The digital transformation of the global payments landscape: key components and markets
by Pushpendra Mehta, Executive Writer, CTMfile
The COVID-19 pandemic accelerated the velocity of digitalization of the global payments sector and ushered in the era of payments modernization faster than was previously expected.
“In many markets, the volume and value of digital payments is growing exponentially. We’re now seeing the next generation of payment methods maturing, with a growing appetite for digital wallets, wearable payment technology, Open Banking-enabled payments and cryptocurrencies. These newer entrants are eating up market share as cash and card usage declines,” observed John Farrell, Senior Vice President Product at Volante Technologies.
Payment entities around the world, including central banks, central infrastructures, banks, fintech companies and a growing range of payment service providers, know they must boost their digital capabilities and continually evolve.
With the winds of change blowing rapidly through the payments landscape, Volante Technologies has produced a white paper – Global Payments: Planning For The Next Decade – that examines 10 key markets (Europe including the UK, Italy, Switzerland, Spain, Portugal, and the Nordics, South Africa, Middle East, Latin America, and the US) undergoing radical digital payments transformation. It identifies major trends and developments that will be of interest and benefit to corporations, banks and financial institutions. But before diving into that, let’s first broadly summarize the essential components or common pillars for payments modernization.
The four pillars for payments modernization
“Payments modernization is a blanket term used to describe the movement from traditional financial processes into the modern, digital space. While there are many different strategies to achieve such a transformation, those strategies will almost universally need to include common, interconnected components,” commented Farrell.
1. Real-time or instant payments
The first component is real-time, or instant payments. The speed and convenience that real-time payments offer has aided in its emergence as a frictionless alternative to traditional payment methods. Real-time payments benefit corporations, banks and financial institutions by improving liquidity and cash flow management and increasing visibility into payments.
The second pillar is interoperability, which is an integral part of the payments process. Without interoperability, instant and real-time payments have little viability when it comes to spurring transactions beyond national borders.
“Achieving true interoperability involves establishing universal connectivity between international payment hubs, a problem which has proved uniquely challenging to solve, but that initiatives such as the P27 and IXB seem poised to overcome in the near future,” said Farrell.
3. ISO 20022
The third component that both real-time payments and interoperability depend on is ISO 20022, the open standard for payments messaging that aims to create a common model and language for payments data across the globe. ISO 20022 is expected to play a crucial role in the innovation and modernization of the payments sector.
Finally, there is technology, the most important pillar that empowers payments modernization. Legacy technology, built on decades-old technology, is complex, outdated, tough to manage, and costly. These have been broken down by a shift from inefficient on-premises systems to open, scalable and secure platforms in the cloud.
“The use of cloud computing to power payment systems provides flexibility, efficiency and scalability, with low-code/no-code applications that can be tailored to a financial institution’s specific requirements, implemented quickly and typically at less cost than systems developed in-house,” remarked Farrell.
10 markets experiencing unprecedented digital payments transformation
A. Europe: six markets
The UK is known for its progressive payments scene, and it shows no sign of slowing down. In 2021, Faster Payments, operated by Pay.UK, broke the record for the highest number of payments processed in a single year, surpassing 3.4 billion, according to the Volante Technologies white paper.
This year, there will be a further push on real-time infrastructure. In January 2022, following an industry consultation, the Bank of England announced a revised timetable for the implementation of the Real-Time Gross Settlement (RTGS) Renewal Programme.
The RTGS service is the infrastructure that holds accounts for banks, building societies and other institutions. The balances in these accounts can be used to move money in real time between these account holders. This delivers final and risk-free settlement.
The new timeline maintains the move to enhanced ISO 20022 messaging in spring 2023, but instead of a two-stage process with the first stage in June 2022 and the second stage in February 2023, it will now be undertaken in a single stage in April 2023, as per the Bank of England.
Italy is the third-largest economy in the European Union (EU), and the Bank of Italy, the country’s central bank, owns the world’s fourth-largest gold reserves.
While Italy is still one of the EU’s member states with the highest cash usage rate, the Italian government and the Bank of Italy have heavily promoted electronic payments in recent years. In October 2019, for example, the government developed the Progetto Italia Cashless Plan, aimed at pushing forward digital payments whilst reducing the use of cash payments.
The plan includes incentivizing consumers through cashback bonuses for card payments between December 2020 and June 2021 and lowering the maximum cash payment from €3,000 to €2,000 in July 2020, before reducing the limit to €1,000 in January 2022. To promote merchant acceptance, the plan provides tax credits of 30% for merchants that accept card payments.
