Future remains bright for next-generation payments | KPMG | AU

Future remains bright for next-generation payments solution

Future remains bright for next-generation payments

From money transfers to point-of-sale solutions, payments comprise one of the largest sub-sectors of the fintech industry. In 2014 and 2015, payments technology earned more than $2 billion and $2.7 billion in venture capital (VC) funding respectively, with high-value deals in the headlines. Though funding has dipped in the first 3 quarters of 2016, as in other fintech areas, quarter-by-quarter results show strong and steady interest in this sub-sector.

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Partner, Payments Advisory

KPMG Australia

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Continued activity in crowded personal payments landscape

Personal payments is the poster child of next-generation payments, and solutions that enhance the customer experience and appear to deliver ‘real-time’ payments are the current big trend. Established players within this space like Venmo and Square Cash are gobbling up market share.

While banks once viewed next-generation payments solutions as too small to be credible, banks are increasingly feeling threatened by the disintermediation occurring within the P2P payments space.

Ultimately, if banks are no longer viewed as the service provider for consumer payments, there could be an adverse impact on their revenues. Yet, while fintech companies have gained significant traction at the top layer by providing a better and more frictionless customer experience, their solutions still require the banks’ traditional infrastructures to move the money.

Knowing this, some of the biggest banks have begun to shift their strategies toward investment, acquisition and even actively partnering with fintech companies to create compelling digital solutions. There are also early signs that this market is beginning to mature, with newer startups facing an uphill battle against more established players.

Tech giants pushing into retail payments

Retail payment types, like digital wallets and point-of-sale solutions, continue to attract significant interest and activity. This is the area where many of the tech giants have come to play, with ApplePay and Google’s Android Pay, further disintermediating the banks for consumer attention and market share.

Creating and maintaining an excellent customer experience, quick transaction speeds and the assurance of the payment, as well as reducing costs to the merchant, are among the key concerns in this space. Consumer uptake has been slow, but expect this to change in coming quarters. While wearables may remain ‘gimmicky,’ use of a mobile phone for payments and other transactions will quickly become the new normal.

Disruption on the horizon for B2B and cross-border payments

Corporate or B2B payments and cross-border payments are areas that have not seen significant fintech investment to date but this trend is beginning to change. In the corporate space, opportunities exist for fintech companies that can insert themselves into existing processes to reduce friction across the value chain. Some of the emerging trends in these areas include cloud-based open API platforms for accepting digital payments and payment systems enhanced with richer customer data to help facilitate or automate processes.

Cross-border payments is another area ripe for disruption, as current payment methods are costly, inefficient and lack the transparency desired by both consumers and regulators. Fintech companies like Earthport are leveraging and improving the traditional correspondent payment model, while others such as Ripple, are using distributed ledger technologies to revolutionise this space.

Regulatory pressures affecting payment space

The intersection between regulation and the payments sector is fairly diverse around the world. Regulatory bodies in Europe and Australia are pushing a regulatory standard, while regulators in the US have been strongly encouraging change without pushing a specific mandate.

In Europe, the revised Directive on Payment Services (PSD2) promises a significant impact and a number of major benefits for fintech companies, merchants and consumers alike, and opens up the payments area to new competitors who can use aggregated data to create ancillary payment services.

In contrast, US regulatory bodies are attempting to balance the needs of fostering competition and promoting standards but the tendency is to let the market forces play out. That said, there has been a recent push to modernise the payment system in the US, which includes the development of a Real-Time Payment system that leverages the ISO 20022 global message standard.

Looking forward

Payments technology is a hot area that shows little sign of cooling. While the industry will continue to mature and consolidation is likely in some areas, payments will remain a driving force in fintech. In coming quarters, technology and applications that leverage Real-Time Payments will to continue to draw significant investor attention.

The venuture capital investment will go into solutions and apps that make payments easier, simpler and richer in data, particularly in the rapidly evolving online world. Also expect to see continued growth in mobile payments, as the speed of advancements in technology accelerates the adoption of mobile solutions at an ever-greater pace.

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