Future Trends in Payment Systems

For the second year running, Edgar, Dunn & Company has conducted a survey of payments professionals globally on key industry dynamics in their markets. The response to this year’s survey incorporates the views of 645 payments professionals from 52 countries.

The survey focused on understanding the importance, both today and in the future, of individual payment products as well as the key industry events that are expected to shape the payments markets over the coming five years.

Across all geographic regions, credit cards were given the highest rating in terms of current importance, followed by domestic debit cards. While this finding was somewhat expected, the survey did highlight some key differences among geographic regions (see Figure 1). For example, in Asia, participants gave significantly higher ratings of importance to cash, mobile SMS, remote payments and remittance (e.g. money transfer via SMS messaging), highlighting the considerable diversity in the use of payment products throughout this region.

Looking to the coming five years, the payment products that are expected to grow the most in importance are those that will reduce the use of lower value non-electronic payment methods such as cash and cheques, as well as those addressing the needs of consumers who are currently uncarded or unbanked in some markets.

Figure 1: Regional Importance of Payment Systems

Hence the top four payment products, in terms of their expected growth in importance over the next five years, are considered to be:

  1. Contactless cards.
  2. Mobile SMS/remote payments.
  3. Prepaid cards.
  4. Mobile NFC.

Similar to the findings on current importance, the survey also highlights some key differences amongst geographic regions in regard to the future importance of payment products and channels. In Asia, remittances are expected to experience greater growth in importance compared to other regions, and the internet as a payment channel is expected to lag behind other regions – most likely driven by lower household internet penetration rates in certain markets.

Given the differences amongst geographic regions, it is likely that both the rate of adoption and the form (e.g. mobile SMS versus mobile NFC) of these new technologies will vary. In markets with less developed infrastructure, payment products and channels are likely to leapfrog a generation (e.g. move to mobile payments rather than using traditional point-of-sale terminals).

Putting aside differences in payment infrastructures and individual country cultural attitudes, if these products are to achieve their expected growth and result in ‘significant’ replacement of lower-value non-electronic methods, the universal key driver will be providing a ‘low-cost’ solution for both merchants and consumers (e.g. no duplication of infrastructure). The result of this preference for lower cost solutions is likely to be lower unit profit margins compared to other existing electronic payment methods.

An example of this trend is the recent initiative from the Singapore government that is aimed at increasing the number of electronic payment transactions at merchants running smaller scale businesses, such as food stalls. To encourage the use of contactless stored value payment cards, the government will invest S$16m, allowing terminal rental fees to be waived for the first year and providing merchants with discounted transaction fees (up to 50% reductions) for the first two years on contactless card payments.

Future Regulatory Focus

When payment professionals were subsequently asked in the survey about what they expect to be the most significant issues that they will face in the coming three years, the dominant issue by far was in relation to regulation. Central banks and regulators have played a significant role in the industry over the past decade, and it is clear that industry participants see this role continuing and even increasing in many markets. The issue of regulation relates to a range of issues including pricing, interchange, credit offers and controls, security requirements and the implementation of initiatives such as the single euro payments area (SEPA).

While regulation was a consistent response, the key issues participants expect to face did vary materially by industry player, which is highlighted in the table below:

Table 1: Significant Future Issues

It is interesting that regulators want to encourage more competition, while at the same time some of the players already see competition as being intense. Given the expected future influence of central banks and regulators, it is critical that market participants adopt a proactive approach to working with regulators, in order to ensure that the most beneficial outcomes are achieved for all participants across the industry.

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