The payments space is anything but stagnant. Innovation and disruptive changes have ushered in a transition period from traditional payments to digital. Everything from infrastructure to regulations and technologies is shifting toward a new reality. As a result of this evolution, we’ve seen a lot of consolidation in 2019 as well as some signals about what 2020 holds. To explore the nuances of these changes and get a better sense of what is to come in the near- and long-term, I spoke to the experts.
This is the first in a series of Q&A articles with thought leaders in Fintech & Payments. Dave Maddox is responsible for US business development in the Banking, Financial Markets, Payments and Insurance industries for IBM’s Blockchain Software Solutions and Blockchain Consulting Services offerings. He has 25+ years of experience in the Financial Services industry with executive positions in sales management, business development, and program development. His area of expertise is the Payment Industry. Dave was recently named one of the top 100 to follow on Twitter by the Jay Palter #fintech list.
Ashley Poynter: 2019 ushered in quite a bit of consolidation in the payment’s ecosystem (Fiserv buying First Data, FIS acquiring Worldpay, etc.). What do you think this signals in terms of the new landscape of the industry?
Dave Maddox: Having worked with “First Data” and “TSYS” over the last 25 years it is sad to see their names disappear from the payments landscape. But change is inevitable, and it is not surprising to see the continued consolidation in the industry. Over the next five years the payments landscape will evolve; applications will be consolidated, or shelved, infrastructure and operations will be collapsed with new processes, procedures and products enhanced. The challenge for the mega providers will be to consolidate these systems without losing clients. This consolidation has been difficult in the past due to the integration of back-end applications into client’s front-end POS and CRM systems. The payment processing industry is known for its intense focus on cost savings; as a result, the application consolidation will move more slowly than expected. Over time banks and merchants may have less choice from the mega providers which could mean higher prices. These mega providers may reduce competition due to their scale and the potential for bundling of services. In addition, the consolidation may provide new opportunities for the niche providers. The mega providers will continue to take profits from the U.S. and build out their international presence. Finally, the biggest challenge facing the mega providers within the payments processing industry will be revenue growth.
Ashley: What is your “big prediction” for Payments in 2020? Who will the big players be? Also, what technology/(ies) will lead the headlines in transforming payments as we know it?
Dave: While the mega players consolidate and compete in the marketplace, new payment platforms will continue to chip away at the mega providers market share. Ripple, Alibaba, M-Pesa, WeChat Pay, Paypal. World Wire and others will continue to innovate. No individual company will dominate the industry, but new products and services are more likely from the disrupters than the mega providers. I see continuing development of API’s to bring the back office to the front office which will also assist with the industry consolidation of applications. API’s will assist the banks and processors in their digital transformation, and many will monetize their use to drive revenue. Cloud is the third technology that will have an impact. Banks were slow to adopt public cloud and tended to develop private cloud alternatives. In 2020, I see hybrid cloud dominating and multi-cloud integration the next great challenge. Finally, the technology that could have the biggest impact on the U.S. payment system is a completely new rail, the Fed’s Faster Payments system. This system could be disruptive to Visa/MC/Discover/Amex over the next 10 years if they enable C2B or B2B for large merchants.
Ashley: By next year, 40% of US consumers will be made up of Gen Z. How will this impact digital payments trends as well as how financial institutions respond to changing consumer demands?
Dave: Gen Z will impact the payments business much more than the millennials. They will be less loyal to traditional banks and more willing to try new things. However, they still need a financial institution for deposits, loans, and investments — market intermediators (e.g. Facebook, Google, Amazon) are not banks at the end of the day. What I see is more of an opening for resellers and marketers of financial services in digital marketplaces. Alliances between banks and intermediators will grow in the next 5 to 10 years.
Ashley: Mobile payments have been gaining momentum with over one-fifth of the US population using them last year. That said, the US is slower than other countries in adoption. Why? And will this continue to be the trend in 2020?
