Payments are atomizing...

In part one of my blog on atomizing payments, I explained how payments volumes are likely to expand 25 times or more in the future, resulting in trillions of new payments. In part two, I explain a precedent for this atomization and its implications, and how the payments industry needs to prepare.

Precedent and Implications

Atomization of communication is a precedent. Nowadays, communication is dominated by e-mail, texts and social media posts in volumes that dwarf those of the past using paper. Individuals typically send and receive hundreds of texts and e-mails each week, compared to a few letters in the past. It has taken about 20 years to reach this state, and volumes are still growing.

If atomization of communications is replicated in the payments industry, trillions of payments can become a realistic prospect. The implications are far-reaching.

  • Firstly, cards have no role to play. They may endure for many more years, but as an innovation of the 1960s, they are inefficient, expensive and fraud-prone, unsuited to the atomized payments landscape.
  • Secondly, merchant acquiring may disappear over time. Necessary in the past to connect merchants with the banking system and enable commerce, technology (for example open APIs) is superseding their role.
  • Thirdly, payment revenue will drop towards zero. Merchant fees are not sustainable and will simply be bypassed if maintained. Instead, new business models will emerge, based on the security, resilience and reach of transactions.
  • Fourthly, new account-to-account payment infrastructures and controls will be required to support the volume and bandwidth needed for atomized payments.
  • Lastly, the payment industry needs foresight to plan for this change.

Sleepwalking towards the future

Kevin Hanley at RBS recently gave a great Finextra interview in which he talked about the divergence between technology changing exponentially and industries, organizations and individuals thinking linearly. Payments is an industry changing exponentially, however, much of it remains in a linear mode, underestimating the impact of this change. For example, earlier this year, at a conference I was rebuked for forecasting UK contactless card volumes would rise from three billion in 2016 to six to nine billion transactions this year. A member of the ATM industry, passionate about cash, described my forecast as irresponsible. However, UK Finance figures already show the country is clearly on track to exceed six billion contactless transactions in 2017.

My point at the time was that no one is predicting these volumes, or planning for them, yet they are happening. The payments industry is sleepwalking towards its future. The industry needs to think and act exponentially, and it needs a vision. A 25-times increase in volumes over 30 years is only an 11 percent per year compound growth rate—a rate that the world-leading UK Faster Payments system has exceeded consistently for many years.

We are already in an exponential payments world. The good news is that innovation and change in payments will be sustained for many years and the responsible action to take is to embrace it now.

My thanks to Nick Caplan, Chairman of Faster Payments Scheme Ltd for the inspiration behind this blog.

 

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