The payments space is undergoing rapid change due to the implementation of the second Payment Services Directive and the evolution of mobile. There is a consequent push away from credit-card payments as lower cost options become available.
Tony McLaughlin, managing director, emerging payments and business development, treasury and trade solutions at Citi, says: “Merchants are looking for new methods of online payment that reduce costs, fraud and chargebacks while delivering a frictionless payment experience.”
In the UK, HM Revenue & Customs has stopped accepting credit cards as a payment option. In the US, meanwhile, Amazon has started to offer cashback on payments that have been made in any method other than by credit card.
McLaughlin says: “Many industries pay billions of dollars a year in the cost of collections through card products, so there is extreme interest in the development of alternatives that may drive costs from percents to cents.”
For some industries, the removal of fees will provide a substantial boost to profits. The International Air Transport Association states that collections cost the airline industry as a whole around $7 billion a year in fees, with the majority from credit cards. Further, the industry is exposed to around $1 billion a year in fraud.
With acute awareness of the potential for fraud and loss, the technology providers are exploring where they could gain advantage.
Victor Penna, managing director, global head of treasury solutions, transaction banking at Standard Chartered, says: “Fintechs are moving into the space. They are seeing the possibilities of operating on specific payments types.”
|Tony McLaughlin, Citi|
Citi’s McLaughlin says the new developments in payments are playing to strength, adding: “Technology companies and fintechs will take advantage of open-banking APIs and new real-time payments and collections clearing systems to deliver next generation financial services.
“The threat to established banks and payment intermediaries is clear and present.”
Payment functions such as Android Pay and Apple Pay bring in a digital aspect, but ultimately are still tied to the debit or credit card of the user.
In India, Google has attempted to navigate this through its Tez platform. The mobile app allows payments to be made in-store and online, as well as transfers between users, with funds drawn directly from the bank account of the user.
The app connects to the existing unified payments interface standard, launched by the Indian government last year to push consumers away from making physical cash payments. Transactions made in this way do not incur a fee, making it attractive to business.
Running the risk
With all this change, McLaughlin says banks are running the risk of being left behind.
“Banks are well aware of the risk of disintermediation from fintechs and technology players,” he says. “Sometimes they play not to lose rather than play to win.
“We would argue that as payments move from batch to real time, and as we enter a world hyper-connected by APIs, banks would be unwise to adopt a minimum-compliance approach.”
McLaughlin argues for the move towards request to pay (RTP), which sees the company making the pull for the funds directly from the customer’s bank account, rather than the current methods of the customer initiating the payment and it moving along the card rails.
Further, it allows the bank to retain some control of the transaction.
“RTP is a potential breakthrough in C2B and B2B collections, dramatically reducing cost of collection, increasing security and straight-through reconciliation of incoming payments,” he says.
The method might work well in replacing the use of direct debit, especially around the payment of bills. McLaughlin suggests it will be especially welcome in B2B payments, as it will bring greater control. And he argues that the system makes it more secure.
“There is the potential for errors to be reduced,” he says. “As the customer is the one that validates the transaction, it removes the risk of human error, with them inputting incorrect payments information, like sort code and account number.”
The mechanics of how RTP works means the customer will always give the final authentication of the payment, but this might slow the purchase down.
“For RTP to work it needs to be agreed by the customer, so this does have the potential to reduce fraud,” says McLaughlin. “However, that need to obtain consent from the customer is also a source of friction in the checkout experience.
“We need to get to a risk-based authentication approach in order to deliver the best of both worlds.”
However, Standard Chartered’s Penna is not as convinced of the benefits of such options RTP.
“I am not so sure the pull option to receive payments will be as popular, especially as we see reconciling of push payments being even further improved,” he says.
The arrival of open banking and real-time will have the greatest impact on opening up options, according to Penna, especially as the use of ACH [automated clearing house] and batch clearing diminishes, and processes such as FX in cross-border payments move towards full automation.
“The arrival of open banking and open APIs will have a huge impact on payments,” he says. “It will make it far easier to link up systems, and the cost of executing payments and managing accounts receivable reconciliation will drop. The end-to-end process will become much more automated.”
The implementation of mobile payments options, such as Google Tez, will allow customers to keep their personal details private.
Penna says: “With accounts receivable, it is now possible to process mobile and instant payments in full automated manner. The mobile phone number or the email address of the customer can be used as the unique identifier, enabling automated matching to the customer record and outstanding receivable.”
McLaughlin notes that for systems such as RTP to gain traction there are steps to be taken still to ensure it works as smoothly as possible.
“The rules around RTP do still needs to be worked out in detail, for example the rules and procedures for consumer redress,” he says.
However, is there a need to create another method of payments in an increasingly busy world?
Penna argues that the improvements being seen in the payments space overall will make the need for systems such as RTP obsolete.
“It is possible to centralize the reconciliation processes and automate receipting of incoming cash flow,” he says. “Push payments in the future will solve reconciliation automation, but the pull method will always find itself facing limits on how many customers are prepared to support this option.”