Dave: The US payments market is often a prisoner of past success. Years ago, Europe telecommunications infrastructure was not reliable thus the new “chip and pin” technology was required for card authorization. The US, with reliable telecommunications infrastructure, had no requirement to move to “chip and pin” and adoption has been much slower. Mobile payments face similar challenges in the US. There are three “success” headwinds to adoption. First, the speedy card swipe is very successful. Changing consumer behavior requires motivation and nothing has emerged to reward or punish consumers to drive a change in that behavior. Phones are still a cumbersome process at the checkout line. Second, the success of rewards programs funded by higher interchange in the US far surpasses the rest of the world; 90% of all US cards have some type of reward program. Most US consumers have multiple cards with different rewards programs and US consumers often segment transactions by reward program. Finally, while Apple Pay and Android Pay have seen slow but steady growth, not all of the US POS devices universally support mobile payments.
Ashley: With PSD2 coming into full effect for the EU next month, many wonder if open banking will make its way to the US. What are your thoughts on this? Are there benefits to the US adopting an open banking model?
Dave: I doubt PSD2-like schemes will be successful in the U.S. The U.S. is controlled by 5 or 6 banks which control 85%+ of the lending and deposit business. There is no incentive for the big banks to have common standards that enable everyone to have access to their customers. There is more downside than upside for them. PSD2 like schemes would enable anyone to have access to their customers without any compensation, further enabling competition from disruptors in this space.
Ashley: What are your thoughts on Blockchain and its role in payments in 2020?
Dave: Our CEO, Ginni Rometty has stated “What the internet did for communications, I think Blockchain will do for trusted transactions.” That’s a bold statement but I believe it will be transformational across multiple industries including payments. We are early in the adoption of this technology and new systems and business models continue to emerge. Estimates are that by 2025 10% of the global GDP will be stored on Blockchain. IBM has over 400 blockchain networks in some level of production. A number of those impact the payment industry. First, IBM has established “we.trade”. Through we.trade nine of Europe’s largest banks are working with IBM to build and host a new trade finance platform designed to simplify and facilitate domestic and cross-border trade for small and medium enterprises in Europe, while helping to increase overall trade transaction transparency. This scalable system improves security, lowers barriers to entry for SMB’s and provides invoice financing and smart contracts for payments eliminating counterparty risk. Second, IBM announced World Wire earlier this year. World Wire is a new global payment rail and FX platform for financial institutions and banks that can simultaneously clear and settle cross-border payments in near real-time. Built on the public, permissioned Stellar blockchain protocol, World Wire uses a digital asset as the bridge between fiat currencies to clear and settle payments. The first use case leverages a USD stable coin (stable coins represent fiat currency deposits) enabling cross-border payments with specific support for payment channels (disbursement of payment at destination point). World Wire was designed to eliminate enduring challenges that have long hampered the cross-border payments industry including; time, cost, and complexity. Finally, I believe a network of networks will emerge over time. Most of the networks that emerge will have requirements for some form of payments. Applications will be built to run across multiple networks to provide that payment capability typically built as a smart contract. Blockchain is a transformational technology and transformation takes time.
Ashley: Japanese bank Mitsubishi UFJ Financial Group (MUFG) is getting ready to roll out a blockchain-based payment system in partnership with US-based Akamai next year. The prediction is that this system will significantly reduce transaction costs and increase transaction numbers. Is this the first domino that will kick off a chain reaction within financial institutions globally in terms of using Blockchain technology for payments? Or are we not at that tipping point yet?
Dave: I understand the claim is this system can scale to 1,000,000 transactions per second. I have not seen any benchmark or real data to support this claim. It is difficult to imagine that once all the features and functions (authentication, fraud, AML, sanctions, etc.) are incorporated into the solution it will deliver the expected performance. One can only assume they are eliminating the clearing and settlement process and moving to “real time settlement”. This may be problematic to the banks that prefer to hold onto traditional payment methods which are more lucrative for them.
Stay tuned in the coming weeks. I will be interviewing more experts on the evolution of the payments world, shifts in the ecosystem, and what to expect in 2020.
If you’re interested in participating in one of our Q&A With the Experts series, please send us a note here.