The rise of digital payments

The payments landscape has undergone great transformation in recent years. In-store methods have transitioned from swiping and signing, to chip and pin, contactless and now cardless. Where once we would have used cheques and cash to send payments to friends, we now use online bank transfers, mobile transfers and even nearby payments. Companies such as Western Union and PayPal have reinvented the way we send and receive international transfers. Payments that were once timely and costly have become close to instant and almost free.

Companies such as Western Union and PayPal have reinvented the way we send and receive international transfers. Payments that were once timely and costly have become close to instant and almost free.

Many stores that used to be ‘Cash Only’ now find themselves, unsurprisingly, with a ‘Card Only’ policy. Global brands, such as Amazon, are leading the way among retailers in leveraging advanced payment technologies to remove friction from the retail experience. Both online (Amazon Pay) and within brick and mortar stores (Amazon Go), customers have a seamless experience. Even buskers in train stations and market stalls are now equipped to take contactless payments with their own iZettle card readers.

As a result, sending and receiving payments is becoming easier, faster and more convenient for consumers. But what does it mean for banks and payment service providers? Especially those whose infrastructure was not built to maintain or compete within today’s digital payments landscape.

Sending and receiving payments is becoming easier, faster and more convenient for consumers.

Starting from scratch: rebuilding payments architecture

We live in a world of instant everything. Despite this, many legacy banks still fail to process payments in real-time due to their in-house payments rails. Instead, these payments are often facilitated by clunky and inflexible processes that were not designed to facilitate real-time processing. On the contrary, challenger banks such as Monzo and Starling Bank have built their innovation-fuelled infrastructures from scratch. They’ve created a payments ecosystem that harnesses real-time functionality. This technology facilitates fast, automated payments, and is also simple and adaptable. Consequently, the systems can seamlessly integrate into front-end technology, with the ability to adapt to infrastructural changes and evolving regulatory requirements (such as PSD2).

This ‘start-from-scratch’ approach is what has allowed challenger banks and modern PayTech players to build these non-traditional rails. Legacy banks do not have the same luxury. With aged architecture at the core of its technology and strict clearing requirements imposed by regulatory authorities. These banks have two options:

  1. they find a payments technology partner to provide their required payment rails
  2. they completely overhaul their payments infrastructure and start from the beginning.

We have seen large incumbents take to option 1 in partnerships such as RBS with Starling Bank or Nationwide with ClearBank. The mark up per payment (often significantly higher than the going rate) can be a clear deterrent. The alternative (option 2), requires a large and costly operation, fresh technical expertise and a huge, and potentially risky, migration of services and customers from one system to another. Coupled with the recent and record-breaking number of unplanned outages and technology failures within banking, this strategy isn’t for the risk averse. But perhaps this is an inevitable eventuality for incumbents. The payments industry shows no signs of slowing down or waiting for the banks to catch up…

Keeping customers

When it comes to payments, companies and consumers alike will only be sending and receiving more in the next decade. Whilst digital banks have built these features in from the get-go, can they keep up with the volume of consumers? The incumbents are failing to meet the expectation or demand.

In the next article in this series, we’ll take a look at some of the ways retail banks are hoping to keep their branches, and customers’ accounts, open.