Digital Economy: The future of payments
Hello and welcome to the economist. Intelligence Unit Digital Economy podcast. I'm your host pizza. This is sponsored by DMC technology an independent IT services. Company that specializes in digital transformation. We thank them for their support payments. The Workhorse of the global economy the most numerous form financial transaction changes to the way in which consumers and companies make payments have implications for businesses of every kind the payments ecosystem has seen considerable innovation in recent decades from the back end infrastructure to the point of sale most recently the launch of payment services by the likes of Apple Google of Mart. We entrance a big tech into the frame in this episode of the Digital Economy podcast. We explore the present and future of payments and ask what the digitization of payments means businesses in the economy with particular reference to the K. K. Is a country that is adopted many payments innovations faster than most and it has risen to the challenge set by the European Union's Second Payment Services Directive which requires banks to open up their payments infrastructure. The resulting open banking promises to unleash even greater innovation by reducing the barriers of entry to the payment services market the UK's experience therefore is likely to foreshadow the evolution of payment systems around the world. My guests this month are Adrian. Buckle head of research portrayed dissociation. Uk Finance Steve Everett Managing Director of payments for global transaction banking Lloyds Banking Group and Fiona Roach Canning Co founder of UK based Fintech pollinate. I started our conversation by asking Adrian. What explains the apparent outbursts of innovation around payments in recent history? That hasn't been a lot of innovation. I'm payments in recent years. Although I think the changes in consumer behavior the patterns of payments that we've been seeing over the last five years probably driven more by innovations. That happened in the five years before that because people are very much creatures of habit when it comes to the way that they pay for things. It takes a lot for people to decide to change the way they pay and slow for example. The things that we've been seeing really growing over the last five years one of the key examples would be contactless payments and that has really exploded since about two thousand fifteen but actually the first contact and contactless cards were introduced in two thousand seven. So it's taken a long time for consumers to come round to the idea of contactless cards and then really take them and use them in a huge way such that by twenty eighteen. I think one in five payments made by consumers were made using contactless cards so we have seen some real innovations and real changes some of that due to changes in technology so for example contactless technology coming in but also mobile devices. And the fact that we're now all essentially carrying a mini computer around the time which gives us access to a huge amount of data and huge mountain information but also regulatory changes which have opened up the information that banks provide access to in the ways in which we can interact with all banks and those are going to provide changes that perhaps haven't had an impact on consumer behavior in recent years but are likely to be really key defining factors in the way that we pay for things over the next five or ten years you talked about how a contactless payments took a while to take off after day where the technology is originally released. What was it that catalyzed doctrine for for contactless payments here in the UK? Yes I think. When payments when contacts payments are introduced. We were very much in a situation where the card. Issuers didn't want to issue the cards until retailers have the call acceptance devices in place for people to be able to use those cons but at the same time the merchants card acquirers didn't want to spend the money on installing new card acceptance devices until consumers have the cards. And so you've got a classic kind of two sided market where both sides are waiting for the other I happily in the UK transport for London steps into this situation and they had seen that's great potential for the use of contactless cards on London transport. Systems place where a version of contactless was already in place. The proprietary system known as that transport for London uses and they realize that actually if they could encourage customers to over to using their contactless payment cards instead that it would save a lot of money for them transport for London in terms of the cost of running the system and so what this meant was transport for London encouraged. The KARDASHIAN was to get the cards. Outings consumer's hands and having out in a familiar environment that gave consumers more confidence than take the extra step to try to new retail environment. And so it really did kick start consumer adoption in a big way in this country so from a consumer perspective and Adrian says as Londoners. We're all familiar with the impact of for example contactless payments on our lives. Many of us will use it to get around the city a but what's happening behind the scenes. Steve What is this innovation meant from affects perspective? And have you as an organization had to adapt these payments methods of come into practice yes sir agencies kind of picked up very much on the context but if you go back got five years you know there was so much? Being bought with cash still. Physical crash was still there. Sixty percent transactions sort of five ten years ago was still with physical cash. That nats thirty percent and you look at the numbers that have been predicted. He's twenty twenty five sub Timpson. So so what if we had to work from the commercial banking sawed Lloyd's banking group and we have to work with those businesses that accept payments. And whether that's tear fail whether that somebody hospitality your restaurants and what have you. They need to be like. We used to be able to work with continually around their physical crash proposition. How do they get the cash out of their premises back into this? What we had to do that to to the rising conflict class so there was a lot of work in acquiring business