In the first six months, the global revenues for payment systems declined by an estimated 22% when compared to the same period in 2019. According to BCG, from 2019 to 2024, the global payments revenue is likely to increase by around 1% to 4%, depending on the speed of recovery from the pandemic. However, even in a best-case scenario where the rebound is quick, the expected growth rate would be half the rate of the prior 5 years. 

However, in the past six months, e-commerce, digital payments, and other online services have all registered excellent growth. The pandemic has reshaped how consumers and businesses interact with each other and this will shape the future of the payments industry. 

Here are a few of the trends that were observed during this time.

Cash to Non-cash conversion

Even countries that have been traditionally cash loyal have experienced a drop in the use of cash for transactions and have seen a rise in digital payments. For instance, the UK has seen a 50% drop in cash usage in March 2020. Payments made in-person are reducing every day, as people are being encouraged to stop handling cash to curb the transmission of the virus. In fact, most businesses encourage contactless payments, with some going so far as to not accept them at all. 

Electronic peer-to-peer and consumer-to-business payments have experienced growth during this time. Debit cards, normally associated with lower value transactions, have also exhibited growth. On the other hand, ATM transactions and cash use had experienced a decline during the same period – In India, ATM usage fell to almost 50% and a steep decline was observed in the UK as well. It was estimated that transactions executed via cash will decline by 4 to 5% during this year, which is around 4 to 5 times the annual decrease experienced during the last couple of years. 

Boost for e-commerce 

The pandemic forced a significant percent of the population to shift towards digital channels for their retail purchasing activity. Industries that depend on travel such as hospitality and tourism as well those that depend on density such as entertainment are likely to be unfortunate casualties in the short term, based on how the crisis has been progressing. However, niche segments such as fresh food, pet supplies, in-home entertainment, and so on are expected to grow at better rates. In the retail sector especially, a shift in buyer behavior was observed with customers moving from brick-and-mortar to online retail shopping. This was evident from Amazon’s second-quarter numbers that recorded a 40 % Y-O-Y boosted by the growth in grocery sales. 

This shift in consumption could also lead to a shift in the payment method used. For instance, in place of using credit/ debit cards, consumers could shift to contactless payment modes such as digital wallets or cryptocurrencies.

Move from “physical” to “virtual banking”

Banks in various parts of the world are closing branches either temporarily or permanently due to the current scenario. This has been aided by the adoption of technologies for real-time payment facilities.

In the words of Deepak Sharma, Chief Digital Officer at Kotak Banks, India – “Ninety-five percent of transactions moved out of branches post-COVID. Unless there is a great need for customers to visit branches, we don’t see it happening (again anytime soon). “

“We have also seen fast adoption of WhatsApp banking and conversational banking bots. Very soon, we will see (these changes apparent) while doing small business transactions and loan origination as well. Even after we come out of COVID, this shift in habits that we (have seen) will continue,” he added.

Cross-border payment flows severely affected

Because of lockdowns introduced by Governments, international travel came to a grinding halt causing a massive decline in international transactions. This was further worsened by waivers offered on the transaction to boost demand. Inter-regional trade had a deeper impact than intra-regional which further hurt cross-border payments, while at the same time the prices of commodities such as oil dropped since demand declined. This had a 2-fold effect on the transaction values since both the volume as well as the unit price dropped. 

To conclude, crises often create an opportunity for firms to take a good look at how they conduct business. COVID-19 is no different except for the speed at which it has managed to affect change. Payment systems have been forced to accelerate and meet the challenges raised against them. The most talented firms that adapt to the situation, leap ahead of the competition, and deliver exceptional value to customers will survive and shape the industry.

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In the wake of this uncertainty, firms have been focusing on investing only in the following areas:

Operations: to ensure continued access to basic services;

Supply chain: to address emerging supplier and customer needs;

Revenue: to ensure the continued viability of the business; and

Workforce: to support employees and remote working amongst disruption.

As per a study conducted by Boston Consulting Group (BCG), around 60% of firms have paused the deployments of new IT systems, for instance, and 44% have delayed upgrades to their existing systems. A study done by Gartner shows that the banking industry, one of the largest IT spenders, is expected to cut down on their IT spending by nearly 4.7% owing to the turbulent market. They are focusing on investing in technologies that will keep their businesses running – specifically by going digital and investing in emerging technologies trying to adapt to the “new normal”.

The New Normal

The entire world is currently transforming in an attempt to adjust to the new normal – the practice of social distancing. Even though a lot of industries can work with the limitations of social distancing poses, there are many which cannot. 

