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LAGOS (Capital Markets in Africa) – In the current tech-savvy age, it’s refreshing to find that a new revolution is taking place within banking which will mean consumers no longer have to rely on the “old” ways of paying for services.
The underlying driver for consumers today is having quick access to their funds, being able to make payments between accounts or simply trying to ensure security and continuity of payment services when paying for goods and services.
Out of the ashes of the old banking services model we are now seeing the evolution of new technologies of the FinTech’s. After almost a decade, the FinTech’s have become innovative service providers offering alternative services to the Banks on new Payment platforms.
Banks are being forced to see how they can compete by either replicating or adding to their own business models through acquisition.
At the heart of the revolution are the customers, where as consumers we are demanding more and more sophisticated services. As a result the FinTechs are delivering new services where they have spotted gaps in the market and are now challenging the traditional banks positioning. As an indication of the size of the market, the payments industry in the UK is huge with £2.2m of faster payments made every minute and £450bn of purchases made with debit cards.
Long before mobile payments became popular in the developed markets of the UK, US and Europe, Africa started the revolution in mobile money. Service providers such as M-Pesa a mobile money platform for Africa created by Vodacom the African arm of Vodafone and Safaricom based in Kenya allowed its African customers to make payments via their mobile phones and execute money transfers. The convenience of the mobile application has been embraced by its customers based in the African continent who originally did not have easy access to traditional banking services or bank accounts. In Kenya it is estimated that 43% of its GDP has been facilitated by the M-Pesa platform. This innovative solution has generated enormous benefits for consumers even in remote towns in Southern Africa where often other small businesses sprout up next to the mobile shops using M-Pesa. In the UK Barclays have rolled out Pingit a mobile phone payments service which has 3 million customers.
Real time payments
In a response to FinTech innovations, clearXchange a U.S. based platform was set up by BAML, WellsFargo, JPMorgan Chase, Capital One and US Bank. Its customers can use the platform to make real time payments without the need for clearing and having to wait. Although once the preserve of banks and credit card companies, payments have quickly evolved into internet and digital solutions such as PayPal. PayPal and Visa are also working together to allow users of PayPal and Venmo application to access their money transfers instantly.
Smartphones are also taking part in the evolution of payments. Payment channels such as Apple Pay and Android Pay have introduced yet another innovation to the market known as proximity payments. Employing near field communication chips which favourably meet consumer tastes, Smartphone users can make payment for coffee and goods at EPOS terminals using the contactless channel. Statistics show that Contactless cards payments have grown 250% in 2016. A sign of its popularity includes an application from Starbucks which also allows ordering of the coffee without human interaction at the EPOS terminal. The industry has found that the convenience of smartphone payments have replaced the card for small value payments with $450bn of revenues recorded in 2015. With use of RBS’s contactless application, 455,000 transactions a day were recorded in 2015. Other applications on the UK market include Paym database linking UK bank accounts to mobile phone numbers and MasterCard’s Qkr! used to settle food and drink bills at restaurants. In South Africa, consumers currently have the choice to pay for their electricity at supermarkets like Pick ‘n’ Pay at the EPOS terminals. Contactless payments for Energy providers can easily be developed in this way across the African continent.
Wearables for payments
Following the success of contactless payments channels and initial apprehensiveness about its security, the concept of wearables has quickly taken off. The watch like technology is being used as fitness trackers and smart watches with other devices used in cufflinks, clothes and jewellery. Often they play a role in 2nd line of defence authentication allowing the user to pass a security sensor used in public transport or to gain access to an office. Estimates by Tracita show transaction volumes of $500 bn annually.
Revised Payment Services Directive (PSD2)
PSD2 was released by the European Commission (EC) to promote competition in the European payments market bringing transparency and innovative solutions from the improved use of technology and data.
The EC wants PSD2 to change the payment value chain by driving innovation, protecting customers’ privacy and opening up account access directly to each account holder. There are two roles that third-party service providers (TPPs) will be expected to offer. AISPs will provide read access to bank account data, while Payment Initiation Service Providers (PISPs) can directly access the customer’s bank account and able to initiate payments on behalf of users. P2P transfers and bill payments are the first PISP services that are currently being developed.
