Financial technology, or fintech, firms are promising to revolutionize the person-to- person (P2P) and business-to-business (B2B) payments industry, and are already causing a seismic shift in this sector. Unburdened by regulation and legacy IT systems, new entrants focused on providing payment services are claiming to provide faster and cheaper transfer of monies, both domestically and across borders, than the established players.
Swelling the already established ranks of traditional banks and fintech payment firms such as PayPal, technology companies Google, Facebook and Apple are all entering this space and are expected to grow rapidly. ClearXchange is a growing B2B payments provider, which was established by a collaboration of banks seeking to counter the fintech challenge. The traditional firms providing cross-border payment services, including Swift, Visa and MasterCard, are also under threat from new entrants and are working to improve the speed, transparency and predictability of cross-border payments to stave off further encroachments by fintechs. Swift has now signed up 73 global banks to its global payment initiative, which now covers 75 percent of the all cross-border payments. But that has not impeded the growth of new entrants such as Aligned Commerce, Traxpay and Payoneer, among others, with more likely to follow.
What major innovation has taken place in P2P/B2B payments?
Domestic business-to-business (B2B) payments have traditionally been made in the U.S. by check, wire transfer or ACH. Over the last decade, the large credit card networks – Visa, MasterCard, American Express – have developed e-payables rails and solutions that allow firms to issue invoices through a digital platform where their creditors can pay electronically. This has made payments faster but there are still delays. Cross-border payments are typically made via Swift and interbank transfers using decades-old technology, which is very expensive, slow, and provides inadequate tracking capabilities. It is unsurprising that cross-border payments in particular have been targeted by fintech companies utilizing distributed ledger technology (DLT) such as blockchain and virtual currencies to speed up the process. The use of DLT allows companies, such as Align Commerce, to transfer funds faster, cheaper, and in a trackable mechanism. Where a Swift transfer may take four or five business days, new entrants can promise transfers within two days and for about half the cost. Services such as these are a major disruptor to the payments sector, and more companies are launching new payment platforms every day.
The most noticeable innovation has occurred in the P2P payments space, which has been driven by strong customer demand to pay via their mobile devices. Apple Pay is well known, but newer technologies include Venmo, PayPal.Me and Canadian firm Mobeewave has rolled out an app called PayMeTap, which allows users to pay and receive funds by a tap of their NFC-enabled mobile phone. Apple Pay is also rolling out this sort of tap-and-pay technology and Facebook Messenger is also new to the scene. There are many different types of eWallets and nobody really knows which one is going to be most successful but they have all made payments easier.
These innovative payment products all offer faster speeds and an enhanced user experience by reducing friction in the payment process.
These innovative payment products all offer faster speeds and an enhanced user experience by reducing friction in the payment process. Although some also offer reduced fees, none have discovered a way to bypass the traditional rails when making payments or transferring funds. ACH and credit cards remain the primary methods used to validate mobile devices or to transfer funds. The company that overcomes that hurdle will significantly disrupt the market.
A major disruption in the payments space to date is occurring in the lower end of the market, which services the under-and unbanked. Prepaid card companies have moved beyond their core service to allow funds from prepaid cards to be transferred to other people. This change is effectively encouraging the use of prepaid cards as an alternative banking mechanism. Individuals can have their pay direct- deposited onto a prepaid card, which can be used to pay bills and for goods, etc. However, even here, the card still needs to be loaded with funds using credit card rails or EFT/ACH.
Blockchain is a major disruptive technology and it has the potential to reinvent and disrupt areas such as international payments.
Is the use of credit and debit cards in decline?
From an innovation, disruption and protection perspective, Visa and MasterCard have been way ahead of their competitors in preparing for the future. I don’t envision credit cards and debit cards going away. If anything, the major change is likely to be the elimination of the notion of the plastic card and a move to a mobile account. We have mobile and wearables now, but in the future this may move to implantables and injectables. Biometric payment devices are already in development. So although the notion of a card goes away, the network stays.
The technology behind those networks will likely shift, eventually. Blockchain is a major disruptive technology and it has the potential to reinvent and disrupt areas such as international payments. But for domestic payments, for now at least, blockchain is slower than the existing networks, which can process payments in a millisecond and are available almost everywhere in the world. This is not likely to change in the next few years.
Are customers and businesses demanding cheaper services?
The emphasis has been on providing faster and more user-friendly payment services but fees are also an issue. At the moment, fees on credit cards remain and most of the P2P platforms charge but this is changing. One new entrant launched funds transfer services with fees attached but these were removed within a year. The company also removed more restrictive conditions such as monthly limits due to customer demand. This has enabled the company to capture a greater share of the market. I would expect many more P2P and B2B providers to go in the same direction. But most companies will need to retain some limits to reduce losses from fraud or to restrict money laundering.
B2B payment providers are more justified in charging fees since they offer a more efficient service that cuts costs for businesses, such as manual invoicing, cutting checks, eliminating the need to use expensive bank wire transfer services, as well as introducing payment tracking. Most companies have accountants and accounting departments to perform these services but there is now a case to claim they are unnecessary. Over time, this argument may be settled as businesses become more accustomed to using more frictionless services. It will be interesting to see how the banks will respond once all businesses move away from checks and traditional paper to electronic payments. At that point, unless the next new faster, cheaper, better thing has come along, it will be hard to justify charging fees because someone will figure out how to lower the cost on the same service and it will become commoditized.
What further change can we expect to see in the next two to three years?
In the next two or three years, more P2P payments will move onto mobile, which offers a frictionless form of payment. There will certainly be some consolidation in the payments space, with some eWallets being absorbed by peers and even by the more traditional players. Banks are responding to this fintech threat, and responding aggressively.
Banks are responding to this fintech threat, and responding aggressively. Banks are not likely to be disintermediated; they are more likely to embed real-time, P2P functionality within their secure banking apps, and earn fees from other payment interfaces.
Banks are not likely to be disintermediated; they are more likely to embed real-time, P2P functionality within their secure banking apps and earn fees from other payment interfaces. Some of the more innovative payment offerings, such as Mobeewave, where you can make payment by tapping two phones together, will be more resilient to this renewed attack from banks. A greater innovation will be to be able to transfer funds in the same way between different apps. There is great promise for that network technology.
In the B2B payments arena, blockchain technology is very likely to be a truly disruptive force, especially for cross-border payments because it makes it so much faster. One of the issues holding this sector back, however, is regulation. Because some of the new entrants do not hold funds nor transmit money, they do not require banking licenses. But this is likely to change and they will need to answer to the same regulations as banks and existing money transfer companies.