Banking is one such industry. Banks build trust in very tangible ways – with retail outlets that are designed to emanate confidence and security. Older and larger banks rely on the security that comes from human contact, reassuring customers that their money is safe and in a concrete vehicle, as opposed to a mere tab in their internet browser. 

When COVID-19 struck, their business took a hit even though most banks had already enabled digital banking for their customers. This was not because the business operations affected their customers drastically, but because they needed their employees to work out of their retail outlets to process transactions. Social distancing and working from home is feasible only when employees are enabled by the infrastructure they need. This new normal meant molding a secure environment that was safe for both the employees and for customers’ transactions.

Agility and Customer Experience

Banking, insurance, and other financial services are highly customer centric. Traditionally, they have always needed the human component to provide a sense of confidence to their customers. COVID-19 has put these companies in a situation that they haven’t ever seen before. Traditional financial systems have not been very agile when it comes to change, with a large cluster of systems hosted in an on-premises environment and large IT teams supporting it for years. The pandemic showed them the importance of agility in their systems and how it can impact their overall customer experience and hence, their business too.

During the initial days of the lockdown in different geographies, many banks could not keep up with the number of customer requests pouring in, and multiple outages were reported owing to the lack of staff. This was heavily impacting their business’s reputation. Soon, their customers’ behavior changed with the new normal and the demand for digital banking was at an all-time high. This is where an agile system would be quite useful, so they can quickly and efficiently change their business operations as needed by customer behavior. 

Risks and Business Continuity

With COVID-19, every organization was faced with a pressing question – how to keep the business running? This was definitely a concern for those who were doing business with banks or other financial services companies. 

For the banks themselves, the actual challenge was to reassess their customers’ Credit Risks. With a looming NPA crisis, it was already a tough task for banks to give out loans to corporates. Their existing formulas now needed a revamp, as the variables had changed. In many countries, a moratorium was announced by Central Banks, keeping private banks devoid of any interest revenue for that time. Handling the collection process and dealing with distressed customers was the other big challenge they faced as problems caused on this front were leading to a lot of reputation risk for the organization. Robust risk management functions would be needed with the active tracking of borrowers. 

Given the circumstances; their business operating model needed rework to ensure that business continuity is maintained.

How Can Technology Help?

Technology has been a key driver of the financial services industry for ages now, with the domain spending around 10 percent of its revenue on IT expenditure. However, now is the time for these companies to use this budget wisely, as technology is going to be what saves them from bankruptcy. 

In the current situation, there is an acceleration to the digital strategy of all bank leaders. Decision-making concerning these projects has quickened and “someday” or “one day” has become “today”.

Operational costs have become much higher during the pandemic due to unconventional methods of working and handling crisis management. Organizations have had to provide facilities for everyone, including their call center employees, to work from home. Thus, technology must play a key role to provide these facilities remotely – be it secure access through a VPN, or a security system to process the transactions without fail or delay. 

Machine Learning, RPA, and other emerging technologies could be an essential component to help solve a lot of these challenges, as they reduce the dependency on humans to an extent. It could be expected that financial services companies could start to adopt Machine Learning algorithms for their credit scoring systems to make their systems more agile. Insurance companies could adopt technologies such as image processing to help underwriters in claim processing and so on. There has also been a shift to Cloud hosting from On-Premise installations, which was highly preferred by the large traditional banks, to keep all activities remote. Some banks have started turning to intelligent automation to tackle problems related to collections and debt as well.

Conclusion

Going digital is the key solution, even though that is not the ultimate goal, as human interaction is still imperative when it comes to the banking and financial services sector. However, if  you work in financial services, now is the right time to look into developing a viable Digital Transformation roadmap for your company, and ensure you have the right technologies to stay agile and customer-centric.

The ability to balance technology and the human element will define every organization’s success in the future. At Experion, we help enterprises on their digitization journeys by developing FinTech solutions that are truly future-proof.  For more information on how we can help you stay future-ready, drop a mail to sales@blackrockdxb.com 

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But the recent pandemic, COVID-19,  which has the whole world reeling from the repercussions of being locked down,  has made steady paychecks with health insurance benefits look a lot more promising. And while there are advantages to being in the gig economy, there are also disadvantages that cause incredible anxiety to the workers in the ecosystem, the biggest among them, undoubtedly,  being the payment question.

According to a Global Marketplace and Gig Economy Payment Satisfaction report, a survey of gig economy freelancers from various industries around the world found that 73% of gig workers are likely to leave the marketplace due to payment issues. Many gig workers and freelancers face delayed or even denied payments, and many spend weeks tracking down payments every year. And this is where companies who rely on gig-workers can make a difference and digital transformation can be a lifesaver. One could argue that adopting a digital transformation platform to meet employees’ requirements in real-time –  an instantaneous payment platform for instance – will help the gig economy thrive going forward. 