about being able to get the adoption of people to take cards and particularly contactless cards. And that's been a been a big drive but actually what's also happening behind. The scenes is open banking so we see no from banking in new in UK now for two years with NAPA PSD to in Europe and open banking as it comes into many other markets around the globe be starting to transform the way the people and not just banks can starts in third party. Payment providers can start to come to the fore so we've had to make that investment because we have to adhere to the the regular listeners. Who may not know? Could you describe what open banking is? And what is and what it means in particular for payments so from an open banking perspective all of the UK banks Nine nine banks in Yucai hats. We Nabl third party providers who would be approved by the open banking entity and the FBI could access certain types of consumer accounts and business accounts and that meant that third parties could get access to the data in those accounts and pull that data into their own propositions and importantly then starts what she might payments now. The key here is that these. The parties have to be approved. So it's not just anybody can can into the spice but equally the client consent so me as a consumer. I have to give consent to that third party to go and access my my bank accounts at your wherever my mind. My chosen monkeys now. What that makes us far more easier for for new entrants toy into the market and therefore drive propositions it equally gives the banks. The opportunity to develop new propositions pollinate is a FINTECH that allows banks to make greater use of it that payments data and offer value to their customers. What are the developments in the payments infrastructure? That makes that possible. Could you be existed? Ten twenty years ago so great question so large retailers have been unlocking the power of their data for many years. If you look at somebody like a TESCO or Sainsbury's they've had the infrastructure to pull together their payments data. They're put level data and then then knowledge of the consumers and use that to drive massive sales and marketing campaigns through next own TESCO club called the innovation. That's been happening. More recently. Is that entrepreneurs and small businesses can also have access to that. There's now a plethora of companies that allow small businesses to have loyalty programs sales and marketing programs point of sale. I'm what pollinators allowing small businesses to do is rather than have two or three different services that they have to work out how to port data from one to the other they have to manage the permissions regulation around that data policies in the payment data to allow small businesses to more easily manage and grow their businesses by knocking the that data so rather than on a Sunday night. When you want to be having dinner with your family Downloading all of your transactions into excel to. Send them to your accountant. Accountancy we can enable that other click of a button more more generally. What role do you see? Fintech having independent in ecosystem now as a result of open banking is Steve is described as more opportunity for entrance to market. What what role do you think INTEX will play? So banks have traditionally been focused on the financial life of that lions and that is starting to change so what we're saying is challenger banks are offering their customers access to a much broader ecosystem of products and services often offered by INTEX. The hard thing for small business is being able to piece together the right solutions for their business and one of the things that we really liked about working with World Bank of Scotland is that they had a vision to return to the heart of the community in the heart of the High Street by being that single point of contact for small businesses to bring together that fintech ecosystem and for banks. It's always going to be about prioritization. Steve I'm sure you can agree to this. This regulation to adhere to large platform. Mike rations and what Fintech scan do pollinate is one hundred percent focus on that one pain point that they're solving for the merchant whether that be being able to digitize loyalty scheme or be able to more easily have their data flow into an accountancy package. And that's where I think you get the willpower of banks working within techs I at completely dose Rj. So if I go back and think about the big change programs I was doing ten years ago pretty much. All that tech was built in house now. Most Freebie changed program I do. There are third parties involved right. So we've just put in your cash payments platform for some of our largest corporate institution flights. We've bought that from what I'd probably call big tech but actually the beauty there needs to be to take that work within tech's to develop by. She say Niche Need Resolve Niche. Pain points that you may put two or three different solutions together from three different. Fintech and actually for the collective power of that and the speed to market in New Delhi. To experiment is kind of changing in terms of our ability to get to market and stevie mentioned apron banking We've had the privilege to build wilbanks. Liz Open banking solution for them called PADS Which is live online and live in pilot point of sale as well and the interesting thing about open banking. You talked about the two use cases one to request information and the other to trigger a payment and I think something like nine thousand nine point nine percent of course from companies at the moment is all about the information so we aren't yet really seeing that innovation in different ways to pay and to Adrian's point consumer creatures of habit and cash works really well for consumers in the moment and credit cards. What really well for consumers so until consumers given a reason potentially by banks or even by merchants because it's cheaper for them to adopt those new means of payment. They are going to stick with what's comfortable and what works an Improv. Something that I've been saying. We obviously get asked a lot. What is going to be the next big successful payment method or indeed? How much of shopping can we expect to move over to open banking in the next few years and