The rapid development of online, digital and other new forms of payment led Apple’s chief executive (CEO), Tim Cook, to confidently predict in a recent speech given at Trinity College, Dublin, that the next generation will be unfamiliar with money.
Young Britons may also not know what cheques are. Back in 2009 the UK Payments Council proposed that cheques should be phased out by the end of October 2018 to reflect declining usage, although it subsequently modified its plans.
The fact that banks still make money from the anarchic three-day payment cycle that accompanies the use of cheques is one reason that calls are being made for banks to modernise or die. First Capital recently asked experts in the payments sector for their predictions on what lies ahead in 2016. Five key trends emerge from the responses.
1. Banks must evolve if they are to survive
While the Oxford Dictionary definition of a bank remains relevant – “a financial establishment that uses money, deposited by customers, for investment, pays it out when required, makes loans at interest, and exchanges currency” – the way in which businesses and consumers use banks is changing.
This is particularly evident in the development and widespread use of online banking apps, which have revolutionised customers expect from their bank. Many challenger banks and third parties have emerged as a result, to galvanise the sector and become an integral part of the UK financial landscape.
As for the next stage of evolution, Mike Laming, lead technologist at innovation company Adaptive Lab, predicts that “software companies, with banking licenses, are going to redefine what it means to be a bank… they have the freedom to reimagine from the ground up what a bank should be.”
This task will be made even easier come 2017 when the second generation Payment Service Directive (PSD) takes effect. The directive will require banks to open up their Access to Accounts (XS2A) to competition, allowing new entrants into the payments marketplace.
An Open API adoption is already high on UK Treasury’s agenda, and while this is great news for consumers and businesses, traditional banks will now have to work a lot harder to compete against third parties.
2. The continuation of contactless
Growing demand for faster and easier payments is evidenced by the launch of Apple Pay and its various cousins. Mobile payment, contactless and electronic wallets (e-wallets) were big news in 2015, which will continue into 2016.
Payments UK reported that 771m “Faster Payment” transactions were made in 2014; a figure expected to rise to 1.94bn by 2024 due, in part, to the increasing number of mobile apps that have been developed. “Mobile payments are here to stay; new apps and solutions are popping up on a regular basis,” says Remi De Fouchier, senior vice president (SVP) of digital security firm Gemalto.
“To date over 150 have been launched or piloted worldwide; ignoring mobile commerce and mobile payments isn’t a viable option.”
However, John Cooke, commercial director of card services at payment services provider allpay notes that “change in payments is usually very slow – contactless has been around since 2008 and it’s still not accepted in most supermarkets.” Cooke expects the situation to change during 2016 and that “all debit cards should be contactless by the end of the year.”
Ray Brash, managing director of prepaid cards specialist PrePay Solutions agrees. “Contactless is obviously the word of the moment when it comes to payments. With the limit having increased to £30 at terminals, contactless will take off further as customer demand for convenience grows.”
It’s likely that contactless and mobile will be used for ever smaller transactions, becoming a regular form of easy payment that was previously the reserve of cash.
3. Fighting fraud with fingerprints
A major concern for both consumers and businesses is the impact that increased data sharing and use of technology will have on security. Data breaches regularly made the news in 2015, so this year could see measures and regulations introduced to placate fears.
Although UK fraud cases dropped following the introduction in 2004 of chip-and-pin technology to replace magnetic strips this did not address all card security issues, especially during card not present (CNP) transactions.
The next step on from Europay, MasterCard and Visa (EMV) – already being used by Apple Pay and others – is biometric authentication. Fingerprints will always remain unique and, barring a major accident, they cannot be lost or forgotten like PIN codes and security questions.
However the issue with CNP fraud cases will still be present, which is where the need for ‘Big Data’ will kick in. Being able to analyse transactions in real-time should allow abnormal purchases to be identified quickly and accurately. It is access to this data, and development of the technology required to maximise its potential, that will be the next step in cyber security and regulation over the next few years.
A research report published by Infosys, entitled ‘Payments Strategy- Renew the Old, Ring in the New’, comments: “IT will play a key role in this space as both a backbone enabling monitoring and compliance and also providing next-generation analytics solutions that can detect and prevent fraud attempts.”
Mark Prior-Egerton, solutions marketing manager of secure payments specialist The Logic Group agrees, claiming that tokenisation will remain the only solution: “At their heart, many of these payment methods will still be based on card data and securing that is vital. The key to this is tokenisation which allows card data to be encrypted whether payment itself is made via a smartphone, wearable or even your fingerprint.”
4. The customer will continue to always be right
The desire to create a seamless, easy-to-use payment solution is accelerating improvements in user experience (UX). The launch of services such as transport network Uber have raised customers’ expectations to a level most dated e-commerce solutions never envisaged. Placing these innovating giants against more traditional offerings highlights just how far the industry has come in only a short space of time.
Going forward, one slick and clean platform will be insufficient to satisfy consumers, as the Infosys report explained: “Customers now expect a Netflix-style experience across channels, in which they can pick from one channel what they left in another channel.”
This omni-channel experience is destined to be the next big thing for the payments sector, allowing bank, card and virtual payments to be accessed via one easy-to-use system. Hopefully this kind of approach will eliminate the administrative burden currently facing businesses and consumers, resulting in a ‘friction-less’ and less confusing payment solution.
5. Cash to remain king – for now
This could be seen as one of the most unexpected trends on the list. Although banks have lost relevance, contactless has evolved, big data is solving security issues while innovate tech revolutionises UX, cash is still king for most consumers.
Indeed, Bank of England (BoE) data shows the number of banknotes in circulation has steadily increased, from 1.895bn in 2004 to 3.239bn by the end of February 2015. Production has also risen, from 469m in 2006-07 to 843m in 2014-15. According to Payments UK, over 18bn cash payments were made in 2014, accounting for 53% of transactions, suggesting that predictions of the imminent demise of cash are overdone
“To ignore cash is to ignore vast swathes of the population and the businesses that cater to them,” says Peter Moore, CEO of payment technology firm Consolis. “For example, convenience stores and small, independent cafes and retailers still rely on cash as the cornerstone of their businesses.
“Cash is still king [for many] that rely on these corner shops and cafes for their everyday needs. We should not ignore the large number of small businesses that rely on cash transactions to stay afloat.”
This does not negate the work in developing payment technology. For the business-to-business (B2B) sector specifically, it is vital that the payment industry continues to innovate and become more receptive to digital technology.
Bacs (formerly Bankers’ Automated Clearing Services) statistics show that recovering late payments cost the UK’s small to medium enterprises (SMEs) almost £11bn in 2014, while as of July 2015 £31.3bn was owed to the 99% of SMEs that make up the UK economy, hindering growth and reducing profitability.
“Our figures show that while the late payment landscape is improving in terms of the totals owed, it is at a cost, and a very real one, with SMEs having to dip into their pockets to chase money they are owed,” says Mike Hutchinson, director of scheme support and development at Bacs. “We urge businesses to look at automated payments like Direct Debit to reduce the time and money that companies are spending to recover payments due to them.”
To conclude, it’s evident that reliance on antiquated payment systems is costing businesses dearly and explains why the payments industry has to step up fast! There is much to look forward to in 2016 payments sector continues to innovate. A need to move with the times, evolve and adapt to changing customer expectations, business demands and comply with regulation will drive forward change, although despite much talk of ‘new trends’, money will continue to make the world go round – however it is transferred.
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