Cashing in on the non-cash market
As non-cash payment volumes climb worldwide, what can payment service providers do to take advantage of this trend? Capgemini Global Financial Services' chief sales and marketing officer Jean Lassignardie and Simon Newstead, managing director of transaction services market engagement, international banking at RBS, talk e-commerce, m-payments, regulatory risk management and customer-centric innovation.
The continued growth in volumes of non-cash payments around the globe - a trend Capgemini Global Financial Services and RBS have tracked for the past five years in their World Payments Report (WPR) - represents a significant opportunity for financial institutions and payment service providers (PSPs).
Looking ahead, financial institutions and PSPs can drive innovation and meet the current and future demands of customers through development and implementation of new products, as well as strategic selection of chosen markets. Opportunities exist in both emerging and mature markets and will increase as the global economy recovers.
The two-speed market growth race
'World Payments Report 2013' (WPR 2013) predicts that global non-cash payment volumes will top 333 billion transactions in 2012 with a projected growth rate of 8.5%, following transactional growth of 8.8% in 2011. By closely tracking volume worldwide, WPR 2013 has uncovered a 'two-speed' pattern of financial recovery in which growth in emerging economies is outpacing that of developed markets.
Central Europe, the Middle East, Africa (CEMEA) and emerging markets across Asia have led the charge with more than 20% growth in transaction volumes, while Latin America recorded growth of 14.4%. Growth in these emerging economies outpaced that of the developed markets of North America, Europe and mature Asia (Japan, Singapore, Australia and South Korea), which recorded single-digit growth rates. Mature markets, however, still account for more than two-thirds of global non-cash transaction volumes with a 76.9% share. Capgemini and RBS's forecast shows that, even though growth is surging in the emerging economies of Asia and Latin America, it will still take at least ten years for these markets to overtake their mature counterparts in terms of transaction volumes.
Debit and credit cards continue to be the most popular non-cash payment instruments. Global debit card use grew by 15.8% (reaching 124 billion transactions) during 2011 and credit card use by 12.3% (to 57 billion transactions). Industry estimates suggest that mobile payment use will grow by 58.5%, totalling 28.9 billion transactions through to 2014. E-commerce payments are projected to rise by 18.1% per year from 2010-14, reaching 34.8 billion transactions.
Inconsistent reporting: a statistical black hole?
Such growth figures are very attractive, but in the case of e and m-payments, some caution is advised. Analysis of these figures raises some important questions about their veracity. In assessing volumes for e and m-payments, prepaid cards and virtual currency (offered by banks and non-banks) in regions such as Africa, the report uncovered a statistical 'black hole' due to inconsistent reporting of payments. This inconsistency is emerging as new regions become more active and non-banks take an increasing share of the market.
Analysis in WPR 2013 suggests that industry estimates of the size of the mobile payments market could be inaccurate by as much as 50%, with optimistic estimates raising the question of whether centralised data collection is needed. In order to achieve more accurate estimates, regulated statistical accountability and more standardised market-sizing estimates are needed using a variety of indicators such as e-commerce sales, volumes of payment gateways/trusted service manager mechanisms, and non-bank processing volumes/cash values. Without accurate information, PSPs may risk erroneous investment in payments areas. Improved statistical data collection, common definition and market-sizing estimates would help to overcome this problem and mitigate future market risk.
Managing regulatory risk
Growing complexity across global financial regulation landscapes continues to pose challenges to banks and PSPs as individual initiatives increasingly overlap. WPR 2013 found that standardisation, systemic risk and control, transparency and innovation are the main drivers behind key regulatory and industry initiatives (KRIIs); however, various geographies focus on different areas.
Take proposed regulations around prepaid cards, for example. The Department of Finance Canada published a proposed set of regulations in October 2012 to enhance the consumer protection framework for payment network-branded prepaid cards. The proposed regulations will give consumers access to information required to make financial decisions before prepaid cards are issued. The core objective of these regulations is to increase transparency in prepaid payment products. Similarly, the US Consumer Financial Protection Bureau issued an Advance Notice of Proposed Rulemaking in May 2012 regarding prepaid cards. The aim is to evaluate several topics such as fees and disclosures, unauthorised transactions and product features.
It's important for PSPs to recognise the relationship between these regulations in order to best comply with them efficiently and effectively.
PSPs can 'cluster' how they implement individual regulatory initiatives to take into account cascading effects across geographies, complementary reinforcement effects and competing effects. In North America, most new regulation is focused on transparency and customer convenience. In the Asia-Pacific region, top of the regulatory agenda are standardisation and bringing new participants into the financial system. And in Europe, SEPA regulations are dominating the landscape as regulators concentrate on increasing competition and improving transparency.
The customer is key to innovation
Payments are ubiquitous; they are a part of everyday life for consumers. For this reason, in addition to continued growth and increased regulatory complexity, Capgemini Global Financial Services and RBS have a strong conviction that customer-centric innovation offers players in the payments industry the greatest opportunity for success. Payments acquisition in particular - whereby sales and commerce are facilitated agnostically to location, channel or currency - has emerged as the area with the most potential for innovation.
There are many drivers for innovation in this area, including an increasing desire on the part of sellers to be closer to their customers, the need to meet new and changing demands, and the fragmentation of the value chain. Through payments acquisition innovation, PSPs can offer retail and corporate customers a choice of instruments, locations, channels and currencies.
Innovation is evolving in consumer-to-business (C2B) acquisition towards any form, anywhere and anytime payments. Successful initiatives are already making their mark in this area. In the US, PayPal's Order Ahead application is being used by retailer Jamba Juice to enable customers to order and pay for their goods before they visit the store. The application provides the customer with a menu and the facility to place an order and pay for it.
In business-to-business (B2B) acquisition, Swift 3SKey is a good example of innovation in security. This provides a multibank and multichannel personal digital identity solution, which has been developed in collaboration with the international banking community. The solution enables strong authentication for banks and corporates, ensuring that the transactions are genuine, unaltered and legally binding.
Both new and legacy payment providers recognise that not all players need to provide end-to-end services and focus on different aspects of the value chain. The four innovation value hotspots identified WPR 2013 - origination, acceptance and capture, security and fraud, and value-added services - present an opportunity to differentiate and meet the ever-changing needs of retail and business customers.
The rapid pace of change in the payments acquisition space requires PSPs to revisit their strategies and identify areas in which they can excel. It's vital to a PSP's future success to focus on the customer, choose its market and prepare for regulation.
Banks and PSPs must innovate in order to seize the opportunities presented by the continuing growth of non-cash transactions.