Rapid advancements in technology and innovation are disrupting the payments sector as well as giving rise to new market entrants and changing customer expectations.

This is among the highlights from an analysis released by PwC’s Strategy& division on the convergence of payments, which forms part of a report on the “Convergence of Payments – PwC Payment Trend Series # 1”.

The study also finds that the future for payments is promising, with payments converging as the world becomes more digital.

The convergence of payment methods has transformed to meet customer expectations, streamline transactions and provide seamless integration. Some popular examples include, amongst others, the use of social media platforms for online retail, e-commerce, retailers offering consumers ‘buy now, pay later’ solutions, mobile banking, and online payment gateways.

Chantal Maritz, Strategy& payments transformation lead at PwC, comments: “Convergence will be central in the transformation of the payments industry across countries, with providers looking holistically at the payment process and adding value beyond the transfer of funds. The Covid-19 pandemic has also given rise to concerns over the transmission of the disease through contact and this has further accelerated the need for and the rate of adoption of digital payment systems.

“The timing and approach for payment convergence will however differ across the world, with emerging markets showing rapid change relative to mature markets due to the increased rate of mobile and digital adoption based on population and the availability of infrastructure.”

The rate of payments convergence

Emerging markets are currently driving the growth of digital payments and widespread adoption of digital wallets with countries such as China and South Korea leading the charge globally with mobile payments adoption rates of 32,7% and 24,4% respectively.

Card transactions tend to be more prevalent in developed markets, such as the US where they are the most popular payment method. The slow growth of digital payments in mature markets is mainly due to a dormant millennial population and a slower rate of penetration of digital payment tools in the market.

Cashless payment innovations, driven by a collaborative ecosystem, can boost BigTech players. Sixty-two percent of banks have indicated that the infrastructure of the business models used by BigTechs is a threat for them. Open Application Programme Interfaces (APIs) as well as ecosystem-based models can be the key to sustain market share and help banks to be more competitive.

Ninety-percent of banks are in agreement with an ecosystem-based business model and believe that it is necessary to keep up with technology.

However, the stumbling block is that they are not particularly good at adopting new technology, and tend to show unwillingness to share mandated data with other entities. Usually if there is regulatory compliance involved, just around 48% of banks tend to be willing to make use of an open API business model.

When it comes to new ecosystems and enabling infrastructure dynamics, the market leaders are Singapore, the UK, Finland, Norway, Sweden and the Netherlands with the US, Italy and Saudi Arabia lagging behind.

How has Covid-19 changed the face of the payments industry

The new realities brought about by Covid-19 have accelerated the shift to digital or a cashless economy as well as individuals’ pre-existing online presence and behaviours as consumers explore different ways to access products and services. In the developing world, this transition doesn’t only facilitate a safer payment environment but, in the long-term, will be a shift towards greater financial inclusion.

Countries with advanced sovernment-to-person (G2P) payment ecosystems and digital payments infrastructure are also able to better respond to the impact of the coronavirus pandemic at a faster rate.

Maritz adds: “Covid-19 is a catalyst for change – it has reignited the race to deploy rapid payment services in some countries, including South Africa. The dire circumstances being experienced across the country have prompted the need for financial inclusion, for greater innovation and collaboration among financial sector players.

“As an emerging market, unencumbered by huge amounts of legacy technology, South Africa has the opportunity to develop a modern payments infrastructure and a cutting-edge payment platform that places customers at the core. The additional benefit is by driving the modernisation of payments some of our current challenges can be addressed at a macro-level namely, digital financial inclusion and subsequent economic growth.”

The driving factors of payment convergence

There are several factors driving payment convergence globally, all with different benefits to the consumer.

These drivers include:

* Mobile phone and internet penetration – Consumers with smartphones have a variety of smart features available at their fingertips enabling them to conveniently consume and pay for services.

* Infrastructure modernisation – Infrastructure modernisation plays a key role in enabling digitisation and ultimately digital payments.

* Regulation and policy – Regulators globally are pushing for payments innovation and fair competition to ensure consumers’ basic needs are met while supporting financial inclusion.

* Emerging technology and market competition – Emerging technologies such as cloud, AI and API are enabling service providers across industries to continuously improve and reinvent themselves.

* Rising customer expectations – Payment service providers offer value-added products and innovation to carve out their strategy position in the market.

* Cost-effective merchant solutions – Merchants are looking for solutions that accommodate more than just payment methods, but rather include value added services and connections to more financial products and services such as credit.

* The cost of legacy infrastructure – As legacy systems age, they become more expensive to maintain, with fewer resource skills to ensure system stability.

Will we see a cashless world?

The global payments industry is adapting to the changing world, but this does not come without many challenges. While many countries are managing to overcome these obstacles, there are others who find themselves during these, trying to navigate themselves towards a cashless economy.

Some of these challenges include:

Fraud risk and security of digital payments: With the rise of digital payments, the threat of additional fraud and cyber risks is introduced.

The adoption of payment infrastructure by small merchants: Most non-cash payments require merchants to acquire expensive infrastructure, as well as high transaction costs. This could be a challenge for smaller merchants.

Regulatory complexity: Regulators need to implement policies that create an environment that is conducive for growth and innovation, whilst maintaining stability and security within the National Payment System (NPS).

Consumer confidence and behaviour: When trying to influence or change behaviours, it is crucial to match the services to the target demographics and digital literacy.

Slow reaction of big banks: Even though the big banks are the ones under the most threat of losing their market share, they are often the slowest movers.

Maritz comments: “The rapid adoption of digital payments will open up the payments industry to a new normal and shape the way consumers interact with businesses, as well as how businesses interact with each other.”

The payment providers who will be successful will be those that: offer value-added products and innovations to the market with a strategic view in mind; keep up to date with the latest technologies and adapt to the changes, delivering services that meet client expectations; target different areas of payment flows that are related to demographics, such as the middle class in China and Indonesia or link pensions to the baby boomer generation; and target small and medium sized enterprises (SMEs) to promote growth in the payment industry.