The World Payments Report (WPR) 2012 highlights a steady growth in non-cash payments’ volume globally. The main drivers of this 7.1% increase in electronic payments in 2010 have been the emerging economies, with Brazil now representing the third non-cash market, after the US and Europe.
The eight edition of the report, from consulting firm Capgemini, The Royal Bank of Scotland and not-for-profit Efma, shows that cards continue to play the greater role in the war on cash. Plastic accounted for almost 60% of all electronic transactions. Smaller ticket-transactions have become increasingly popular, promoting the usage of debit cards. These now constitute over 30% of the overall 283bn electronic transactions’ cake.
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The 55-page report also stresses that the rapid growth of mobile payments has been underestimated by last year’s study. According to the WPR, m-payments are growing by 52.7% and faster than e-payments, compared to 2009. The combined figure of web and mobile payments was 22.5m transactions in 2010, the year to which the study refers.
The WPR data has to be viewed in the context of intense and ongoing regulatory activity by governments and institutions globally.
Regulation: beauty or the beast?
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By GlobalDataThe report states that the breadth and depth of regulatory and industry initiatives is driving industry transformation. It says: "We find that while ‘regulation’ is often synonymous with ‘constraint,’ some regulations are actually enabling payments innovation, directly or indirectly".
The first example offered is that of the Single Euro Payments Area (SEPA). The migration to a new common European system has now the mandatory deadline of February 2014. This new legal certainty is seen as the chance to accelerate the process and, at the same time, to move beyond the compliance aspect and concentrate on its potential as a platform to promote competition, efficiency and innovation.
Theresa Connors, RBS director of marketing engagement, says: "A common platform will enable banks to really maximise potential innovation in cases such as invoicing, for example".
Connors also stresses that "banks understand the need for regulation. We support the drive for common interpretation and implementation and one of our mantras is that we would like a level playing field across the globe."
However, behind the general assertion that regulations can foster innovation, the report notes that they can also represent a hurdle.
Continuing to use Europe as an example, the Eurozone debt crisis has accelerated the compliance-impetus towards some Key Regulatory and Industry Initiatives (KRIIs) such as Basel III.
Banks are acting faster than originally expected to Basel III, but this rush has a downside: it is challenging their ability to innovate, "since meeting the considerable imperative to comply dominates time, energy, and financial resources", testing their ability to invest in new technologies, according to the WPR.
Furthermore, regulations impact one another, and continually evolve, requiring constant monitoring and attention. Regulators and market players "need to look at all current regulations holistically, carefully gauging the impact of each regulation on the others, and the net effect," the report says.
Capgemini chief sales and marketing officer, global financial services and Asia Pacific, Jean Lassignardie describes the potentially negative impact of regulations in explicit terms: "The regulatory snowstorm has not let up: the problem was highlighted last year, but we haven’t seen any structured integrated plans that cover everything. And planning for each is difficult."
"It is a major issue, and payments regulation is becoming an industry in its own right," Lassignardie tells Electronic Payments International.
From this starting point, Capgemini amplifies a concept only hinted in the report: "There is an argument that regulation is stimulating innovation, by creating a level playing field. However, we also observe in the report that all the many hurdles to regulatory compliance are taking funds from innovation."
"As such we are unable to conclude as to whether regulation is hampering or driving innovation. Our main conclusion on the matter is that regulation is obviously unmanageable," he says.
Another important point highlighted by Lassignardie relates to the risk posed by regulation, which could create a counterproductive environment: "The defence industry uses the term ‘furtivity’ to describe the way military equipment is designed to avoid detection. And that term could soon start to be applied to the banking technology that will soon be developed to bypass regulation".
If regulations become unsustainable it may be easier to invest in ways of ‘getting around it’. For this reason, Capgemini says, the next major regulatory initiative should crack down on furtivity in banking, requiring banks to ‘reverse the proof’.
"The regulator should ensure the institutions are forced to put themselves fully in the spotlight, rather than building more and more sophisticated radars to detect activities they are not being shown," Lassignardie stresses.
