Think of Generation Y and you are thinking of smartphones, laptops and tablets. You are thinking not of brick-and-mortar stores but online shopping, thanks to Amazon and eBay. And money? You are now thinking of cards and online remittances.
Payments professionals grew up in the age when customers adapted themselves to the payment systems of the day. A three-day payment clearing cycle was more likely the norm then. Tell this to the Gen Y customers though and they will tell you that they are not interested in adapting themselves to such systems. They want their funds transferred instantly. They want that shopping order to be accepted immediately. They want their products dispatched to them in the next hour itself! And they want this power, not between the banking hours of 9 a.m. to 6 p.m., but around the clock.
Payments account for one-fourth of total banking revenues. With a CAGR of 8%, payments and transaction-banking revenues are expected to reach $1.1 trillion by 2022. An industry survey indicates that almost half the payment industry players want the beneficiary to have immediate access to funds while only 15% of them were willing to wait until the next day.
With such potential of a stable revenue stream, can the industry then ignore the customers’ demands?
Real-time payments are changing the way payments are made today and every continent is actively gearing itself for it. UK’s Faster Payments Service, launched in 2008, saw a surge in volume in payment flows last year, as it became the default payment mechanism on online banking platforms in the country. A domestic reach of almost 100% has been enabled. Elixir, a net settlement system operating in Poland, is used for low-value standard payments, social insurance and tax payments. Zoom in to Nigeria, which has developed the NIBSS Instant Payments (NIP) system for online, real-time payment delivery. Move on to Singapore which plans to launch Immediate Payments G3 in 2014. Further south, Australia is developing New Payments Platform (NPP) for low-value payments. RTGS, the funds transfer system for real-time settlement has been adopted by more than 45 countries today.
Payments industry is evolving in different ways in mature markets and developing markets. The developing markets are projected to post a stronger revenue growth; CAGR of 12% as against 5% CAGR in the mature markets. Industry is shifting away from account-based revenues to fee-based revenues. In mature markets the average per transaction fees are declining. However, emerging markets in APAC and Latin America show an increase in this trend.
So mature markets are working with a myriad of challenges – decreasing margins, slow economic recovery, slow new business investment, few opportunities for innovation and legacy payments systems that are usually expensive to replace. To achieve growth in payments, these markets need to capture a greater share of wallet from their customers and improve their operational efficiencies.
Developing markets on the other hand present plenty of opportunities. Domestic businesses in these markets are seen to be in strong growth phases. A relatively younger population fuels the adoption of new technology. Also, high use of cash and a high level of unbanked households offer innovative opportunities for the industry players.
Innovation all around
The evolution in the payments industry is being fueled by the introduction of new payment products, payment standards and clearing and settlement systems.
In India, the Reserve Bank of India (RBI) is proactively taking steps to migrate from paper to electronic systems. The National Payments Corporation of India (NPCI) was set up in 2008 for bringing together all retail payment systems under a single umbrella. New Zealand has adopted the New Payments Settlement System for retail payments while China has developed a national payment system, China National Advanced Payment System (CNAPS) for processing high value and bulk payments.
Innovation in alternative payment channels is attracting new customers. Alternatives to credit cards, like debit cards and mobile and online payments serve as entry vehicles for savings account. Industry studies show that frequent use of such alternative products can lead to savings account balances that are 50% higher, thus serving as a lucrative offering.
In line with compliance
Regulators across countries are taking definite steps towards ensuring real-time payments mechanism. At the same time, AML and sanctions screening regulations like FATF SR VII – to enhance transparency of electronic funds transfer, FATCA and Dodd Frank - to combat terrorism financing, mounts the pressure on the banks. Payment integration initiatives like SEPA promise to simplify transactions but adds to the cost of compliance.
Payments Hub: The answer to it all
Gearing towards the ability to manage, on a single platform, any type of payment transaction, instrument type, customer, channel and payment standards and various internal payments engines banks are implementing payments services hubs. Legacy solutions are usually hard-coded which makes it difficult to add new channels or payment products. Multiple processing systems exist that make transactions time-consuming and cumbersome. Such payment engines do not take long to become obsolete as they are incapable of fulfilling the capacity or flexibility that the banks require. Not only does a payments hub act a single source of truth for all payment transactions, it is capable of supporting large transaction volumes, an added advantage for those multinational banks. Payment flows tie up large amounts of liquidity.
Payment hubs significantly improve visibility into the payment flows across all payment types, thus allowing banks to better manage and forecast intraday liquidity. It also speeds up the time-to-market for new payment products. All this is achieved by the banks at least cost thus allowing cost savings.
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