A decade ago, the idea that you could just walk into your ‘bagal wali dukaan’ without cash and still make payments would have sounded revolutionary. But today, even a chai-wala accepts digital payments. With the outbreak of the Coronavirus pandemic and the social distancing rules, digital payments got the much-needed push to slowly and steadily becoming ubiquitous.
It has been almost eight months that India and the whole world has been, at various levels of lockdown, due to the COVID-19 pandemic. Even before that, we have seen focussed efforts from the governments of most countries to promote a less-cash economy. The premise being – lesser cash will lead to lesser costs for the governments related to printing and lifecycle management of physical cash and subsequent migration of businesses from the parallel economy to the mainstream.
Another big benefit of the digitisation vision is to solve for enabling credit facilities to a vast population of small businesses and entrepreneurs, from organised lender institutions. This is currently not possible as they do not have adequate banking transaction history and hence are forced to take loans from the unorganised sector which is often at a higher cost and loan amounts are possibly much less than what they deserve against the collaterals taken by money lenders. Clearly, digital payments will continue to grow in future as it is a declared vision of many governments as well as regulators.
There will be various levels of evolution in different countries – with countries like China, far too ahead on the QR code-based payments ecosystem as compared to the world; India, fast adopting to digital payments in the metro and urban landscape; while US and Europe creating inter-bank architectures to help drive their initiatives in digitisation. Here are a few trends in digital payments to look out for in 2021:
Online Purchases getting preference over OTC (over the counter) purchases
More and more businesses, across the world, are moving towards an internet-based shopping experience. This is driven largely by the Amazon and the Flipkart marketplace model where they enable convenience and habit-forming discounts for multiple categories of products. Apart from this, we also have more focussed digital merchants who are more vertical centric like those in the grocery and household segment as well those in the furniture and medicine segments. There are other segments like eyewear and apparels which have seen reasonable success. This is driven by new business models and a new generation of shoppers – who are not stuck in the more traditional look and feel experience as well as enhanced telecom data speeds and mass availability of internet and data facilities through mobile phones. The last but most widely used segment is travel and entertainment.
To keep up with the demands of the enormous group of Gen Z shoppers – who have grown up with the internet and who will constitute a major segment of shoppers in the years to come – businesses will need to innovate their use of payments and become fully digital.
While online shopping would not be more than 10 to 15% of the overall commerce in a country like India, it is huge in developed economies and hence this model can only move up from where we are. Many reputed researchers predict that that online e-commerce model in India will double in the next two to three years. The only way of making payments on such e-commerce businesses is through digital means and hence digital payments will see a lot of focus and innovation in the next few years
Over the counter (OTC) payments will also see a lot of innovation
Contactless Payments: Most networks have enabled contactless cards which are based on NFC technology which requires the card to be tapped on the acceptance device for the payment to be processed. While this requires the acceptance devices to also be retro-fitted to accept such payments, the trend is only growing as this allows a lot of convenience and reduces wait time at check-out counters. Currently, Indian regulators have allowed a small value for transactions without 2FA, but that is more than sufficient to take care of a majority of purchases across the country. Over a period of time, as the comfort related to security and safety of such transactions increase, the regulator will increase the limits.
NFC Tags for toll payments: Another variant among contactless payments that has taken strong roots in India is the “Fastag” used primarily for toll payment on national highways. This is only bound to grow in future with the government fully involved and actually driving the initiative by making these mandatory for new vehicles before they are dispatched from the factory and incentivising use through discounts for existing vehicles. This is a huge business segment and using this as the dominant use case the issuers are expanding the use-case universe for other purchases related to the transport business. Some examples of it being used for Fuel purchase at fuel pumps along the length and breadth of the country. This is exactly on the lines of the Octopus Card in the Hong Kong or the Oyster Card pass in the UK, which established itself with the dominant use-case and then grew horizontally to add newer lateral use-cases around the dominant use case.
Mobile PoS devices: Continuous innovation on the acceptance devices front have already reduced the cost of the PoS device in the last few years. Recent innovations have moved the POS device to the mobile phone of the merchant. This clearly reduces one big hurdle for acceptance of cards at merchants because nobody in the ecosystem now has to bear the cost of the PoS device. With the proliferation of NFC-enabled cards by banks and issuers and limits being increased for pin/OTP-less transactions, the popularity of this acceptance mode is bound to increase. Regulators, globally, are increasingly accepting the new mode of payment acceptance and providing higher limits.