exactly this point until we see a convincing reason for consumers to change their behavior whether that's Something that's more secure something. That's faster something that provides them with the discount will be ability to collect points or some kind of loyalty reward until we see some kind of use case it can be the best thing in the world from the point of view but it does nothing in it for the consumer. You haven't got a chance of persuading the consumer to change their behavior. I do feel like I should ask. Now what is the next big payments innovation again? I mean in terms of looking at if we look at the pattern of behavior so the big things that have been successful in the last five years of the things that were already around in the market in the five years before that so again I think you know the things that are talking about these open. Banking solutions and fintech driven solutions are likely to be the things that will shape the future payments over the next few years. So they're things that already exist. The difficulty is plucking out of the Murray. Add of fintech solutions. That are out there. Identifying not one that suddenly going to catch the public's imagination and really take off. There are some things that you can predict. You can see you can assess the level of usability that something has you can look at the factors that might make them more attractive to consumers but at the end of the day picking out the factor that will suddenly make something takeoff can be very difficult. It could be something as admiral as a tweet by Kardashian mentioned product and suddenly everyone wants to use it so both kinds of things. It's that kind of trying to lighten if I could predict exactly which was going to be the most successful. I would be a very richmond. Indeed so my view would be consumers. Don't know what they want done. What's available the drivers for these are the culprits are the merchants of the institutional clients that we talk about and my experiences. I getting a card out and having to put a sixteen digit numbering to a payment screen. Right I won't frictions as possible and you could say that is because the payments Geek. Because that's that's my job but that's what I want but at the moment unless I think about good things like Dr. It's standing orders. I am pushing the payment to the end recipient with time and almost all of my payments are going to businesses. There's very very few payments. Where making it from me as a consumer to another consumer so actually if I can get the corporate or the institutional client or the merchant to pull the payment for them. We have to push it. I think that's where the game changing is going to be going to come and I think that's where with what we've seen here in the UK with open banking combined with the maturity of instant payments. Right we've had instant payments now for eleven years. I think it is and that means that that we can pull payments. Now you know as long as you've given the concentric for the open banking scheme to be able to just let the corporate the person you're buying from pull that payment and that doesn't matter whether it's a merchant where it could be your water company could be your mobile telephone provider and if you look out to to Asia you go around. Singapore almost a free payment journey has being pulled through. Open banking using. Api's APR technology has really kind of been come. John Game. Changing the last couple of years so I think that that that gang changes can accomplish gonNA come from poor payments from the corporate to the consumer. Although as I say on that it is still for the use of the person making the payment. They need it to be simple to use to tive and as the minimum at least a good as experience as they currently have by paying with the caudal pain with another payment method. I'm ideally they need some additional benefits to to spur them onto jabs behavior. And I think it's that part that needs attention at the moment. Yes it's very clear. What's in it for the merchants and on that on that side? But it's communicating. What is in it for the consumer? What's in it? And how is this going to be presented to the no? I'm sure and that's the challenge. Sheriff in the commercial banking client base. They all operate in different sectors. They all may therefore have the ability to to change the way in which they're they're they're consumes customers pay them and it might be different charts all today. It may be eighty eight may be a discount. It may be but badge. This is why we haven't yet seen it. I think because of because open banking settling DAS- settled down inch pumps. This is now the opportunity to people to get him. We're seeing more and more clients. Come to say that you. Can you help us explain that? Can you explain what it is? And what the opportunity is so payments many spaces where we've seen incursion of of Steve mentioned big tech. We've seen the Google and apple. Watch their smartphone and contactless payments based features? What impact has that had? Let's let's say on the UK payments ecosystem and what impact to expected to have google uncle? Pay Apple pay launched thinking 2016 winning twenty seventeen. They have had a lot of take up in a very short space of time but they are really in the UK. It's the next step on from contactless. So it really is a kind of progression from the consumer's point of view. People start using contest payments using a card and then we're seeing the move onto them store the card information on them about device and then just use that device to initiate the payment instead. Certainly we have seen a lot of success. We've seen a sixteen only about two percent of people in the UK had signed up for we'll pay but by last year this was up to about one in six people registered. For at least one of these services that's driven by the fact that now when you get a new handset automatically takes you through the steps to set up one of these services but also looking at it we are seeing people now increasingly actually making use of the service to make payments and using it more and more regularly than Manhattan. So it's taking a while. People were first of all. You have your early adopters using it a lot but most people were trying at once and twice monitor twice and perhaps taking some time to