Digital Payments 2017: Technological Innovation, Adoption, and Regulatory Challenges

On December 13th of last year, a meeting of some of the top financial minds in the UK took place in the ornate, 19th Century Glaziers Hall in SE1.

They had come together, in front of an audience, to discuss the future of the payments industry. Where we are now, what the future holds, and what challenges lie ahead. The session was a fascinating insight into the latest developments and how this complex, fragmented and evolving industry remains restless in its search for the fastest, most user-friendly, and most convenient methods of transferring funds. And how this restlessness is tempered, and how the industry seeks to overcome the various obstacles in its path.

Starting with innovation, an element causing great furore is that centred around the growing use of mobile apps as a method of payment. Apps have been around for a while now, but as a means of doing business it has only been in the last few years we have seen their disruptive potential. Dennis Jones, CEO of Judopay cited the example of the American taxi industry, how its outdated business model routinely failed to maintain the synergy between supply and demand, and how cash payments for rides was a persistent friction point. In one broad brush-stroke, the arrival of Uber all but resolved these issues, and a whole new business model was born.

As the prevalence of app payments has risen so has the attention from would-be fraudsters. Jones went on to describe how ‘consumer pattern recognition’, which effectively triangulates the position of a consumer by pinning them, their device and how they input their information is emerging as a technology which, after the first transaction, reduces fraud to almost zero. Touched upon as well, was the emergence of payment facilities that reveal payee account names, not just account numbers and sort codes, to bolster user confidence, ‘request repay functions’ that eliminate the need for separate invoices for B2B transactions, and how real-time transfers of funds, even across national borders, from banks to customers, is upon us.

Clearly, the success of innovation rests on consumer adoption and this was another key topic of discussion. Ian Ogilvie, CEO of Ogilvie Advisory referenced a recently published Moody’s report, which which demonstrated how economies that have a high take-up of digital payment, get a material boost to their GDP. The push then for greater adoption, is not just to the benefit of the fintech industry, but to the country as a whole. Reminding attendees that 50% of transactions in the UK were still being made with cash, the key to adoption was the demise of cash as a method of payment. However, there seems to be little impetus from central government to push for this, even with HMRC losing around £8b a year attempting to acquire and process cash.

The onus of adoption then lies with companies providing technological alternatives to cash so compelling, that consumers make the change organically. It’s proving to be a slow-burner, but there’s evidence this is happening. 22% of UK card transactions are now contactless and one in five customers entering a shop that doesn’t accept card payments, will immediately leave.

Unsurprisingly, the new EU directive PSD2, which comes into effect in 2018 played a large part in the discussions. The stand-out feature of the directive is the requirement for banks to open customer account information to third-party payment providers. The burden of the associated risks with this lies with the banks themselves. Though intended to stimulate competition and innovation, there are concerns that this onus on banks will see them working to mitigate risks and thus take away the space for third parties to fulfil this role.

As yet, it remains to be seen how this will play out but the consensus amongst the guest-speakers is that PSD2 is largely a welcome directive. Indeed, the biggest challenges come not from regulation but tackling fraud and cultivating a payments eco-system that encourages consumers to ditch their scrunched-up notes and shrapnel in exchange for digital alternatives.