal data for third-party onboarding or log-in actions (eg BankID schemes), but also combining payments with other data streams such as e-invoicing or loyalty and discount schemes (directly connected to payments). Other alternative services include credit services offered to both consumers (eg Payu) and businesses (eg Paypal). By using (historical) transaction information of buyers and sellers to do risk profiling and scoring, parties like Amazon and Paypal are able to provide instant lending services to facilitate payment transactions. 

PSD2 accelerates these movements by facilitating easier access to the payment infrastructure for non-financial institutions so that the payment system can be better integrated with alternative services.

Figure 10: Rise of alternative services on top of existing infrastructure and services

Looking ahead

Integrating payment services with alternative services and data sources is a result of improved connectivity in the digital world. Although not new as a technology, externally exposing services via APIs has seen a rise in popularity in the financial system over the last years. Automated and real-time access to data and services has significantly improved products and services by both financial and non-financial players.

PSD2 is a key enabler for evolution in several of the described domains. Recent years for PSD2 are marked by discussions on (technological) standards and caused the postponement of implementation (of the RTS, regulatory technical standards). A key topic in PSD2 is ‘strong customer authentication’, which impacts various of the simpler customer journeys that have been important differentiators for parties across the domains in the payment ecosystem. The coming years will show whether the innovation promise of PSD2 will materialise.

The traditional financial system in Europe is still heavily relying on the traditional cards schemes and is under increasing pressure from bigtechs (GAFA & BAT) that are trying to expand their footprint. Indeed, the global payments landscape is undergoing a transformation. Rapid technological advancements, regulatory reforms and rising initiatives, in particular by global digital platforms, have led to changing dynamics. These developments are putting established banks and PSPs under considerable pressure to make a move.

An interesting recent development to keep an eye on is the launch of ‘PEPSI’ (Pan European Payment System Initiative). While national payment providers have not been able, or willing, to act in a pan-European manner in the past (eg Monnet, Eaps, Payfair), with the mounting pressure they are in a way ‘forced’ to do so. PEPSI is an initiative that has set out to develop a pan-European retail payment solution that will be able to compete with card schemes and bigtechs. The initiative is backed by twenty of the largest European banks, and it is supported by the ECB. Looking ahead, this initiative could become an important new development that will have an impact on the further evolution of the payment landscape. However, important success factor will be the willingness of involved players to take a co-ordinated and co-operative approach to establish a pan-European alternative for domestic (card) payment schemes around Europe.

About the authors

Annabel Keulen