The biggest threat to the future of your payments business

I read a couple of articles this week which reinforced my belief that the biggest threat to most payments businesses is their inability to adapt quickly enough to the changing landscape. The first one was by John Seely Brown, the Co-Chairman for Deloitte’s ‘Centre for the Edge’, a body which develops research on new corporate growth.  In their Tech Trends 2017 report he had this to say:

“The exponential pace of technological advancement is, if anything, accelerating. Look back at the amazing changes that have taken place during the last 15 years. At the beginning of the noughties, the holy grail of competitive advantage was scalable efficiency—a goal that had remained mostly unchanged since the industrial revolution.

Then the Big Shift happened. Fuelled in part by macro advances in cloud, mobile, and analytics, exponential advances across technology disciplines spawned new competitors, rewired industries, and made obsolete many institutional architectures.

Rather than thinking of our business models as a 200,000-ton cargo ship sailing on calm open waters, we suddenly needed to mimic a skilled kayaker navigating white water. Today, we must read contextual currents and disturbances, divining what lies beneath the surface, and use these insights to drive accelerated action.”

If companies don’t act now they face a rapid decline, as they slowly try to turn the cargo ship while armies of kayakers speed past them.

Consumer trends

Take a look at these numbers from Nasdaq’s 2017 Payments Processing Trends:

• Between 2015-2020, mobile payment volume is expected to rise by a compound annual growth rate (CAGR) of 80%.
• The number of in-store mobile payment users will rise at a five-year CAGR of 40% to reach 150 million by the end of 2020. This growth would represent 56% of the consumer population during that year.
• There will be 51 million mPOS devices by 2019, that is 46% of all POS systems.

Retailers will use mobile wallet and connected technology to help meet the insatiable demand for instant access to products and services. According to Deloitte’s Tech Trends report, people will be using their smartphones to “make an ‘order ahead’ purchase online”.  Location tracking will notify a store when you’ve arrived to collect your goods, and the whole process will bypass the need for long queues and credit cards.

Shopping as we know it is in for a big shake-up.

Regulating the landscape

These changes will undoubtedly have an impact on fraud. The kayakers will be surrounded by great whites that are aggressively looking to take advantage of any weakness in their boat. To fight this, advances in fraud technology will need to connect to various parts of the payment and non-payment ecosystem. Fraud detection systems will need to take a far closer look at consumer behaviour and act like Brody in Jaws. The technology will be increasingly sophisticated, with greater use of biometrics, and will aim to blow fraudsters out of the water.

Governance of this developing and dynamic state of affairs will require yet more legislation.

The largest threat and how to mitigate risk

The largest threat to all payment businesses will be failure to innovate speedily. As I wrote in one of my previous Finextra articles, APIs are going to be the key differentiators between the true innovators in the payments community and those too cumbersome to adapt.

The only way to manage this innovation is through a different approach to your development plans. Successful evolution will occur by shifting from manual testing to automation. This not only increases the speed you can launch to market, but reduces the cost of delivery and risks of failure. According to Capgemini, QA and test budgets have grown steadily every year since 2012. On average, the industry is spending 31% of its IT budgets on testing and they predict that this will rise to 40% over the next two years. Capgemini believes a reasonable level should be 25%. I believe it should be lower still; our experience suggests that 20% is sufficient for anyone testing payment technology.

Capgemini offers the following reasons for the increase in test budgets (part of their global survey of industry executives):

1. Increased amounts of developments and releases – 52% (of respondents)
2. A shift to Agile and DevOps causing more test iterations – 41%
3. Increased challenges with test environments – 36%
4. Businesses demanding higher quality IT – 33%
5. Detection of more defects which leads to more/longer test cycles – 31%

Again, the trends are there to see: more releases caused by a shift to Agile and DevOps from businesses demanding higher quality IT. The question however is this:

Will you be watching all of this from a capsizing cargo ship or patting yourself on the back as you kayak through the rapids?

The smug kayakers will be those who have changed their approach to innovation. They will be testing new payment systems and rapidly launching technology in a secure and inexpensive way.