Receiving Payments Trends
The dynamic payments industry continues to expand and evolve, with digital payment vehicles and transaction volumes growing across the globe. The research will look at the trends affecting this expansion in three market regions — the United States, Canada and India — with a bias toward what one needs to know to enter the receiving payments space with a new product.
Country: United States
This section will discuss the key trends in the receiving payments space for small and medium businesses in the United States. The trends have been segmented into business, social and legal related insights.
United States: Business Trends
The business trends driving the receiving payments industry in the United States include a shift to more automated payment offerings by small and medium businesses, collaboration with financial technology firms to increase payment services options and targeted merger and acquisition activity to improve range of industry.
- Small and medium businesses are offering automated payment services such as recurring billing or subscription services to customers in order to streamline payment processing.
- There are many benefits to businesses incorporating these recurring payment methods. These include consistent cash flow for merchants and improved brand loyalty through convenience and time savings for customers.
- Auto payment service providers in the US include Square and PayPal which allow businesses to accept recurring credit card payments online. Uber is an example of a company that proves the positive returns on investments of setting up automated payments for customers.
Collaboration with FinTech Companies
- Traditionally, businesses received payments through cash and check that was processed through their banks. However, as digital, online and mobile payment platforms have become more prominent, there is increased collaboration between banks and financial technology (fintech) players to serve the small business community needs.
- According to Jennifer Lee, fintech leader at equity firm Edison Partners, “The rails that [existing] payment systems are built on date back 20-30 years – people are not starting to reinvent that alone; it isn’t an overnight thing – it’s incremental innovation adding up to something massive.”
- Traditional banks benefit from fintech startups that are able to hastily adjust to disruptive innovations in the payments space while startups benefit from the wide range of existing clients and resources offered by large banking firms. According to a survey by Finextra, 81% of banking executives believe that working with fintech partners is the key to digital transformation.
- For example, American Express and GreenSky teamed up to offer improved point-of-sale lending technology that allows consumers to choose among multiple purchasing options.
Targeted Merger and Acquisition Activity
- Payment service providers (traditional banks or financial technology companies) have been engaging in targeted mergers and acquisitions (M&A) across the industry.
- This activity has added capabilities and talent to firms' portfolios and addressed challenging areas such as cross-border payments, an improved end-to-end payment experience, multi-payment integration, and business-to-business (B2B) payments.
- PayPal, a large US online payments firm, is a leading company in M&A activity. In one instance, it acquired iZettle, a European provider of mobile point-of-sale technology, allowing it to expand into international transaction markets and also support purchases at physical businesses. Further acquisitions include a peer-to-peer mobile payments company, a merchant payment processing firm and an inter-nation money-transfer company.
United States: Social Trends
Consumer expectations, alternative payment methods and of course, the ongoing COVID-19 pandemic are the social trends affecting the receiving payments space in the US.
Consumer Digital Expectations
- According to Accenture, "as the payments universe expands, customer experience is becoming the prime competitive differentiator".
- Noor Pierik of CM Payments states, "Payments are all about convenience for the customers. He wants to choose how he pays and spend as little time as possible by doing it".
- Big businesses have long offered digital payment methods, developing consumer preferences to "ditch the credit card".
- In order for small businesses to remain competitive in the changing landscape, they need to take advantage of the various methods such as in-app payments, one-click payment buttons and peer-to-peer payments that customers have come to expect from bigger companies such as Amazon or Walmart.
- Additionally, for brick-and-mortar businesses cashless and contactless payment methods are becoming increasingly popular through smartphone technologies and apps.
Alternate Payment Methods
- Younger consumers are shifting their payment preferences to alternative methods.
- One such example is the "buy now, pay later" service whereby consumers can take home their purchase immediately but pay for it through a series of installments over time.
- There are payment service providers such as Afterpay and Sezzle that allow merchants to implement this type of payment service and accurately track accounts and inventory.
- Beyond this, a recent Deloitte Center for Financial Services study found that 66 percent of respondents said they would pay with an alternative instrument to a credit card if the merchant incentivized it with a similar rewards proposition.
- The COVID-19 pandemic has affected the receiving payments space in two major ways:
- A significant rise in the frequency of online shopping as persons were urged to stay at home and limit shopping in public places during mandated lockdown orders.