Italy has also pulled ahead of its EU neighbours in developing real-time payments technology and in recruiting banks to adopt it, backed by strong support received from the Italian Banking Association (ABI). The ABI has stated that the pandemic has helped increase the flow of instant payments between banks.
With payments modernization efforts growing in intensity, the total transaction value for digital payments is expected to reach $90.8 million in 2022, and to then show an annual growth rate of over 15% between 2022 and 2025, according to the white paper.
In Switzerland, cash has lost some of its appeal. Just recently, the number of digital payments surpassed the number of cash transactions for the first time.
The closest thing the country has to a national real-time payment scheme is the TWINT AG mobile payments app, created in September 2016 through the merger of two existing Swiss payment apps, Paymit (powered by UBS, SIX, and various domestic banks) and TWINT PostFinance. In November 2021, the payment app reached four million active users.
Switzerland is now ramping up payments modernization efforts, a process orchestrated by the Swiss Interbank Clearing (SIC) payment system, operated by SIX Interbank Clearing Ltd (SIC Ltd) on behalf of the Swiss National Bank (SNB).
One important digitalization milestone was the introduction of ISO 20022-based message flows in 2018, which also included client-bank messages. There are also plans to replace the traditional paper-based payment slips (red and orange payment slips) with QR-bills by the end of September 2022, which will make it possible to make a digital payment by scanning a QR code.
The Swiss financial sector, led by the SNB, will be introducing instant payments from 2024, the year by which the enhanced SIC 5 clearing and settlement platform is expected to be ready to process them.
Spain is at the forefront of instant payments in Europe largely because of Iberpay, which manages the Spanish payment system (SNCE) that connects banks, companies and individuals to process and settle their payments.
Iberpay is seen by many as one of the most advanced and innovative payment systems around, particularly in the European context.
“At the beginning of 2022, 99% of the market share in Spain had been connected to Iberpay’s system, which is estimated to process over 500,000 real-time transactions every day,” mentioned Farrell.
“As a result of Iberpay’s achievements, the digital transformation of the payments industry is in full force in the European region, with the popularity of digital wallets and real-time transfers on track to eclipse the use of more traditional payment methods as early as 2023,” Farrell further added.
Portugal has accelerated the adoption of digital payments over the past few years. The Banco de Portugal, the country’s central bank, has supported a shift to more electronic payments, realizing the opportunities it opens up in terms of convenience and driving payment volumes.
In 2018, the SIBS Instant Payments Solution platform was introduced to the Portuguese market, facilitating instant payments processing at the national level. In 2020, it became an intra-country platform by connecting to Eurosystem’s TIPS service. This has significantly boosted the growth of electronic payments in both Portugal and Europe, with Portuguese banks now able to offer their customers pan-European instant payments with settlement in seconds.
According to the white paper, it’s estimated that the total transaction value for digital payments in Portugal will reach an annual growth rate of around 10% between 2022 and 2025, resulting in a projected total amount of $14.8 million by 2025.
The P27 Nordic Payments Platform initiative, commonly referred to simply as P27, is a partnership between several leading banks in the Nordic region with the goal of creating the world’s first real-time, cross-border payment system. The platform is intended to serve the 27 million people living in the Nordic region, which is where name P27 comes from.
A joint initiative by Danske Bank, Handelsbanken, Nordea, OP Financial Group, SEB and Swedbank, P27 will ultimately enable instant and secure domestic and cross-border payments in the Nordic currencies and the Euro. The platform will initially allow payments to flow instantly between people and businesses in Denmark, Finland and Sweden.
P27 messages will be built using the ISO 20022 standard, which will enable high levels of flexibility, extensibility and straight-through Processing (STP) with efficient reconciliation and AML compliance.
B. South Africa
South Africa has been considering payments modernization for a number of years.
In 2018, the South African Reserve Bank (SARB), which is legally responsible for the country’s payments infrastructure, published the National Payment System Framework and Strategy – Vision 2025, which outlines the key goals for the national payments industry.
To realize its vision, the SARB has been urging industry stakeholders to collaborate to ensure the safety, efficiency, integrity, transparency and accessibility of the country’s national payment system (NPS).
Despite the SARB’s agenda, last year anywhere between 70% and 90% of payments in South Africa were still cash-based.
To address this, BankServAfrica, in partnership with the Payments Association of South Africa and the Banking Association of South Africa, has developed the Rapid Payments Programme (RPP), an inter-banking payment system poised to revolutionize digital transactions.
The RPP, set to be launched into pilot later this year, “will require all South African banks to build simpler, more cost-effective real-time payment functionality into their product offering, to accommodate high-volume, low-value transactions,” as stated in the Volante Technologies white paper.
