For years, the global economy has been getting more sophisticated and interconnected. Companies and individuals are trading across greater distances with increased confidence and security as ICT tools connect them in ever impressive and diverse ways. However, the speed of payments that follows these trades has historically lagged behind as the scale of global demand outpaces the traditional tools of international money transfer.
This is where innovation in payment services comes in. In Accenture’s ‘review of the international landscape of innovation in payments systems and insights for UK payments’ innovation” is defined as:
“…something new – it need not be radical – but something that is new, different and which delivers on an incentive for the innovator and a benefit for users.”
New thinking and new ways of making reliable international payments are essential in driving increased international collaboration and heightened levels of trade. As such, here is a condensed version of the review’s findings highlighting the state of UK payments innovation.
Perhaps unsurprisingly, the majority of payments innovators are from UK credit and payment institutions where they make up 36% and 26% of Accenture’s surveyed innovators respectively. Central banks (20%) and telcos (9%) make up the majority of the remainder as they have a vested interest in making payments a simple and practical endeavour for their customers. E-money institutions (7%) and retailers (3%) complete the scene as they boast the flexibility to adopt innovative ideas more readily than some of the more monolithic financial institutions.
Across these broad industry sectors, innovators range in size and shape from small fintech start-ups such as Osper, Invoiceable, RIngpay and Coinfloor, to large established multinational credit institutions such as Visa and Mastercard. Banks such as Barclays and Lloyds are also making significant investments in improving their payment options in order to keep pace with more mobile competitors.
Who Benefits from Innovation?
There are marked benefits involved in payments innovation for the parties at both ends of the payment – both the sender and the recipient have plenty to gain from improved payment service provisions. In addition, innovators themselves benefit from the increased sales and revenues of putting their payment improvements into operation.
The sender (payer) benefits:
New payment options: Greater variety of viable payment options allows the payer – whether they are an individual or a business – to choose the service that suits them best.
Ease of use/frictionless payments: Simple, swift and reliable, ease of use is of paramount importance in both business and personal purchases.
Protection against fraud and default: Failed payments and fraudulent activities can cause costly delays to businesses and severe financial difficulties to individuals. Protection against these eventualities through innovative payment concepts is prized by all potential payers.
The receiver (payee) benefits:
Lower cost of payments processing: Reducing the cost of payments processing translates into direct competitive advantage for sellers of goods and services and individuals enjoy receiving more money per transaction.
Improved liquidity management: Faster and more reliable payments processed at a lower cost allow businesses to enjoy greater levels of liquidity as they receive payment for their goods/services more quickly.
Lower cost of cash handling: If payments can be reliably left to electronic transfer then the security and cost of handling cash quantities can be revised.
The innovator benefits:
Increased revenues through new service offerings: Innovators receive the commercial benefits of having more businesses and individuals attracted to their new service offerings.
Increased revenues through service differentiation: Innovators are able to stand out from their competitors through payment process USPs.
Achieving governmental goals: Regulatory compliance and other governmental requirements are of growing importance to payments industry players as the sector evolves.
Lower cost of payment processing: This is an ongoing source of competitive advantage for everyone using electronic payments.
What are the Common Barriers to Innovation?
The payments industry has often been criticised for being a number of paces behind increasing global trade flows but this is largely due to significant barriers to adopting more innovative payment methods. The key barriers highlighted by Accenture’s survey respondents were:
The need to incentivise industry collaboration (37%): While often slow and outdated, the traditional high street banks’ transfer methods work through international agreements made between banks and clearinghouses. In order for new and innovative payment methods to work there needs to be similar collaboration between new Fintech solutions providers and the major established payments players.
Network effects in a two sided market (35%): The established system of traditional payments creates value between various banks, between established credit card holders and merchants and so on. Innovative payment services may offer benefits but lack the same scale of merchant acceptance initially.
Lack of standards and interoperability (11%): Again, ease of use comes through mass acceptance of innovative payment methods and until they achieve the requisite usage demand, merchants and financial institutions will be less inclined to provide means of interoperability.
The Role of Payment Service Providers (PSPs) in Fostering Innovation
The payments industry is at a critical juncture where new and innovative ideas that have been established and introduced on a small scale are ready to be adopted in a much more inclusive fashion that achieves significant market penetration. PSPs are a key part of the equation in helping such ideas grow and achieve their full potential, as they sit between the payer and payee and are therefore in a position to impact both parties and influence other PSPs.
PSPs are also needed to break down adoption barriers by encouraging interoperability and incentivising collaboration between the new players in the payments industry. By challenging traditional payment systems and providing genuinely attractive alternatives that offer ease of use and lower processing costs, there are proven benefits available for all parties concerned.
When it comes to showcasing the best of new payment innovations and earning the trust of all parties involved to encourage collaborative experiences, PSPs hold a huge amount of influence over the success or failure of such innovations.