On the other hand, the report shows how this type of initiative could drive innovation indirectly. This may happen because achieving compliance increases costs and payment service providers (PSP) are forced to consider alternative ways of maintaining profitability, "sometimes through operational models that deliver efficiencies in ways that customers rarely see," the report says.
What customers instead can see is the rise of new technologies. NFC or Mobile-payments are now buzz words and the report has no doubts in stating their increasing relevance in the payments’ landscape.
How should regulations interact with these new technologies? The research says that to be more relevant, the primary focus of standardisation should be core payments, rather than targeting e- and m-payments "prematurely".
"But when the focus does turn to standardization of e- and m-payments, it will need to be done in such a way that innovation can still thrive," the report states.
M-payments: small volume, underestimated growth
RBS spokesperson Theresa Connors describes the feelings of the industry: "The mobile-payment story is just phenomenal".
"M-payments are rocketing, currently they are mostly used in countries that have a largely unbanked population. These countries have fast forwarded the last 20 years of banking infrastructure, without investing in new architectures or having to keep up with legacy infrastructures," she says.
The optimism goes hand in hand with awareness that the huge growth in e-payments will not be without challenges. This is precisely because the many forms of contactless and m-payments are becoming more popular, competing with existing forms of e-payments.
The first challenge for the industry is that of convergence, and namely to develop hybrid instruments that combine various payment channels and enabling merchants and consumers to pay using online banking capabilities rather than cards. iDEAL, MyBank initiative from EBA Clearing are examples cited in the report.
The RBS, Capgemini, Efma research is optimistic about the future of mobile payments, in the light of the rapid rise in the number of smart phones.
Application stores, such as Apple’s App Store and Google’s Android Marketplace, are defined as "game-changers" for the mobile ecosystem, as they are making mobile apps more visible and accessible to consumers.
In the words of the report: "This is especially the case in developed markets, where volumes are currently low, but are expected to surge once near-field communication (NFC)-enabled e-wallets are launched.
"In developing economies, the growth in m-payments is being largely driven by the huge population of unbanked consumers, which can get access to payment services options through mobile devices. Recent industry projections are even starting to envisage an ‘all or nothing’ adoption of m-payments, with the upper-end ranges of usage seeming to be achievable given the widespread innovation in m-payments solutions. Several stakeholders are also pursuing a number of e-wallet initiatives, which fuse e- and m-payments into joint value propositions that are expected to boost usage".
Despite this momentum, Capgemini stresses how the 52.7% growth of m-payments was, once again, underestimated by the whole industry.
"For two years in a row the whole payments sector has underestimated that growth – even though it was aggressively predicted".
Especially for banks, underestimating the pace with which new technology is developing could mean arriving late and losing a slice of the market.
It is becoming more and more clear that banks need to compete with e-money institutions "or their lunch will be eaten", Lassignardie says.
The consulting firm highlights that the invasion of telcos and mobile payments vendors, plus the current enduring economic conditions, means that customer engagement is more important than ever, especially as the new entrants seem to have understood the need to move fast far better than the incumbents.
For this reason, the closing section of the report, The Way Forward, states that banks must continue to focus on innovating to meet customer needs and collaborate on a value-creating payments ecosystem.
Connors says: "Our focus on customer-centric innovation has never been greater."
The reasons being: the presence of new players in the market, the use of new technology, and the emerging markets making the environment even more competitive. Banks have to reason carefully on which investments really touch customers, Connors adds.
The report explains that the focus is on how the relationships between banks and non-banks will evolve in coming years and on the role the regulatory environment will play in shaping the relationship with players that are increasingly difficult to classify in the categories used by today’s banking system.
As users will continue to expect more choice and better service, banks cannot shy away from an open dialogue with all stakeholders, including non-banks and regulators, to make sure conditions remain ripe for innovation – to the benefit of customers, PSPs, and the global economy.
A final remark relates to the geography of payments evolution. If emerging economies are the key element in explaining the growth of electronic payments, the report stresses how the BRIC definition does not apply to payments, with Brazil moving much faster than the others in that group.