In a move that seemed understanding of this predicament, the US Federal Reserve officially announced in August 2019 that it plans to build a real-time payment service by 2023-2024 called ‘FedNow’. Hopefully, the changes that COVID-19 has brought upon the world economy spurs them on to develop and implement this sooner rather than later. 

In the announcement, the Fed Reserve invited extensive feedback from members of the banking and payment community and in a much-publicized response, Google wrote to the US Federal Reserve Board detailing the successful example of the UPI (Unified Payment Interface) based digital payment platform in India to build FedNow. 

UPI, according to the NCPI website “is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments under one hood.”  It also caters to the ‘peer to peer’ collect request, which can be scheduled and paid according to your convenience. 

Google listed three major qualities of the UPI worth emulating: 

• Interoperability – account to account transfer and not just an online wallet
• Real-time money transfers
• An ‘open’ system – standards are open-source so technology companies can build their implementation of the solution

Let’s look at these qualities a bit closer and understand how they can become game-changers for the gig-economy.

Interoperability

The diverse requirements of the US FinTech industry necessitated multiple channels for enabling payments. The payment systems currently in place don’t interoperate seamlessly. Private solutions are closed-loop systems too –  real-time transfers are possible only between those users who use their specific solution. This is arguably the biggest drawback of the multitude of perfectly functional payments systems that have organically sprung up over the years.

Now imagine a new platform that can now provide you with access to the funds lying in your bank account and can transfer money from your PSP (Payment Service Provider) to another party’s bank account without worrying about the PSP the other party uses. This would essentially convert all PSPs into portals to your financial world. This is what the UPI platform accomplishes.  

Real-Time Money Transfer

As smartphones are replacing physical cards and POS systems, any new system being developed should be able to authorize a payment using a pin or two-factor authentication to transfer cash instantaneously regardless of the platform the merchant uses. Without Visa or Mastercard needing to act as intermediaries. A system that combines all the existing payment rails and can transfer money to any of the nodes seamlessly, just like UPI does.

‘Open’ System

In the current payment ecosystem, different payment rails need different types of authentication information. The new system should simplify and standardize these operations – the different types of authentication for each payment rail should be handled under the hood by the new system.  The result would be an open and interoperable payment infrastructure, compatible with all the existing technologies and has the potential to integrate newer ones. 

This is what will enable any PSP to facilitate transactions to any other PSP instantaneously, leveling the playing field for banking and non-banking PSPs (Fintech firms) when it comes to managing payments. 

The Entrepreneur’s Advantage 

The biggest beneficiaries of such an instantaneous payment platform,  other than gig workers, will be small business owners and the low fixed-income individual who has to wait for a couple of days after a paycheck is deposited for the amount to reflect in their account.

If FedNow works with this kind of an open system, it will create opportunities for small and medium-sized banks, credit unions, FinTech companies, and large retailers to develop their version of PSP applications. And while developing such a system, firms must ensure that they create a simple, intuitive platform for P2P transfers and digital POS systems for their customers. 

It will also create an opportunity for payment and ‘payment adjacent’ solutions providers to develop their own version of PSP apps. For instance, even small FinTech firms can utilize their existing infrastructure and leverage digital transformation solutions to meet customer requirements, offering innovative, secure and user-friendly solutions that can compete with the likes of larger banks.  In this way, they can reposition themselves for continued success, even post COVID-19.

Having developed FinTech solutions for their partners, companies like Black Rock IT Solutions have a distinct advantage in developing PSP apps for their client partners, that companies around the globe can rely on to be top-notch.

To know more about Experion’s Fintech offerings, drop a mail to sales@blackrockdxb.com

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Blockchain as a technology (BCT)/software protocol has a lot to offer to the financial services realm. A major attraction for BCT within financial services is its ability for disintermediation, a cost-saving mechanism for most sector players. Blockchain trims down a need for costly infrastructure requirements that aid in transaction processing.

Before we begin, let us look at what is meant by Blockchain technology.

As per industry definitions, Blockchain is a distributed digital ledger (DLT) that allows transactions of value to be recorded and verified electronically over a network of computers (called nodes/blocks) without being managed by a central ledger. Data is encrypted inside each block to protect it from fraud /hackers. All data/transactions within the blocks are cryptographically encrypted.

