Growth in global payments: and the winners are…
From online marketplaces to small business flows, peer-to-peer remittances and an ever-growing gig economy, global payments are booming. But is the growth in cross-border payments beginning to shift away from traditional practices and providers to new methods and technologies?
On the final day of Sibos 2022, Worldline's Head of Financial Services, Michael Steinbach discussed who in the payment industry is poised to capture the growth of retail payments: banks, fintechs, central banks, market infrastructures, or even someone completely new? He was joined in this discussion by Ripsy Bandourian, Head of Europe at Plaid, Jessica Richards, Head of Market Development at Natwest, Isabel Schmidt, Co-Head of Payment Products at BNY Mellon, Emanuela Saccarola, Global Co-Head of Cross Border Payments and Receivables at Citi, and Thomas Olsen, a Partner at Bain, who acted as moderator.
Driver of change in global payments
The biggest driver of change in global payments is by far digitalisation. This doesn’t show signs of fading, as described by Jessica (Natwest) during a broader discussion on the rate of change. “I think payments has been and will continue to be a catalyst for growth. It’s interesting that payments now sit at the heart of every customer relationship, and it used to be the backwater of the financial services. Now it's the backbone.”
According to Michael (Worldline), it changed the expectations of users fundamentally. This goes for consumers as well as for corporates. “We live in an instant world today, things are available instantly, on your smartphone, and usually at low cost,” said Michael. “I’ve used this example many times, but it still holds true – nobody types in a Google search and waits to receive the result for a few days. Or expects to get charged for it. Users have the same expectations towards banking and payments – whether domestic or cross-border.” The panellists agreed that consumers and businesses expect cross-border payments to be immediate, cost-efficient, predictable, secure and reliable. There will be localisation of demand and not all regions may experience the same requirements or rate of change, as Isabel (BNY Mellon) suggested. “I think it’s important to recognise there is a little bit of a regional play in this, depending on the markets. I think the level of penetration of instant payments is probably going to be quite different depending on what other payment mechanisms exist in each market.”
Both opportunities and challenges
Everything is constantly changing. This also applies to the world of payments. This rapidly evolving environment brings opportunities through innovation, but it also presents complexity and brings implications. As Emanuela (Citi) stated following an audience poll on the percentages of cross-border payments that will be instant in the next three years, she suggested that “the complexity of making cross-border payments is a lot higher than for domestic payments. You need to think about different regulatory requirements, different formatting to liquidity, etc. So ultimately it is more complex and if you think about retail payments; the four dimensions we look at in terms of consumers are speed, transparency, traceability and low cost. These are much more complex to achieve cross-border.” The results of this poll indicated an audience belief that 70/80% of domestic payments were to be instant in three years, and 20/30% for cross-border payments. The panellists felt that these results show the direction, but how long it will take to get there remains unclear.
With the introduction of instant money transfers on a global level, there will no longer be any coherent reason why a cross-border instant transfer should cost significantly more than a local or regional payment, for example in the SEPA area. The risk of currency conversion within the transaction time of an instant payments transaction should also be manageable. Additionally, this enables the value date of the transaction to be reached within seconds instead of minutes, hours or even days. Correspondent banking, in contrast, is safe but too slow and expensive for today’s world, with a lack of transparency and trackability. Banks must act now to develop products that meet their customers’ expectations and ensure their underlying infrastructure is fit for the future.
Regulation and initiation
According to the panellists, banks are facing a tidal wave of regulation. For solving fundamental problems, the first consideration is determining whether governments should primarily drive standards and solutions or whether the increasingly diverse industry ecosystem can coordinate sufficiently to drive change. For Michael, this is clear. It is difficult to change or introduce new standards if there is no business case. “Regulation is likely to drive standards,” he said. “That's not necessarily a bad thing. I can certainly see a non-competitive space where a standard can be made mandatory by regulation. Market participants can then build on these standards and use the available competitive space. In fact, this is a pattern that worked well within SEPA. Based on these mandatory standards, infrastructures can interconnect.” During the session, Michael’s view was reinforced by Isabel, who suggested that standards must be seen as a given, but: “We also need regulators at the table. We need to be able to understand global perspectives and to ensure we can rely on repositories of knowledge and data.”
To build this much-needed foundation, standards are fundamental. We need to find an effective application that will drive adoption. For example, access to the internet was made easy and adoption skyrocketed with the introduction of smartphones. In an instant payments scheme, initiation is key. Digital identity could fundamentally change the process. The digital ID on the phone is directly linked to the wallet and enables seamless payment initiation through different channels. This concept still requires work and is a complex topic. During the session, Emanuela suggested that by 2025, around 60% of the world's population will have some form of digital token. Today, most of us have many different digital identities – Emanuela gave the example of different photos for social platforms or emails, for instance. To this point, she indicated that we should expect further fragmentation before the market converges in an efficient way.
This degree of innovation and diversity also presents many opportunities for collaboration. Interconnectivity will also be needed. As Ripsy (Plaid) suggested, “there will be no single player that will be able to do all of this alone.”
The winners are…
Returning to the question of who will win or who will have the biggest impact or benefit the most, asked at the beginning of the session, one thing is for sure: banks have the most to lose, if they do not move in the right way. It is key to remember that banks continue to hold the trust of the consumer. The results of an audience poll taken during the session showed that the audience narrowly believed that banks stand to have the biggest impact and benefit most from the growth in global payments. However, they need to be open to new developments in the market. Fintechs, on the other hand, have much to gain, said Michael. “The services they offer today are user-friendly and relatively cheap. And they do so while still building on existing infrastructure. They negotiate good rates with banks, have a lower cost base and take more risks (while banks basically don't take risks). Now imagine what fintechs could be capable of if they could build on modern infrastructure, probably using rails provided by central banks.” The results of the audience poll placed fintechs as third, behind tech platforms in second. Clearly, there is further room for discussion on this complex and ever-evolving topic.
The global networking of the existing payment traffic infrastructures is in full swing – although partly at least as a proof of concept. What comes next involves embracing fragmentation before creating interoperability, reducing friction and making collaboration essential. Worldline has gained relevant experience in this specific field over the last twelve years. For example, Worldline has technically and functionally set up a payment transaction bridge between the Fed in the USA and Europe and have been successfully running it for years. This ‘bridge’ is currently batch-based. A migration to global instant payments is the next natural step for Worldline to live up to the claim of being a leader in international payments. In his closing remarks, Michael offered advice and a call to action: “To the banks - stand up. Don’t wait to be political siloes. Think about the broader picture and start creating now, because the further it goes on, the longer it takes and the less influential your decisions will be. Be active, be creative and influence this ever-more global world.”