South Africa has also been Africa’s front runner in terms of ISO 20022 adoption, with Strate, the country’s central securities depository and central collateral platform, joining the SARB and the Payments Association of South Africa in planning to move to ISO 20022 in the coming years.
C. Middle East
The Middle East region has been heavily dependent on cash, but the pandemic has also helped to drive the move away from cash towards digital and alternative payments.
A number of instant payments initiatives are underway, including SARIE, Saudi Arabia’s instant payments system launched by Saudi Payments under the supervision of the Saudi Central Bank (SAMA). The introduction of SARIE complements Saudi Arabia’s Financial Sector Development Program (FSDP) under Saudi Vision 2030, which looks to achieve 70% non-cash transactions in the region by 2030.
At the end of 2021, meanwhile, the Central Bank of Egypt (CBE) approved the regulations that will govern the services of the country’s new instant payments network (IPN). The IPN links Egypt’s banks and other financial services providers, allowing payments sent between accounts at different institutions to be credited and debited instantly.
In February 2022, the Central Bank of the UAE (CBUAE) announced that Accenture has been selected to lead a consortium of companies to help execute its National Payment Systems Strategy (NPSS), building and operating the National Instant Payment Platform (IPP) over the next five years. The IPP will deliver the flexibility needed to respond to the rapidly changing payment market while complying with best practices and international standards, including ISO 20022.
Three major cross-border payments initiatives have been launched recently. One is the Buna payment platform, which enables real-time, multicurrency payments throughout the Arab world and beyond. Another is the AFAQ payment system, which connects the real-time gross settlement (RTGS) systems of the six countries in the Gulf Cooperation Council (GCC).
Perhaps the most distinctive initiative is Project Aber, the pilot project for a common digital currency between Saudi Arabia and the UAE. This project is unique as the world’s first dual-issued wholesale central bank digital currency (CBDC) pilot, involving two central banks and six commercial ones.
Banks in the region are expected to manage multiple ISO 20022 modernization programmes for both domestic and cross-border payments, whether it’s Buna, the AFAQ system, SWIFT gpi or the various instant payments schemes being rolled out by individual countries.
D. Latin America
“Financial services is a very big business in LatAm. The region boasts 10% of global banking revenues, and with growth at double-digit rates and a population making the switch from cash to digital banking, it’s becoming a hotspot for payments modernization,” explains the white paper.
Brazil is the largest market in the region. In November 2020, the country’s central bank, Banco Central do Brasil, rolled out the new PIX network, an instant payments system to foster efficiency and financial inclusion. It now has 107.5 million registered accounts, which is more than half of the country's population, and the volume is already equivalent to 80% of debit and credit card transactions, according to central bank data.
Contactless payments are on the rise. Chile, for example, has introduced Google Pay compatibility through wearable technology. Mexico is exploring the wider use of QR codes for financial transactions.
It’s estimated that 40% of debit accounts and 29% of credit accounts across the region are now enabled via contactless payments, according to a survey conducted by Mastercard and Americas Market Intelligence (AMI).
E. The US
The US is on the cusp of a comprehensive real-time payments transformation.
According to a September 2020 PYMNTS survey, more than one-third of consumers said that sending and receiving funds in real time is “very” or “extremely” important, with P2P payments ranked amongst the top use cases.
B2B payments is another major use case for real-time services and reached US$ 49 trillion in 2021, as per Statista’s Research and Analysis service. In fact, the recent Citizens’ annual payments and treasury survey found that 85% of business leaders believe the most important factor when choosing a banking partner is whether the financial institution offers real-time payment capabilities.
In response to demand, the Federal Reserve Banks’ new interbank faster payments system, called ‘FedNow’, is set to launch in 2023.
The FedNow Service will be an instant payment service that will enable financial institutions of every size and in every community across the US to provide safe and efficient instant payment services in real time, around the clock, every day of the year.
The FedNow service will operate on ISO 20022 – just as The Clearing House’s (TCH’s) Real-Time Payment (RTP) system does today.
“TCH is now thinking internationally. It has teamed up with EBA Clearing and SWIFT on the immediate cross-border (IXB) payments initiative. This ambitious project aims to enable faster and more efficient cross-border transactions between the US and Europe, and is a powerful example of how TCH’s RTP system is focusing on market innovation and helping financial institutions to meet the needs of corporate clients,” the white paper reveals.
To seize the opportunities presented by payments modernization, it is imperative to embrace its four pillars: a push for instant/real-time payments, cross-border interoperability, ISO 20022 migration and modern payment technology. It is equally important to be on top of the latest global payments trends so you can help to “future-proof” your business and stay at the forefront of digital transformation.
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