Less Cash, More Checks?

As a rule, banks rarely lead the way with technical innovations; many banks simply copy what other banks do. So, when a telecommunications company, Western Union, made the first electronic transfer, over 100 years ago in 1871, no one could have predicted it would signal the start of Fintech and one of the most exciting digital revolutions in one of the most traditional of services - banking.

The rise of Fintech

Since then, the efficiency and security of the new world banking system have been and remain exponentially linked to technological advancements. The race to acquire and retain customers is constant—and digital innovation, especially around payments, is growing faster in importance than any other feature. According to global management consultants, Kearney, payments is now a massively strategic issue for banks. In America today, according to Mckinsey & Co Consumer Trends in Digital Payments, not only has digital payments penetration increased to 89 percent in 2022, but the share of respondents who report using two or more forms of digital payments has grown even more rapidly—from 51 percent in 2021 to 62 percent. This percentage is only set to increase to eye-watering figures; Statista’s projection is that, globally, the total transaction value in the Digital Payments sector will reach US$9.47 trillion in 2023. In the UK alone it is set to rise to US$433.60 billion.

Back in the 1980s ATMs facilitated the widespread use of debit cards, while the personal computer gave customers the ability to access data remotely. Once the internet took hold this provided the perfect infrastructure for banks to provide an online banking service to its customers. Shortly afterward the proliferation of mobile devices in the 1990s led up to the first i-phone being launched in 2007. These technologies allowed people to use their credit/debit cards data over the phone and online, wherever they were in the world. The development of e-commerce sites and social media in the 1990s promoted the use of online digital payments as an increased use of basic data matching systems enabled companies, such as eBay, Alibaba and Amazon, to collaborate with third-parties using IFP data sheets and block cipher techniques. Open banking was born.

Global pressures

PayPal transformed digital payments when it first entered the market in the late ‘90s, and they became one of the first payment service providers to be established globally. A lot of PayPal's innovation was unheard of at the time, being one of the first companies to allow payments via mobile payment apps and using their email addresses. By 2013, PayPal continued its drive to create a “wallet-less high street” when a small independent shop, The Tea Box in the UK, became one of the first high street retailers to allow customers to pay using facial recognition on their mobile phone.

Eight countries in particular are at the forefront of this drive to eliminate cash and become totally dependent on digital payments, notably India, Japan, South Korea, the United Kingdom, the USA, Nigeria, Thailand and China.

Putting the customer first

To remain competitive banks have had to meet increasing customers’ demands for efficiency and security. Shipping cash globally became a thing of the past when the telegraphic transfer enabled global payments to take place in days, rather than weeks. Today, we are able to make electronic payments almost instantly, within seconds.

Today, as it has always been, security breaches and risks for data security are the biggest concern among consumers and can be considered a key challenge for the adoption of digital payments, especially when it involves emerging technology. Alibaba introduced an escrow-based online digital payments solution Alipay in 2003, as there was a growing distrust towards online transactions between strangers. Alibaba would hold onto the buyer’s money until they confirmed the goods have been delivered, aiming to build back the trust towards internet shopping at the time.

From reactive to proactive

Socio-economic factors play their part in speeding up the adoption of new technologies in a way that no one can predict. The collapse of Lehman Brothers bank (2008) not only shook the banking sector to the core, but also damaged the public’s confidence in the traditional banking system.  In doing so, it created the perfect platform for for less traditional, more digitally-focused disruptors to enter the market a short time later in 2016. The emergence of  new online banks such as Monzo, Atom, Revolut and Starling broke down traditional perceptions and made it far easier for customers to switch banks. At the same time, Bitcoin took the market by storm as the first cryptocurrency to threaten the traditional banking system. At first, it wasn’t taken seriously and was seen as just another computer gamers dream. However, a plethora of digital currencies over the past decade has led to a cryptocurrency market worth US$1.18 trillion. Cryptocurrency will continue to be a challenger in the global financial marketplace. As such, a number of governments are now seeking to capitalise on the technology that powers cryptocurrency by investing in their own digital currencies.

Meanwhile, Covid-19 which enveloped the world in 2020, served to boost the use of digital and contactless payments and catapulted retailers and their customers around the world into a predominantly cashless society. According to Ace Money Transfer in 2020 alone, over 70 billion digital transactions occurred following the pandemic. The pandemic also created a challenging operational environment for the banks as more customers began to switch primary banks. As a result, the need to adopt an enterprise payments strategy that drives innovation and attracts and retains customers started to become important. This allowed a financial institution to simplify their payments infrastructure and deliver an effective payments strategy on a single, integrated, real-time platform. It promised intelligent, automated and centralised payments processing and liquidity management across all payment types and clearing schemes – real-time, low value, high value, SWIFT and correspondent payments – through a scalable, open-architecture platform.

So far, the banking industry has benefited significantly from increased transaction speeds, security and global reach brought about by technological innovation. Open Banking and Enterprise payment solutions have allowed banks to keep up with the demands of their customers in a more competitive marketplace.

Only now by being proactive on the technical and digital payments front, will banks have the ability to remain competitive. What we can be certain of is that the industry looks set to become increasingly reliant on Artificial Intelligence and Open Finance. Where a few lead, others will be sure to follow. Born out of Open Banking, Open Finance systems will use API’s for pooling and sharing financial data across various types of organisations to meet increasing customer demands for improved, more convenient and efficient payment capabilities. With this burgeoning of responsibilities upon multiples sources, the need for testing as part of building a resilient payment system has never been greater.

Will FY 2023/4 be a year steady growth or does the market have another series of challenges to face?  Register with us to Contribute, Learn or Participate in Roq’s forthcoming series of articles and events on digital payments that will offer the opportunity to share your thoughts and join in the debate.