- Concern over the spread of the virus through contact with cash as a contaminated surface.
- As a result of the pandemic, cash and check are more quickly becoming obsolete ways of receiving payments for a majority of businesses.
- Parallel to this, there is an increasing need for the payments industry to adapt in a number of ways as highlighted in this McKinsey & Company Financial Services report. Selected changes include:
- Ensuring universal access to digital payment solutions for merchants and consumers amid the shift to remote buying.
- Providing omnichannel payments solutions to support omnichannel commerce, especially for those companies that may have closed down physical stores and shifted to completely digital offerings during the pandemic.
- Making all payments touchless and contactless (including card and wallet based) to decrease the risk of virus spread through shared contaminated surfaces.
- Expanding digital wallet solutions beyond payments to include identification features, transaction monitoring and shopping alerts.
United States: Legal Trends
The legal trends within the receiving payments industry center around the protection of consumer data and addressing increased privacy and security concerns. The implementation of fraud protection services by payments providers and a change in regulations governing payments services are two of the main trends identified.
Fraud Prevention Services
- Developing innovative ways of ensuring fraud protection is a major trend in the receiving payments space as a balance is sought between a seamless customer experience and data security.
- There are two prime technologies being implemented to protect consumer data and payment providers' liabilities:
- Biometric authentication is a form of security expected to support over 18 billion payments by 2021.
- The use of artificial intelligence to approve good transactions and reject fraudulent ones through the detection of anomalies and criminal patterns. Artificial intelligence is especially necessary as fraud becomes more complex and fraudsters rely on machine learning algorithms for execution.
- According to Merchant Fraud Journal and VentureRadar, examples of top companies offering fraud protection services within the receiving payments space are Forter, Signifyd and Riskified.
- Due to the rapidly evolving payments industry landscape, there is a need for new standards to govern the flow of money and again, protect consumer rights.
- In the US, regulations coming into effect in 2020 include the CCPA legislation in California and the Wayfair Act. The CCPA refers to the California Consumer Privacy Act and it aims to give consumers more control over the data that businesses can collect about them while the Wayfair Act empowers states to impose local taxes on businesses that operate, but are not located, within their borders.
- Beyond this, Deloitte expects a combined public and private effort to drive the development of global standards, such as ISO 20022, to regulate payments messaging, interoperability, interfaces, payment engines and integration among players.
The Canadian point of sale environment inclusive of both physical and virtual payments continues to evolve, becoming more oriented toward e-commerce and mobile device transactions. Cash payments are declining while credit and debit cards continue to be the dominant point-of-sale payment methods by transaction volume in the country according to a study by Payments Canada. The trends in Canada mirror those in the US in that the market is influenced by payments innovations, payment service providers, payment systems modernization and updated regulations which are outlined below.
Canada: Technological Trends
Relatively speaking, the technology in the receiving payments space is not as advanced as in the US. However, the country's mobile e-commerce market continues to grow, electronic payments and digital wallets are increasingly adopted by consumers and real-time payment rail system is under development.
- The mobile e-commerce market currently accounts for 36 percent of all e-commerce sales in Canada.
- At the same time, 72% of all domestic businesses believe that it is important to develop a mobile e-commerce offering in order to survive the future of retail.
- Within the mobile e-commerce market, 51.4% of all transactions are completed through mobile apps on handheld devices such as smartphones and tablets.
- Canadian consumers prefer to use debit cards to purchase items with 62% of all their mobile transactions being completed via this payment method.
- In 2017, digital wallets were the second most popular payment method by usage, accounting for 18% of the industry. In 2019, digital wallet use was expected to grow at a rate of 23% per year to cover 22% of the market by 2021.
- This high growth can be attributed to an increased adoption of new payment channels such as contactless methods and peer-to-peer (P2P) payments due to the perceived convenience. For merchants, digital wallets offer fraud protection and typically result in a lower rate of cart abandonment.
- Highly used platforms by consumers in Canada for digital wallet payments include PayPal and Apple Pay. Furthermore, 20% of Canadian merchants accept payments from AliPay and WeChat Pay.
Real-time Payment Rail System
- Payments Canada is in the process of developing a real-time payment rail system called Real-Time Rail (RTR) to enable instant settlement of low-value payments.