Blockchains are more trustworthy than conventional centralized systems because each transaction on the chain is verified/validated by the participating nodes/blocks and also encrypted cryptographically. Any change/duplication of data in one of the nodes is synced with the other nodes and this leads to transparency. As per a recent article published in the Medium, Blockchain’s decentralized, open & cryptographic nature allow people to trust each other and transact peer to peer, making the need for intermediaries obsolete. (*Source:Medium)

So how will Blockchain prove to be a transformational force for the financial services domain? Let us check out a few scenarios:

1. International Payments: Global payment volumes have been rising with the passing years. Along with this rise is the increase in infrastructure and processing requirements along with the need for quick settlements. Security, of course, is important as it always has been. Transaction costs are another challenge. Competition from non-banking players is seen as a forceful change in the payments scenario.

Blockchain technology has great hopes pinned to it in the form of savings in transaction costs involving intermediaries as well as the time lags associated with the transactions. Real time payments with reduced settlement risks are another possible outcome of Blockchain implementation. This is in addition to lessening the threats to data safety, privacy and similar limitations.

2. Asset Management: Global asset management is cumbersome when it comes to clearance and settlement practices. Blockchain promises to simplify processes, bring down costs and delays. Blockchain implementation can speed up decision making, protect data sensitivity and provide much-needed transparency to transactions. This is in addition to simplification in the KYC, client onboarding, trading processes.

3. Trade Finance: Trade is an area that is largely prone to theft and fraud dangers. Documents involved in a trade process such as invoices, Letter of Credit, Bank Guarantees and Bills of Lading are not free from the dangers of forging. This is what Blockchain adoption can eliminate. Since it is a peer to peer network, middlemen are cut off, bringing down instances of cost and time savings. Asset tracking can be made simple as each asset is linked to a generated serial number within the chain. Another instance of the technology making trade finance simpler is in the execution and maintenance of Smart Contracts.

4. Investment Banking: It is said that Blockchain technology could save millions of dollars for investment banks. This includes a huge savings in office infrastructure in addition to savings involved in reconciliation processes, enhancement of data accuracy, transparency in dealings and auditability (Source: Accenture Report on Investment Banking 2017)

5. Capital Markets: Capital markets include a global network of financial institutions that act as trusted intermediaries. Such intermediaries possess volumes of isolated data, leading to challenges in the form of data inaccuracies, processing delays and resultant errors. What the Blockchain can do is to bring down the number of intermediaries and in the process, eliminate many of the earlier roadblocks. Capital markets also gain a number of benefits such as faster clearance and settlements, easier compliance requirements, and the operational efficiencies resulting from a mix of all these benefits.

6. Financial Inclusion: For the many nameless people on the planet, Blockchain can be a way to financial inclusion and creation of own identity. This way they could make more money by selling their wares directly to people who matter, without ever having to go through meddlesome intermediaries. An example is the Blockchain connecting several mobile wallet providers for quick services to people who are in need for money transfers and payments, yet not in a financial network.

7. Insurance Claims: A trusted technology such as Blockchain is the most suited for transformation of the insurance industry. The onus would be on increasing transparency to the entire process. The end-to-end process of insurance starting from customer evaluation down to claims processing is now covered by a haze of mistrust and formidable costs, which prevents even the most eligible parties from reaching out for cover. This is true globally, and is what Blockchain technology can correct. Smart contracts linked to Blockchain can enable a dynamic pricing policy for premiums.

8. KYC Process: Blockchain creates an internal identity process that is aided by storing data in the form of blocks and making this data tamper-proof using a hash format. This ensures greater data security, identity management and fraud prevention in transactions. Banks can be a beneficiary of such automation of KYC, leading to customer experience and loyalty.

9. Banking in general: Though banking as a whole cannot be overthrown by disruptive technologies including Blockchain, there is a greater chance for the industry to undergo a sea change as a result. More transparency, faster processing, cost reduction, bringing down cyber risks plus mediation and central controls will change banking scenarios for the better. Since Blockchain operates with blocks/nodes that are tamper-proof, all transactions that take place in the peer-to-peer network are relayed throughout the blocks and verified. A way forward for banks is to start testing the waters internally by automating back office functions, and gradually extend it to outside operations.

Challenges to Implementation
Blockchain technology needs agreement between the different parties/functionaries as well as regulatory approvals before it can be fully adopted into the various financial service realms. Infrastructural expenses can be another hurdle to adoption as legacy systems can be costly or even suicidal to interrupt, even for a few minutes or hours. Process and people changes are also an essential part of implementation, and this is not often an easy thing to accomplish.

Conclusion
Blockchain will definitely bring about a big wave of transformation into the financial services sector, with focus falling on Payments, Trade Finance and Banking. It may not eliminate intermediaries and banking altogether, but is poised to make the scenario much more customer-friendly and trustworthy.

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