The TPPs will gain access via banks to customers online bank accounts and payment service using Application programme interfaces (APIs) following consent by the customer. APIs facilitate the communication between systems without any human action necessary which is particularly helpful within the payments space. Consequently, customers will soon be able to use TPPs from checking their account balances, to making money transfers and payments.
PSD2 will cause massive disruption as acquirers and card issuers lose valuable revenues from market fragmentation. Fortunately, customers and merchants will benefit from lower merchant fees and reduced liquidity risks compared to traditional card payments. It is predicted by Accenture that £1.45 billion of card transaction revenues is projected to be earned between 2017-2020. This means the revenues normally earned by Banks will be disrupted by PISPs taking a 16% share of this on line retail payments market.
With the advent of Bitcoin in 2009 that uses the Blockchain technology platform, the uptake of Blockchain is gradually gaining prominence.
Blockchain has been defined in Wikipidia as “a transaction database shared by all nodes participating in a system based on the Bitcoin protocol”. In its simplest terms the blockchain is a digital ledger of transactions, agreements and contracts. The blockchain is a distributed ledger meaning that the ledger is spread across computers in multiple locations across the world. Digital records are grouped together in blocks and then packaged cryptographically into a historical chain using complex algorithhms. Due to its transparency, anyone who is in the network can access the latest version of the ledger. The ledger is updated in synch with each computer within the network and each block has its own unique digital signature guaranteeing an audit trail which cannot be tampered with. The integrity of the transactions and security of the chain means it can operate without administration by a central party.
“Smart contracts” another feature of blockchain, can be executed once pre-programmed conditions are fulfilled and without third party management necessary. The beauty of Smart contracts means the block chain opens up a wealth of opportunities from smart appliances able to purchase their own goods, to machine to machine business and bartering.
However, it is recognised that the use of blockchain shared ledgers will involve agreeing on new infrastructure operating models such as how we replace core networks such as Swift, Visa and the DTCC, than simply the technology itself.
Although the concept of blockchain is an attractive one the decentralised nature of the system means transactions do not need to pass through banks or clearing houses and are unregulated. Whilst the system appears to be immutable with the notion of trust defunct, it still raises issues by the Financial system of its position in mainstream regulated markets.
That said, it hasn’t escaped the interest of Regulators and Central Banks. The bank of England (BoE) is keen on engaging FinTechs in exploring the value of the blockchain technology. The Central Bank has recently partnered with Ripple a San Francisco-based startup to test a blockchain-based technology. The aim is to make cross-border payments and the movement of currencies instantaneous. By improving speed, it will make the payments process more efficient and lower settlement risk.
This article is featured in the April 2017 edition of INTO AFRICA Magazine, Powering Africa’s Energy Projects.
Kinsuk Mitra, Principal for Risk & Compliance UK & Ireland, Financial Services practice, HCL Technologies. Kinsuk’s career spans 25 years across the Investment Banking sector starting at Citigroup in London as a Financial and Product Controller tracking Global Fixed income and Equities markets. During the dot com era Kinsuk helped to build e-business Trading platforms for UBS and Credit Suisse in Switzerland as a Risk Manager. Following tighter regulation in Banking, Kinsuk assisted as a Management Consultant to deliver major Regulatory and Risk management change programmes and IT implementations. As a Programme Director, Kinsuk has helped achieve compliance for financial services clients faced with demanding EU competition rules and regulations driving Mergers and acquisitions transactions.
Major successes included advising the German stock exchange in its $7.4bn ambition to tie up with the NYSE and also NBNK in its £1.5bn bid for the Lloyds branch network. Kinsuk has successfully driven international teams, delivering Basel 2 and Basel 3 with Investment Banks Fortis, BNP Paribas and HSBC in London and at Standard Bank Group in Johannesburg. More recently Kinsuk was a Risk COO at Deutsche Bank supporting the CRO in strengthening the Banks Risk & Compliance framework. Kinsuk is a Chartered Accountant and a member of the Southern African Venture Capital Association SAVCA.