- The system is expected to give consumers the ability to make payments using identifiers such as their mobile number and email address while encouraging innovation in the national payment industry.
- Banks, payment service providers, e-commerce merchants and mobile providers will all have access to offer their services on top of the new platform. By doing so, Payments Canada envisions the system will improve cross-border payments and transaction transparency.
- Payments Canada is currently selecting their technology provider with a target launch date in 2022.
Canada: Business Trends
Unlike their counterparts in the US, businesses in Canada have been relatively slow to offer online shopping and embrace an omnichannel market presence. However, similar to the US, the players in the payments industry have participated in multiple partnerships and acquisitions driving innovation and growth.
Delayed Online Presence
- In the past, Canadian retailers have been slow to adapt to the changing technological landscape and start selling online leading to the relatively slow development of online shopping in the country.
- However, this is quickly changing and retailers have begun to invest in digital platforms due to rising competition from global e-commerce companies like Amazon which is the largest online retailer in the country with US $6.2 billion in 2019 revenue. However, Canadian small and medium businesses are still far slower in moving online compared to their peers.
- Businesses who have chosen to do so have expanded their online presence to reach more customers across the vast geography of the country, and not just their local shoppers.
- According to a report by the Business Development Bank of Canada, the delayed online presence of many Canadian businesses is due to concern over data protection and security (32%), lack of knowledge of relevant technologies (25%) and lack of appropriate talent recruitment (24%).
- Almost half of local small businesses do not have a website.
Partnerships and Acquisitions
- Despite the slow uptick in an online presence for small and medium businesses, the payments industry has seen multiple partnerships and acquisitions take place between fintechs and incumbent financial institutions/payment service providers.
- These have been ongoing in an effort to provide infrastructure and software that supports more real-time payments, mobile payments and cashless payments.
- Examples of this type of business activity abound and are supplied below:
- Debit card scheme Interac Corp. partnered with international payment service provider Bambora to expand acceptance of Interac transactions in worldwide online shopping
- PayPal acquired a Vancouver-based firm HyperWallet to enhance its provision of an integrated suite of payment solutions to e-commerce platforms and marketplaces.
- Google Pay partnered with Canadian financial institutions to support credit and debit card transactions through its mobile wallet platform.
Canada: Social Trends
Despite the momentum gained by non-cash payment methods including cards and digital wallets, cash is still a prevalent payment method among Canadian consumers especially for smaller goods purchases. However, Canada has a high internet coverage that is expected to translate into increased e-commerce activity where cash is less likely to be used. At the same time, Canadian consumers still have security concerns when shopping online.
Cash Vs. Credit
- In a 2018 study, 63% of consumers reported making a cash purchase in the week leading up to the survey while 15% described themselves as heavy cash users who used this payment method for over 50% of their purchases.
- In terms of the demographic makeup of this population, Payments Canada has found that younger Canadians (18 to 24 years old) represent 20% of the group even though they are also the most tech-savvy group.
- This supposed contradiction is thought to be due to the fact that this age group has lower incomes and are less likely to be fully banked leading to their cash use patterns.
- Overall though, Canadians prefer to use cash because it is quick, easy and accepted everywhere. Additionally, Canadians prefer to use the money (cash and coins) on hand to pay for their goods.
- However, while cash remains prevalent, credit cards are the preferred payment type among consumers at a variety of store types including discount stores and grocery stores that are more likely to be small or medium businesses.
- 92% of Canadian household have an internet connection. However, in the remote northerly regions, the service tends to be slower and more expensive while the highest usage is seen in urban areas.
- Concurrently, 72.6% of the population has made purchases online and this proportion is expected to grow in coming years.
- However, of those consumers who do not shop online, 62% say they are worried about their personal information security while even among those who do shop online 21% have abandoned their cart as a result of security concerns when making a payment.
- Transparency regarding website security measures and relevant trust marks will aid in consumer confidence when shopping online at domestic businesses.
Canada: Legal Trends
With the payments ecosystem rapidly changing and new players entering the space, Payments Canada and the Department of Finance, the country's two regulatory bodies in the industry, are reviewing and implementing rules to support new methods and functions.
Review of Existing Regulations
- In 2018, a decision was made to review the 39-year-old Canadian Payments Act every three years, alongside the launch of a Modernization initiative by Payments Canada.