become convinced about it but now we're seeing an increasingly high proportion of people using it on a very regular basis and is starting to take traffic away from people using a contactless plastic card and instead moving over to initiate the payments using their phones. You talked earlier about the sort of untapped potential of payments data in the valley and we know that big tech giants are nothing if not excellent it analyzing data and extracting the value. So what what is your aware. Are they doing with this data? Could they be doing this date? So if you look at companies like Google or Apple Amazon or Uber. What they're trying to do is create really engaging customer experiences and you could argue actually. They're trying to minimize the friction around the payments. I think animism was the first to do one. Click payment a couple of years ago. They didn't ask for your three or four digit security card to do that. And that's because they're trying to get the money out of the consumer make sure they don't lose that transaction uber well pioneered the invisible payments and apple seem to be using payments to drive the ubiquity of their hardware and is potentially less about the payment data itself and more about driving their own business models. Payment there are companies. Who are coming in. And they're definitely understanding both the value of the payment data and the value of that customer relationship. I was in Australia two weeks ago. And a bank is understands that a payment business and much requiring relationship is the first relationship in but also the first relationship out and so when they can see somebody. Sign out with a new merchant acquirer. They know that they're very likely to lose that. Banking relationship the financing relationships. That off the back of it which they know worth multiple times the value of the relationship so I think banks are definitely watching the the tech giant's to see what they're doing payments but in general actually the large tech companies aren't necessarily using the payments data themselves. They're just trying to minimize the payment to drive business models. What was talking about payment data? Are there any particular? Privacy concerns arise from the use of payment. Data is it regulated in any particular way. Their specific concerns that that you need to deal with any company. Managing payments needs to talk about so holidays. Very lucky in that we came to life in two thousand seventeen say the laws around general data protection already in place and so our platform is designed with privacy at his heart so one of the tenants of GDP for example the right to be forgotten. Silver Consumer says actually. I want you to erase everything you know about me. Platforms designed to make that very easy. Whereas other companies had to understand all the places that data was and design entire new sets of processes to enable that customer to be forgotten Payments Day. So you can learn a lot about an individual so for example if we let your current account information we could tell not just that you drive a car. We could actually tell the specific car that you drove because your registration is returned. As part of payment information we could work out your fuel consumption by the amount. You're topping up. We could probably work out. How many children you have whether you're an environmentally conscious purchaser whether your price sensitive so you have to be very careful around the personally identical identifiable information that you find in payments data and consumers have a lot of trust in banks being able to do that banks have a long history in appropriately using payments data. And that is a concern about giving data to tech giants. Who Don't necessarily yet half that trust. I think it's also one of the challenges with open banking as well as how do you empower the consumer to who has access to their data? And how do you enable them to differentiate between who is a licensed approved and regulated business? Who is going to be responsible and deal with their data in a responsible way and how do they distinguish them from someone who is perhaps a fraudster or scam artist or someone who is out to either still data and use it for nefarious purposes or alternatively initiate the payment that the consumer does not wants to be made so there is a certain amount of work that still needs to be there in terms of both consumer education but also the signaling to the consumer to enable them to make that distinction? Keep themselves safe when shopping online. And when using these new kinds of services Steve. Another common concern discussed when we talk about. The digitization of payments is the risk of exclusion financial exclusion of people. Who cannot or will not do not want to use digital devices for their payments. How great the threat duty this is. And obviously Lloyd's is a bank on which many people live their financial livelihood. What are you? What are you doing to manage this transition? So I don't see it. As a M Notre yes of course. There's a driving growth of digital payments quote the stats earlier but the reality is not everybody has smartphones. A large proportion of the people still don't have a smartphone just do not have an IPAD and therefore even if they use online banking digitalize. There's an awful lot of challenges around broadband in this country so so therefore when you turn it back into the is again as I said I keep unfortunately commercial commercial client needs to be able to accept payments in many many different forms if they can utilize them then that's great for them because it's more efficient frictional etc but but where people haven't got the finds the haven't got proper next that to take pay to different ways so they will continue to take payments for cash they will continue take Dr Davidson standing over this. And yes they will give continued to create alternative propositions around digital payments that may make it easier for for their consumers so so as not twenty five. Ten percent of transactions will still be physical cash right so there is a challenge and absolutely and we need to continue to work by ourselves as bank to two propositions to our clients important for our clients to make sure our clients are still around in ten years because they got the