QR codes: This has been a revolution in countries like China where this has become the most dominant mode of payment and now with major networks like Visa/MasterCard/Rupay in India adopting their payment standards to a QR code, it is becoming increasingly popular in the small and geographically distant merchants across the country. The biggest advantage that QR codes provide is its lowest cost of installation and almost zero maintenance, thereby, making it possible for digital payments to be accepted even in small towns. They have solved the break-even issue faced by most merchant acquirers where they just could not deploy a traditional PoS acceptance device at smaller merchants, even in metros.
Competition between closed and open payments platforms
Consumers value the convenience of being able to conduct the entire buying experience, including payment, on a closed, all-in-one platform or buying from multiple platforms and with multiple payment options. We expect to see increased competition between established providers of closed and open payments as we go forward. Strategies are likely to include developing exclusive payment products that offer amplified value within a platform or an extended financial infrastructure to enable commerce across platforms. We feel consumers will most probably go for seeking multiple choices and with the regulators more in favour of open systems, thus, discouraging the development of monopolies, open payment platform will become more dominant in future
Evolving product commoditisation
This is fuelling an evolution in payments economics. We see increased competition to traditional banks from fintech payment processors and increasingly from large merchants converting themselves to process payments on their own in order to ensure better success rates and payment experience. Accordingly, traditional competitive differentiators, such as transaction processing speed, convenience and access, may become increasingly commoditised and thus would reduce the capability to charge higher processing fees from merchants. In fact, some newer players are already making payment processing free for merchants in order to establish future alternative revenue streams. We expect the newer players to leverage post-transaction synergies to offer new, differentiated, or enhanced customer experiences; expand into adjacent markets; and use data analytics to anticipate customers’ changing needs and expectations, drive increased “word-of-mouth” and sell more profitable services. One of the services that almost everybody is looking at is lending to merchants and customers based on their payment histories. This will not only lead to increased stickiness in the hyper-competitive payments world but also incomes growing multiple folds for the payment processors.
Role of regulators and governments
Increasingly, the role of regulators will impact the proliferation of digital payments. Gradually, regulators are taking proactive steps to promote digital payments and at the same time ring-fencing them to protect newer customers from fraudulent elements. Some regulators are creating supporting architectures like open banking and PSD 2-related guidelines or the FedNow guidelines, in the US, supporting real-time gross settlement services. In India, the regulators and the government are working proactively to promote digitisation through multiple schemes like the already world-renowned JAM trinity. Here the government has opened 350 to 400 million accounts and linked them to Aadhaar number and mobile phone, thereby, enabling digital disbursement of funds into the account and enabling digital means to access such funds through simple and low cost means like UPI and biometrics.
The regulator has already created the sandbox environment for testing innovative ideas in a controlled live environment, while the government is working towards creating a centralised platform for enabling simple and accessible credit analysis and loans disbursals. Increasingly with the support of the regulators and the government, the digital payments will only continue to grow.
Payments will increasingly become invisible for a seamless customer experience
The customer experience has been a major topic in payments. In fact, according to Accenture, “as the payments universe expands, customer experience is becoming the prime competitive differentiator.” That experience is reaching a new stage: invisible, frictionless payments. This is a big shift from the past. For a long time, there were just two primary payment experiences. You either went to a store or you shopped online and entered your information on a checkout page. Now, with unseen and embedded payments, those experiences are starting to mix. Uber, for instance, keeps its entire experience focused on getting a ride — not paying for it — by keeping customers’ information on file and charging them automatically, at the beginning of the next ride. There are other modes where standing instructions can be taken from customers with various limits so as to process payments without on a recurring basis.
Software has also evolved so that payments form factors and their tokens can be embedded easily into applications, which enables industries that are less payments-oriented to incorporate a frictionless payment experience for their customers. We expect to see an even greater variety of payment experiences emerge in 2021 as customer experience and invisible payments become the norm.