- This regular review is being implemented so that the regulations remain current and fit for purpose. Many merchants want to see reduced interchange rates on credit card transactions to aid the shift in consumer payment habits toward this method.
- There was already a number of amendments and updates to the Canadian Payments Act in 2015 that reformed the governance structure of Payments Canada in order to support the competition and innovation in the payments space as a result of emergent payment methods.
Retail Payments Oversight Framework
- The Department of Finance is planning a new regulatory oversight regime called the Retail Payments Oversight Framework.
- The aims of the new framework include regulating non-bank payment services, ensuring a reliable and safe retail payments ecosystem and encouraging innovation within the payments industry.
- The proposed measures would target retail payment service providers that offer functions such as the provision and maintenance of payment accounts, payment initiation, authorization and transmission, the holding of funds, and clearing and settlement.
India's shift to a cashless society was originally spurred by the government's demonetization efforts in 2016. Since then digital payments have taken off among the population that has access to the means of participation, that is, ownership of a smartphone. Only 22-30% of the population (data varies by source) owned smartphones in 2018 but that number was and is growing exponentially as the market expands. This section discusses the technological, business, social and legal trends affecting the Indian receiving payments space.
India: Technological Trends
Digital transactions in India are boosted by a number of new technologies. The most prominent of these has been the introduction of the Unified Payments Interface (UPI) to facilitate real-time payments between bank accounts. Others include digital wallets and contactless payments via NFC (near-field communication) which are expected to take off in the coming years.
United Payments Interface (UPI)
- The Unified Payments Interface (UPI) is a system that allows users to make instant or real-time payments between 55 banks, independent of the acquirer payment service provider mobile app. It was launched by the National Payments Corporation of India (NPCI) and regulated by the Reserve Bank of India.
- The use of UPI recorded a growth of 222% in the 9 months between January and September 2019. Among transactions, Google Pay is the most preferred UPI app with a contribution of 62%, followed by PhonePe with 25%, Paytm with 6% and BHIM with 5%.
- UPI uses interoperable one-time passwords generated on one bank app that can be used across another for transaction authentication. Another authentication feature is the use of identifiers such as bank account, Aadhaar number or mobile number to send or receive money.
- NPCI even plans to introduce an iris-based authentication system that will enable customers to authenticate payments without a pin or a password.
- While digital (mobile) wallets were only used by approximately 6% (73.9 million persons) of the population, there is a wide variety of options in India with the most popular being Paytm and PhonePe.
- At the same time, incumbent financial institutions have begun to introduce their own digital wallets such as:
- SBI Buddy by the State Bank of India
- ICICI Pocket by the ICICI Bank
- PayZapp by HDFC Bank, the country's largest private sector bank
- Mobile wallet use in India is expected to rise exponentially (a compound annual growth rate (CAGR) of 148 percent over the next five years according to the Capgemini's World Payment Report) primarily due to the increasing mobile device ownership among the population. However, beyond this the benefits of the technology include:
- Easy accessibility for day to day transactions,
- Less security issues such as the fear of robbery associated with carrying cash,
- A wide range of supported use cases such as online shopping, bill payments and point-of-sale purchases and
- Financial incentives such as discount and cashback offers by wallet providers for digital transactions.
Near Field Communications (NFC)
- It is expected that tap and go products enabled with near field communication technology will be the next big step in the payments market of India.
- This technology enables card and mobile payments to be done by tapping the device instead of by swipe or chip insertion, that is, contactless payments.
- The NPCI has made substantial investments in this technology, launching the National Common Mobility Card (NCMC) which allows users to tap the terminal without having to enter a PIN for transactions below INR 2000 when purchasing goods and services. It can also be used as a common card on a number of transportation networks across India.
- Visa and MasterCard are also keen on introducing the technology in the country.
India: Business Trends
In India, as in the US and Canada, a major business trend within the receiving payments space is growing partnerships and acquisitions between traditional banks and fintech companies. However, the sudden rise in digital payments has led to an influx of companies within the space vying for the same audience.
- According to Razorpay, a full-stack fintech company, the digital payments industry in India will benefit from greater collaboration between banks, traditional payment providers and fintech companies.
