The payments business is changing so fast that it will be unrecognizable in a year or two.
As more technologies continue to emerge, more types of players are capturing a share of payments, which means “payment system” are expanding and evolving. As real-time payment methods become the norm, it can result in accepting payment types that are more sophisticated today. And Apple’s device-to-device initiative for its iPhones in late 2021 is a wild card.
Who is successful and who becomes less relevant as this image develops? Forrester Principal Analyst Jacob Morgan led a team that produced the “Future of Payments” report. Its central theme is that the structure of the payments business will increasingly be determined by the players who can facilitate payments.
“You don’t jump out of bed excited in the morning because you’re going to pay today. But he might be excited because he’s saving up to buy a new house or go on vacation.”
Jacob Morgan, Forester
Simplicity can lead to “hidden” payments in some cases. Consumers and businesses alike face many expenses in everyday life, such as buying gasoline for a car, that can easily happen in the background. Consider the long-standing popularity of toll payment systems that rely on transponders or license plate capture.
For vendors and businesses alike, making the payment side of transactions painless or nearly invisible represents a competitive advantage. Uber is a good example of this.
For payment providers, the reward is volume. For businesses, investing in maintaining or enabling a smooth path to purchase for consumers creates an advantage over competitors. At the same time, Morgan says in an interview with The Financial Brand, payments technology has improved to the point where businesses will want to invest in it to save costs.
However, while Morgan believes the momentum created by digital payments among consumers will continue to have some impact during the pandemic, he says the companies handling these transactions will change. Additionally, while the focus of innovation in payments has largely been on the consumer side, Morgan believes much of the focus will shift to business payments.
A Shakeout Among Traditional Payment Providers
Historically, banks have “owned” the payment system. But increasingly, a mix of new channels combining banking and non-banking “rails,” often facilitated by banks providing access to the banking-as-a-service payments system, has changed that. . Parallel systems, such as PayPal and Intuit, both work with industrial relays and with funds held in their own systems as “deposits” that can be used to make transactions.
“Banks have more competition, so their share is shrinking. Some banks will find that payments are no longer an economically viable option for them. Other banks will deliberately pay double. It’s almost a A binary choice will be made.
Jacob Morgan, Forester
At best, Morgan explains, offering payouts requires a level of investment that demands the scale achieved through market share. “You need scale and volume because the margins are so small,” he says. He added that offering real-time and near-real-time payment networks with 24/7 availability would not be cheap.
This will mainly be the scope of large banks that already have a significant market share, as they can consolidate the volume of others that can no longer justify their payment processes. Morgan believes this will apply to traditional payments as well as platforms that offer payments as a service. He sees this trend as driving consolidation among organizations that choose to stay in payments, expanding capacity and volume, and those that would otherwise decide to “double down” on purchasing or licensing payment solutions. to include them in your offers.
“Smaller banks that may not have enough scale may choose to divest from payments and instead try to create value on the core payment rails,” says Morgan.
Morgan expects fintechs to continue their efforts to unbundle payments, creating value in specific services in their chosen part of the payments process. “We’ve seen more than a decade of disagreement, which creates complexity,” says Morgan.
As a result, some banks and other players will try to reorganize services. Paying for new ways to deliver functionality and, more importantly, simplicity.
The Advent Of ‘Encapsulated Payments’
Embedded payments involve tying payments into other processes so that the purchase of an item automatically involves payment system and possibly financing that purchase.
“Encapsulated payments” represent the next iteration, Morgan says. This concept will take payment onboarding a step further, including data and payment Drop functionality.
In commercial payments, wrapping data around the payment will enable features such as automatic reconciliation by the payer. According to Morgan, this data can also support payment authorization and approval processes.
Technically, encapsulated payments allow users to take advantage of features like 5G connectivity. “Edge computing”: where processing occurs closer to the production of data. and connected devices: devices connected to other devices via the Internet.
In a sense, consumer payments have already seen one form of this, the “chip and PIN” payment card, which includes a microchip.
“Most people think of integrated payments as a means of initiating a payment from within another platform through the use of an application programming interface (API),” says Morgan. However, he explains, “the card’s chip hosts and runs a Visa, MasterCard or American Express microprogram that resides on the card and decides whether to make a payment. In a sense, it’s a There is a packaged payment.
As with more of this kind of paid programming, “we’re almost going back to the future,” Morgan says. Ultimately, he says, change isn’t about the payment system themselves, but about potential improvements to the entire process.
Contextual Authentication, Authorization And Payments
A selection of technologies are converging to help authorize payments in ways that require little or no human interaction. This collection will include biometrics, geolocation, device fingerprinting (data that identifies a remote computer or other machine) and local artificial intelligence. Forrester predicts that payment providers will configure packages of payment services wrapped with data and authorization elements to enable seamless transactions.
One application on the commercial side is payment for fleet vehicles, such as delivery trucks. Morgan points to Car IQ as one company that already offers this.
“Such services allow fleet owners to control the payment rules for their drivers and their drivers no longer have to carry the means of payment with them,” says Morgan. The vehicle actually becomes a payment instrument. The Car IQ service allows payment for fuel, parking, tools, and maintenance and repairs.
The foundations for such consumer services are already taking shape, with manufacturers such as Mercedes-Benz and Jaguar Land Rover adding features such as voice, face and touch biometrics to their vehicles. From there, these features can be used to handle payments to the car.
“Digital payment system will not replace previous form factors unless they support all users and can be translated into low-tech environments,” the report said. Morgan believes that regulators will insist on technology that enables the interoperability of payment methods to promote financial inclusion.
According to Morgan, one way to achieve this would be central bank digital currencies. The Wall Street Journal published a video during the Beijing Olympics showing one of its reporters participating in a CBDC pilot program that China has opened to foreigners in its Olympic “bubble” during the Games. Senior Correspondent Jing Yang shows how you don’t need a device to convert another currency into China’s Digital Yuan (e-CNY). He puts $20 into a special ATM and receives an e-CNY card with the equivalent of Chinese CBDC.
Morgan says the view of digital currency experts at Forrester is that most countries exploring CBDCs will move to them within five years.
“CBDCs provide a very exciting opportunity to come out of the whole cryptocurrency and decentralized finance environment,” says Morgan. The firm also sees stablecoins as a viable outcome of the digital asset movement, he added.
Money That Knows What To Do With Itself
Future payment system will be more than worth the amount. The Forrester report states that the programmable amount will “establish operating conditions, limit service to a merchant, a security, a u location or time…”
This technology has commercial and consumer applications. On the business side, one use could be company-financed employee travel and entertainment that would be monitored for abuse and automatically accounted for.
Consumer application will be pocket money for children. Morgan says the timing of the payment system when the money will be available for spending. And what it can be spent on can be determined.
Morgan points out that the gig economy has already created a limited form of programmable money. Shoppers picking up groceries for customers of the delivery service have pre-authorization. To make purchases on the customer’s account, but the funds can only be used at select stores. As part of the process, the worker is paid for his service.
More complex uses can also be configured. Morgan looks at home shopping.
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