Few would argue that the payments sector suffered or enjoyed – depending on the perspective – extreme levels of disruption during 2016. The pace of change in the industry is extraordinary and we are only halfway through the digital transformation journey. What can we expect to come next in 2017?
No signs of slowdown in the pace of disruption…
So far, the main impact of innovation in digital payments has been an explosion of new entrants into the market. In Europe, this is likely to be accelerated when the revised Payment Services Directive (PSD2) comes into effect (EU Member States have until October 2017 to incorporate its requirements into national law), which formalizes the sharing of customer information between merchants and their customers’ banks.
PSD2, though, is more of a reaction to market developments by European regulators than a driving force in itself. While US markets are not affected by the Directive, payment service providers and banks will still feel the disruptive effects as the sharing of customer information becomes more widespread.
…but it won’t look the same everywhere
The impact of digital payments disruption depends to a large extent on geography. In emerging economies, disruption will create a boom in new customer acquisitions because of the ability of digital payments to reach the unbanked and underbanked. In some regions, notably Africa and parts of the Middle East, we should expect a strong influx of providers chasing the millions of new customers who are able to access payments services for the first time.
In developed economies, it is a different story concerning new business models, product acquisition, and a deepening of the customer relationship. The way in which customers interact with their banks is changing rapidly and in this world it is essential that the customer is at the heart of digital and business strategy. In developed markets, customer relationship primacy will be the ultimate strategic goal.
A ‘wait and see’ approach to Blockchain
Across the industry, there is the constant expectation that an innovative new entrant will appear with a fundamentally disruptive technology.
While the use of APIs will continue to become more widespread in payments, we expect to see newer technologies start to a play a role in digital payments. The most obvious candidate today – which can become a reality within five years – is Distributed Ledger Technology (DLT). One type of distributed ledger technology is Blockchain. Blockchain has emerged as a revolutionary technology that enables payment transactions between people, without going through traditional bank or credit card infrastructure.
Should DLT take center stage in the digital payments world, it will prompt a fundamental shift in the way payments are made. The question for established players in the payments sector is whether to invest their immediate future in DLT, or wait to see if the technology is viable. Timing will be critical and many will be watching the global DLT innovation hubs – Seattle, San Francisco, the UK and Asia – very closely in 2017.
A slowdown in new entrants, but more consolidation
As more new FinTech companies enter the market in 2017, start-up activity in the digital payments sector could finally peak. The high valuation of payments start-ups during 2016 suggests we are reaching a saturation point. The next logical stage for the market will be consolidation and acquisition, with a steady increase of deal flow in 2017.
Partnerships between established payment service providers and FinTechs makes perfect sense. FinTechs excel at innovation and delivering what customers want through new service models, while established banks and other payment service providers have valuable as-sets with their experience in the sector, capital to invest and trust.
Trust is the key factor
Payment services increasingly rely on customer relationships and the sharing of highly sensitive data, which means that trust between the payment service provider and the customer is absolutely critical.
That is excellent news for established players in the market. Trust in financial services is not easy to replicate or approximate; however ambitious and innovative a new tech entrants may be, they will always be constrained by not having this same level of trust.
Interestingly, that same trust factor opens the door to trusted non-bank brands. On a small scale, we have already seen that digital disruption is opening the payments market to non-financial corporations who are able to capitalize on their trusted brand. This trend is poised to continue, and if banks are looking solely at newer FinTechs as their primary competition in the payments space, they could be in for a surprise.
Overall, 2017 will be the year when the payments sec-tor takes a breath and providers consider their strategic position. In the end, those that are best prepared and focused on innovation will win the race.
By Sarkis Akmakjian, Senior Director Product Management at Accuity
This article originally appeared on the Transaction Directory website.
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