- As is the case in both the US and Canada, increased partnerships are beneficial since banks have the brand and network of customers while fintechs have the technology to improve the payments ecosystem.
- Visa is an example of a traditional payment provider that is moving forward with multiple partnerships in the fintech industry to improve the digital payments landscape. For example, Visa partnered with Open, a neo-banking platform for small and medium enterprises (SMEs) and start-ups to launch products such as a business credit card for SMEs, payment gateway acquiring and real-time payments.
- Another type of activity dominating the space is the creation of mega banking entities due to the mergers of large banks to gain traction by investing in building their digital capabilities. For example, three public sector banks merged in April 2020 — Union Bank of India, Andhra Bank, and Corporation Bank.
Too Many Players?
- During the past few years, there has been an influx of new companies in the payments market, offering niche solutions.
- Research analysts expect the industry to deflate due to over-competition and reduced profits, similar to what was seen in the telecommunications market.
- Consolidation into a few large players will most likely take place where payments intermediaries come together for infrastructure rationalization.
- This reduction in the market will most likely be driven by consumers preferences for instruments that will work across a variety of use cases, both online and offline.
India: Social Trends
Despite the trends discussed in this research, India does remain a largely cash-based society. However, demand for digital payments is growing among consumers. This growth will only continue in the coming years due to increasing smartphone ownership among an increasingly young population.
Cash-based Vs. Cash-less
- Although easy to overlook, India's economy remains largely cash-based despite the demonetization efforts and the rise of digital payments. As such, more than 45% of bank accounts log no transactions and only 13% of adults borrow money through formal channels.
- However, the government continues to encourage digital payments among the populace citing advantages such as increased employment, minimized risk of robbery, corruption and storage of large sums in cash and better transparency in operations.
- As such, the demand for digital payment options increased by 106% in the first 9 months of 2019, made more appealing by the offer of cashback and rewards from digital transactions leading India into a cashless society.
- Also, consumers are drawn to using digital payments by the convenience it offers.
Increasing Smartphone Ownership
- Many of the technological trends in the payments space require consumer access to a smartphone but in 2017, only about 22% of the Indian population owned a smartphone.
- Historically, most Indian households did not own a desktop or other device to access the internet but smartphones, other mobile devices and data plans have gotten cheaper all across the country. Also, the internet connection is faster and more reliable, driving the penetration of smartphones in the country.
- On the other hand, the average age of Indians is 27.9 with more than 50% of the population below 25 years old and 25% aged 14 and under. This gives rise to a tech-savvy population that will drive the growth of e-commerce, which is intricately linked to more digital payments, as they are able to own their own mobile devices.
India: Legal Trends
The government of India can be said to be the main proponent for the growth of a cashless society and the monumental shifts in the payments industry over recent years. As such, they have been actively creating and enforcing rules and regulations to govern the players and technologies involved. Additionally, like their US and Canadian counterparts, companies are implementing cybersecurity measures to deal with fraud prevention and detection.
- The government of India is eager to encourage digital payment acceptance among merchants and is considering guidelines that promote cost-effective payment solutions. An example of this is a merchant discount rate waiver on payments made via Bharat Interface for Money (BHIM), UPI, UPI QR Code, Aadhaar Pay, certain debit cards, National Electronic Funds Transfer (NEFT), and the Real-Time Gross Settlement (RTGS).
- Additionally, new e-commerce regulations revising India's privacy, data protection and international trade rules were instated in 2019 which should incentivize more international businesses to operate within the country.
- The Reserve Bank of India was also responsible for developing guidelines for differentiated banks that improve financial access to migrant workers, low-income households, small businesses and other underserved sectors by providing basic banking and remittance services.
- The issue of cybersecurity will be the biggest legal and business risk for all players within the payments industry including merchants, banks, payment service providers and financial technology firms.
- As digital payments increase, financial institutions will need to focus on continuously reducing their exposure to financial crimes and be compliant with evolving regulations.
- Operational disruptions, loss of sensitive information, customer anger, legal fees and higher insurance premiums are all losses companies have to face on account of fraudulent activity. By 2025, the annual cost of cyberattacks could top $20 billion.
- The government of India mandated the Justice Srikrishna Committee to develop a data protection regulatory framework which culminated in a set of recommendations submitted as the Personal Data Protection Bill in July 2018 that is under review.