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The Changing Face of Payments Report, 2014

In late 2013, we researched the views of how payments markets are responding to change. The results are intriguing, so here's the management summary.  If you would like  a free copy of the report, just download here.

In late 2013, the Financial Services Club ran an online survey, in collaboration with Cognizant and VocaLink, about the nature and state of the world’s largest payment processing infrastructures and whether they are fit for purpose.

The survey reviewed the areas influencing payments; the technologies that have the most impact; the ability of institutions to respond to change; the institutions that are most influential in the payments mix; and the likely trends that will most impact payments infrastructures over the next ten years.

In terms of the biggest influence, the overall view is that regulatory change to the industry is the priority right now but, long-term, this will lessen and other factors will become more pervasive, particularly innovation.

As technology is a fundamental component of processing payments, we looked at which of the technology areas that have the highest priority in the retail and wholesale payments areas.

In the retail payments processing arena, where the ACHs are most likely to be involved in the central processing of payments, mobile has overtaken security as the highest priority. The importance of mobile for retail payments will continue to be tested in 2014 with the launch of inter-bank solutions. Surprisingly, with recent public, media and regulator concerns surrounding the resilience of retail payment processing at major banks, resilience is only the fourth highest priority.

Wholesale payments responses showed more divergence of views between banks and non-banks. For example, security is the highest priority for wholesale payments processing, but is emphasised more by non-banks (43% ) than banks (38%).

Resilience is the second highest priority with scalability, transparency and the internet also scoring highly .

The survey showed that the key processors of payments are banks with their counterparty banks, the clearing houses, central banks and payments infrastructures such as SWIFT. The most surprising area here appeared in the lower priority sections. For example, Bitcoin was included in the survey for the first time this year, in order to see whether any banks or respondents viewed this as key. No-one held virtual currencies to be of a high priority, although 11% of banks and 8% of non-banks did hail this as being of interest as a secondary priority.

As a corollary to this question, we asked people to provide a view of how innovative their payments providers are being in leading change in the process. Some participants are clearly innovators, especially the mobile and alternative payment scheme providers; whilst others are seen as both innovators and dragging their heels in the change landscape, especially the regulators, banks, ACH’s and payment associations.

We see this dichotomy as a result of the fact that these organisations are pivotal to the overall pace of payments change. Expectations are high and sometimes unfulfilled.

 

In terms of how responsive and agile payments processors are when it comes to change, banks all believe that their systems are far less flexible than non-banks, with the biggest challenges being responding to customer and regulatory requirements. Over a quarter of banks said that they could not respond rapidly to customer and regulatory needs. In particular, regulatory change is where the banks felt most inflexible with only 1 in 5 banks ready to respond (22%) compared with 37% of non-banks.

The fact that regulatory change is where banks are most inflexible is concerning as regulation is the most influential aspect of change in core payments processing. When asked: What will be the impact on payments infrastructures of recent and impending regulatory initiatives? 87% of respondents felt that this would cause significant to major change in payments infrastructures, with 15% believing that this would cause the introduction of significant new systems. These results suggest that bank systems are straining to meet the demands of regulatory change and that investment in new systems to replace inflexible legacy will be required to meet the regulators’ expectations.

The future

At the end of the survey, we explored the evolution of payments infrastructures over the next decade in depth.

First, would there be more or less infrastructure in the future?

Asked how many retail and wholesale payments infrastructures were in use today and how many respondents expected to exist ten years from now, the great majority of respondents consider that there are between 2-5 payment infrastructures in use now and that this will remain the case over the next 10 years. However, there was a divergence of opinion regarding consolidation and fragmentation of infrastructures. For example, although some banks see consolidation of retail and wholesale infrastructures towards just a single infrastructure, a similar number see fragmentation. Non-banks generally see an increase in infrastructures.

With the possible increase in infrastructures for retail and wholesale processing, where could this fragmentation come from and who will get the growth? The view is that most growth will be in the mobile and alternative payments space, although virtual currencies get a nod in third place for significant growth. Least growth will be with acquirers, central banks and payments associations. This is interesting as these were the three groups called out as least innovative, implying that they are constraining change in the industry.

The most likely areas expected to impact payments are that mobile devices will be a mainstream option. 85% of respondents believe that mobile devices will be a mainstream option for person to person or person to business payments within the next five years, with over half of these believing this will be the case within two years.

Next most likely is that payments processing will be a key business for innovators and new entrants with 77% believing this will be the case within five years and over half of these within two years.

Over 62% of respondents consider that SEPA will be fully adopted across the Eurozone within the next five years, although banks had more confidence (65%) in that statement compared to non-banks (60%).

In terms of what is unlikely to occur, 70% of respondents consider that the replacement of plastic cards by mobile telephones was beyond the ten year horizon.

Banks felt that SWIFT or other core infrastructures being replaced was even more unlikely. 72% of banks believe that this is unlikely even ten years from now, compared with 62% of non-banks.

Our question on the likelihood of basic banking services being provided by a non-bank utility caused a divergence of views both between banks and between banks and non-banks. What is clear is that such a change would result in seismic changes in the industry.

Finally, the statement PayPal will be the largest payments processor on the planet caused a split of opinion. Although 61% of respondents felt this was unlikely in the near term, over a quarter (28%) believed this was likely to happen within the next five years.

For a free copy of the report, download here.

About Chris M Skinner

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here…

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