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The world of payments continues to face tremendous challenges and transformation primarily driven by technology and regulation. Think digital wallet versus paying cash, and what’s more how the digital wallet has evolved. But that’s just one part of a picture that is transforming the way consumers spend and pay.
APIs can potentially change how we work, play and spend. They can allow consumers to make payments and do their banking outside the banking environment in third party apps, for example a department store app. Third parties can design apps to their own requirements and embed APIs in them to tailor the customer experience to how they want it to be.
With APIs for real-time payments and real-time balance updates, the real change is how consumers adopt new real-time payment technology and how businesses understand and create value from rapidly changing customer behavior.
The macro-economic environment and the technological momentum in our world offer businesses and banks not a spare moment to waver. E-commerce and M-commerce around the world is booming and by the end of 2015, mobile commerce sales are projected to hit US$132 billion in Europe and the US, growing at 25% per year. Asia is another potential hotspot as well.
For a sense of the potential, to date, the UK has the most advanced real-time payments systems, with over one billion transactions per year, but this barely includes any transactions from P2P, ecommerce or mcommerce.
As these uses take off, UK real-time payments could easily double or even triple in the next five years. This is only one market in question. Another example is the spectacular growth of Venmo over the past two years (reaching $1.6bn in Q2 2015), a US real-time payment overlay service. This shows the demand for real-time P2P payments and the potent combination of payments with social media.
Capitalizing on such growth requires, in tandem, real-time payment systems that are efficient and trusted by consumers.
Based on Accenture analysis, more than 50% of payment revenues are at risk – 35% in interchange fees, and other innovations from non-banks such as e-wallets and ApplePay which can affect the remaining 15%.
The growth of online transactions and the greater potential with the widening Internet of Things are driving banks to understand the situation better, to cautiously overcome change while ensuring they minimize business risks. Banks are hungry to find revenue sources such as from overlay services, to reap more revenue from real-time payments – one path is to develop P2P real-time payment services, monetizing them by expanding them to ecommerce and mcommerce.
Real-time payments are core to the digital economy – a broad ecosystem that is underscored by a connected economy – from almost everything we do at home, to our healthcare providers, to manufacturers whose goods we purchase from, to the cars we drive.
And each one is a point where payments can potentially be initiated from, for example from electricity meters, road sensors, even delivery drones. Because of that, digital commerce demands 24 hours a day and 7 days a week real-time payments – real-time in availability of funds to complete transactions and real-time confirmation, in milliseconds end-to-end, that funds have been transferred and received.
This is a complex ecosystem, involving not just devices but applications. Banks have to connect bank accounts, digitally-enable them to make payments, at any point in the ecosystem through any device. If banks are not enabled in the digital economy, others will step in – and are already doing so, Venmo for example is owned by PayPal – relegating bank accounts into “dumb” accounts to feed the digitally enable accounts of others. Banks will lose direct connection and a daily point of interaction with their customers.
With the onslaught of such competition, banks have to realize they should not aim to own the entire set of innovation in the payments space, but shift their mindset to collaborate with new innovative players.
With this vast potential to be reaped, banks should move beyond the humble bank account and experiment with new payment propositions, including the internet of things, to remain at the center of payments in the digital economy.