best propositions to take payments in all different forms Adrian duty. The so-called debt of cash is even a plausibility in the near the medium-term. I mean obviously we are. We're in a situation where the use of cash declining you only have to go back ten years to see at that point six out of ten payments in the UK were made using cash but by last year that had fallen to less than three hundred ten and in our latest forecast. Where Steve's referred to predicting that less than one in ten payments will be made using cash however fat should not be underestimated that is still a very significant and very important payment method and although we hear a lot of discussion about the move to a cashless society Marlboro. Actually seeing is a move to a society where we use cash a lot less than we did and indeed some people may start living. Tasha's lives and in fact we're we're seeing already. As many as ten percent of people already living their lives essentially cashless using cash in situations where they can't use another payment method but at the same time there were other people who very much prefer to use cash. And we'll continue to do so. And so what we're seeing is the challenge really for the industry is to move to a situation where we can amend the infrastructure which was designed for an economy that ran very much on cash and we can introduce a new wholesale cash distribution infrastructure that is efficient and is going to be able to keep working and getting cash out to the places where it's needed in the fish and unsustainable manner because the systems that we've got at the moment we're designed to a situation where seven out of ten payments were made using cash and as we're moving to an economy by maybe only one ten made that way. We're going to have to find a better way of making the sustainable unworkable for everybody so to to finish. I'd like to ask you all. Where is this taking whereas the innovation around payments that we've discussed and in particular the digitization payments whereas taking us as consumers as businesses and the economy is a whole? Let's start with you. I think we can all agree that the digitization of payments and the data that it creates will be a net win for the economy as a whole similar to the way that there were some losers when Google came into advertising by the yellow pages for example the net benefit for the economy was greater. I think it will be the same in terms of access to payment stage when the companies that that creates in terms of where it's taking consumers emergence go to one of Adrian's earlier points. It's really really hard to see what will be the next innovation in payments. But it's got to be that sweet spot in terms of what is meeting. The consumer needs cash has great benefits for consumers. I was in South Africa last week. And there was a whole line of people queuing opportunity to take out cash to join another really long queue to hand over again and making money transfer but that trust in physically holding the cash. The tangibility of that and the control it gave them was incredibly important. And until there's a payment method that makes sense for merchants because it's easier because it's lower cost and that provides those benefits consumers whether it be convenience whether it's control whether it's the tangibility and that sweet spot comes together to to cause that next leap. We don't know what that is yet but it will be fascinating to see. Sosas taking it so I I mean I think we work in the payments industries and incredible time to the payment industry because of all of this China innovation and in enhancing technology to really develop new propositions for for consumers and corporate clients. So we're going to see a convergence between cards and instant payments instant payments. Aaron out. Something like nearly thirty teams around the globe open. Banking is opening up fifty two across a across Associate across Europe and that's going to create completely new propositions in new wise in which we make payments whether that's qr codes haven't they haven't hit the the Western world yet. Actually and she should see South Africa. I was paying with. Qr codes only six. That I don't know where we will end up digital payments will come to the fore but physical cash and checks and traditional electric payments will still still be there. But you will see. New Payments is now be driven by the commercial clients into their consumes. Adrian I'd say for my view having been monitoring consumer behavior for the last decade. The one thing that comes back to me time and time again is that consumers really value choice and the value being given the choice of how they want to pay and when they do that they choose the method that is most convenient for them or the most secure for them or indeed provides sava some other benefit so I think it will be important to provide choice to consumers but also consumers react very badly to have any of that choice. Taken away so again. It's incumbent on the industry to ensure that as we move to bring the benefits of new digital payments to consumers that we don't forget those people who greatly value and prefer to use more traditional payment methods and so it's about bringing them the benefits of new payment methods to as many people as possible including educating about what those benefits could be for them if they haven't tried out new payment methods zip but also ensuring that people don't get left behind and don't get limited in what they can do. They can shop. They can buy and they're still provided for in an effective way and I think the one of the thing is around control. Consumers have a great need to feel that they are in control particularly because this is their money and so anything any system that comes in new payment methods that come in have to provide effective and simple control to the consumer. If they're ever going to be widely adopted agent Steve. Thank you very much for joining us. Thanks for listening to this episode of the Digital Economy podcast attacks again to our sponsors technology an independent. It Services Company that specializes in digital transformation. If you haven't already done so please. Make sure to subscribe on your platform of choice tune in next month when we'll be exploring the digitization of manufacturing.