Payments are the backbone of a functioning global economy. A payments system can be defined as any system that can be used to settle a financial transaction by exchanging monetary value. Payments are a part of financial services that have undergone rapid and transformational change over recent years, and the Erlang Solutions team has been at the cutting-edge of many of these changes working on exciting client projects with global card payments companies to fintech startups.
In this two part article, we take a look at some of the main drivers of change to the way payments work and to the broader payments ecosystem using our fintech industry knowledge and experience working on some of the most performant fintech systems in the world such as Vocalink’s Instant Payments Solution (IPS).
If you are involved in the payments industry in the Nordics region of Europe, make sure to catch up with our Nordics Managing Director, Erik Schön, who will be taking part in a panel discussion at NextGen Nordics taking place in Stockholm, Sweden, on 27 April.
The digital payments landscape
Evolving customer expectations alongside technological advances are driving innovation that prioritises speed, near to real-time payments, frictionless transactions and decentralised models. Also, compounded by the pandemic, significant growth of digital commerce has led to record payment volumes in most markets. Combined, these factors make payments one of the most interesting areas of financial services. There are opportunities for innovative fintechs to provide better client experiences, traditional players to expand their services and tech enablers to offer alternative ways for transactions to flow.
With market competition driving fee decreases, it is a challenge for traditional players to maintain the same levels of profitability while using existing payment infrastructure. We have seen some of our fintech clients launch into the payments ecosystem offering a more diverse range of services, and traditional payments companies are responding by leveraging the huge amounts of data at their disposal to guide a strategy of adding to their offering. These new services are in areas including loyalty, tailored offers, data insights, risk management and more.
At the heart of payments, these themes have been massively accelerated over the pandemic years. You can take a deeper dive into this and other emerging tech trends in financial services by downloading our Fintech Trends in 2022 white paper.
A cashless world
Consumers’ shift to digital channels is driving demand for seamless fulfilment and instant gratification. A recent Capgemini World Payments Report survey found an increase from 24% to 46% in respondents who had e-commerce accounting for more than half of their monthly spending when comparing before the pandemic to now.
With 91% of the global population expected to own a smartphone by 2026, according to Statista, these customers are unlikely to return to the way things were done before, having experienced the efficiencies offered by digital payments,
Nayapay, one of our clients in the South Asian market using our MongooseIM chat engine, is an example of a new player in the payments space seizing the opportunity to disrupt local markets. Their chat-based payments app targets the unbanked in Pakistan and is built around fusing the penetration of smartphone usage and people’s willingness to integrate transactions into their daily social, digital activities.
Demand for faster payments
Demand for instant transactions is driving change in cross-border payments, international remittances and e-commerce. Previously, mirroring the instantaneousness of a cash transaction via electronic means had been an ongoing technical challenge. Now, the introduction of real-time clearing and settlement facilities in many markets makes processing payments almost instantly possible. At the beginning of 2020, The Clearing House’s Real-Time Payments System had 19 large institutions participating. Today, it has 114 banks and credit unions as direct members.
Frustration with the latency and cost of the traditional banking model has led to the emergence of alternative options. Innovative solutions such as the P27 initiative in the Nordic region show how fintech can blend with conventional systems to provide better payments infrastructure for all. P27, named from the 27 million citizens in the Nordic region, aims to integrate the payments of four countries and currencies into a single immediate payment system, again using the Vocalink IPS.
Growth in embedded payments
Embedded finance is changing the way payments are made where financial products are added to the transactional flow in non-financial platforms. With consumers demanding ever more convenient, frictionless ways to make payments using various devices from wallets to wearables, embedded or contextual payment options add convenience and speed to the payments process.
On the merchant side of things, embedded finance helps them to better understand the best payment terms to offer customers, provide seamless checkout, request payment, and offer financing such as buy now pay later (BNPL), all within a single customer experience.
Aside from BNPL, other financial products (like lending and card-issuing) are also moving into contextual environments. Major banks can extend their reach to millions of new users through Banking-as-a-Service (BaaS) APIs to technology businesses and platforms outside of the financial services industry.
To make sure you don’t miss the second part of this look at modern payments where we examine what these trends mean for strategy setting by industry players and what the future might look like, you should sign up to our Fintech Matters mailing list.
If you want to start a conversation about engaging us for your fintech project or talk about partnering and collaboration opportunities, please send our Fintech Lead, Michael Jaiyeola, an email or connect with him via Linkedin.