Navigating Regulatory & Geopolitical Shifts in Payments

As digital payments gain traction, the financial sector is embracing innovative technology and open architectures to meet rising consumer expectations

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In the financial sector, particularly in payments, change is imminent. The disruption is caused by several factors, which are gaining enough traction in banks to modernise their payment systems.

The rise of a cashless economy is one of them. Rather than relying on currency, nations worldwide are vying to go cashless. For instance, several European countries are setting the bar for the transition to entirely digital transactions.

This rise in online and digital payments is the result of rapid urbanisation and technical development, which is exemplified by the widespread use of mobile devices and smart apps.

The impact of changing consumer preferences on payment methods

As payments grow more digital and real-time, cash is being replaced by cards, e-wallets, tap-to-pay, or mobile-based solutions.

Fintech companies are quickly introducing cutting-edge payment products thanks to their expertise in digital technology and unique business strategies. Large tech firms with billions of customers worldwide also disrupt the payments environment, creating a highly competitive market.

These changes result from shifting consumer tastes and expectations for payments, which are leaning increasingly towards quick, seamless and contactless transactions.

Geopolitical power shifts and their impact on digital payments

Studies predict that by 2025 more than half of the world’s population will reportedly use mobile wallets. The millennial generation, which epitomises this digital lifestyle and expects seamless and continuous financial transactions, has considerably impacted this trend. Those dissatisfied will likely go to another bank that can onboard them quickly and easily.

Large corporations are also increasingly digitising their operations, adopting digital commerce, and making themselves available for online transactions. Digital payments are part of their business model, from payment gateways to structured, time-bound payments and collections. Consequently, by 2027, the value of transactions in the worldwide digital commerce sector will be predicted to exceed $8.9 trillion.

The environment of digital payments is also changing due to the change in geopolitical power. There is a definite shift from partnerships to provide seamless payment corridors and transfer mechanisms towards country-specific silos. SEPA, Immediate, and P27, which aim to create a seamless payments infrastructure throughout the Nordic area, are three examples of these new digital payment proposals.

To decrease risks, improve security, and standardise through an industry-wide transition to ISO 20022, regulatory organisations and industry leaders are pushing modernisation through various efforts. Future digital payments may already be seen as a result of the rising popularity of digital currencies.

According to reports, 86% of central banks are thinking about adopting central bank digital currencies (CBDC). While the Eurozone and the UK are currently doing research, Sweden and Norway are already testing CBDC prototypes.

Lastly, new technology – such as cloud computing, open APIs and distributed ledger technology – lays the groundwork for innovative payment business models and accelerates cashless transactions.

Embracing open architecture through APIs and payment ecosystems

Banks must redesign their payment roadmap and provide the proper technological foundations to succeed in the digital economy. These foundations should have the following:

  • Many APIs fuel an open architecture that encourages participation in an open payment ecosystem and drives innovation.
  • As more areas and nations promote digital initiatives, the need for a population-size payment processing engine will increase; as a result, the volume of digital payments will only increase exponentially.
  • The capacity to process payments from various business divisions, including retail, corporate, private banking, and wealth management, with ease while supporting the whole payments lifecycle. A single payment hub must serve the needs of the entire company.
  • Real-time rails for accelerating adoption and enabling comprehensive real-time processing with seamless communication. Although digital offers vary by location, they are all designed to process payments instantly, quickly, and in real-time. So, the bank’s solution must guarantee that all transactions are handled immediately and that settlements move forward with this goal in mind.
  • With a cloud-native and innovation-focused strategy, banks can analyse data and gain real-time insights to understand their customers better and integrate innovation across their banking experiences.

Banks can better regulate their payments business on several fronts using a payment technology foundation created with the factors mentioned earlier. In this highly regulated industry, it will help manage the time and costs of compliance while enabling seamless consumer experiences. Also, banks can scale more effectively and innovate more quickly, participating in the growing real-time payments ecosystem due to improved procedures and automation.

This future will be possible at cheaper maintenance costs for the technology used. It will give banks a solid foundation to explore possibilities where their products are seamlessly integrated into the customer’s main journey.

About the Author: John Barber is the VP & Head of Europe at Finacle.