Invoicing for businesses will transition to digital
It’s not just payments, it’s all the activities associated with payments that are evolving. We see the digitalisation of things like ordering and tracking, invoicing and account receivables as a major payments trend for the future. Corporates and business enterprises are looking to simplify how they bill their customers and to get paid more quickly while reducing costs. Agile payment partners are starting to fill that gap and enable those businesses to digitise all aspects of their system.
Fraud prevention services are getting smarter
Balancing customer experience with data security is an ongoing challenge in the payments industry and innovation in fraud prevention is a major payment trend that will continue in the coming year. We believe that there will be an increased use of AI in fraud prevention and at the same time, it will also help extract key business insights in future.
Cybercrime and fraudsters are evolving at a very fast pace and increasingly businesses will depend on AI to set up real-time alerts and controls and more important use real-time transaction behaviour to predict the next fraud.
Fraudsters are increasingly using machine learning (ML) techniques to perpetrate fraud and hence payment processors need to also adopt AI and ML to uncover payment behaviour anomalies in advance and provide necessary alerts to organisations.
More companies will start to use the data generated by their fraud solutions for higher-value activities that derive added value from their fraud protection efforts. These may include identifying their good customers and targeting products directly to them or revealing problems with shipping or inventory. The creative use of fraud data is a major payment trend to watch that can ultimately help solve high-level business operations questions.
Moving beyond traditional 2-factor authentication
Since biometrics are unique to every person and that much more difficult to create copies they lend themselves to secure and non-repudiable means of authentication. Additionally, since these are physical characteristics of the person himself/herself, it adds to the convenience as you don’t have to carry your cards/mobile phone with you and neither you are required to remember anything in terms of an OTP/PIN to authorise the transaction.
It will increasingly be used for creating new payment modes like wearables where transactions can be authorised by face authentication as biometrics provide accuracy, efficiency and security in a single package.
There are major players like Amazon and Google who are experimenting with voice authentication techniques, thereby, leveraging their speaker assistants to be used for payments. Going forward more and more exciting techniques like location and time of transaction past consumer behaviour will be used as passive authentication modes to deliver higher security and frictionless payments.
Further encroachments by tech companies into payments
Tech giants like Facebook, Amazon and Google and similarly telecom giants with their large consumer databases not only have access to a large existing consumer base but also a huge understanding of consumer behaviour. This helps in reducing costs of customer acquisition which is a major cost for any business. It also helps that they can easily predict when a consumer will want to buy anything and whether he is creditworthy to cross-sell lending products like payday loans, limited advance for purchases from their platforms etc. A subsequent consequence is that traditional players will have to re-think their business strategies to create and nurture partnerships with these tech giants in order to remain relevant in the payment space. Regulatory arbitrage in certain countries will also help the traditional players negotiate from an equal level.
While the above trends will play out in the near future, their contribution as compared to cash in payments will continue to increase, in many developing countries like India, CASH will still be the KING and continue to rule the payment landscape. There are many reasons for the same:
- There is huge inertia for merchants to adapt to digital payments. Actually, in anything new which involve changing the way they handle their finances.
- The inertia is also due to the fear of technology and hence will maybe require a generational shift for a significant reduction in cash payments.
- The merchant-upward payments to their suppliers are in cash, hence, they prefer to take payments from their customers in cash.
- Lastly, there is always the fear of increased taxation hassles in digital payments which leave an income trail.
While extraneous events like the demonetisation exercise carried out a couple of years ago or the current COVID-19 pandemic have forced consumers and merchants to adopt digital payment means, the comfort for cash continues to remain high, as is evident from below data-points:
- After hitting a low of 8.7 per cent (due to demonetisation) in 2016-17, India’s currency-GDP ratio rose to 10.7 per cent in 2017-18. This was attributed to the re-monetisation process. It further increased to 11.2 per cent in 2018-19 to reach 12 per cent observed in 2012-13.
- The currency in circulation went up ₹24.47 lakh crore as of March 2020 to ₹26.88 lakh crore for the fortnight ended August 21, 2020.
To conclude, payments is in exciting times where the stars are getting aligned to drive more and more digitisation. But, it is still more than a few years away to become more dominant than cash, especially in developing countries around the world.
– Samir Garud, Head – Banking & Enterprise Products