By Nilesh Pandya, Chief Financial Officer of Skrill
Digital payment providers are growing and evolving, fast. The developments involving mobile are changing the way consumers spend their money. They are not a threat to the traditional banking systems though, and offer a number of opportunities. In all sense digital payments are the future of both business and banking.
The evolution of payment technology has moved fast. Consumers today are less likely to use cheques as a means of payment.While there is a segment of consumers that prefer to use cash, there also appears to be a growing preference to use direct card payments, even for micro payments, if this is delivered in a way that is simple and convenient
for the consumer.
But what does this mean for the banking industry? Before answering,we need to look at some fundamental market shifts.
Payments are more mobile than ever
The Futures Company boldly suggests that the majority of Britons will be using their mobile phones to purchase goods, pay bills and manage their banks accounts by as early as 2015. One in three Britons now carry less than five pounds in cash, suggests a recent study. These changes will drive the way businesses accept payments in the future as well as impact on the ways banks operate.
A radical approach can be seen in Sweden, where Government officials and unions are pushing for a ban on cash by 2020, primarily to reduce crime.Cashless society supporters in the country believe that without cash,robberies and small black market transactions – such as drug deals or extortion – would be almost wiped out.
While cash will remain an important aspect for many people, trends such as that in Sweden and developments in the emerging world such as Africa,where six million people are already paying for goods on their mobiles, proves that electronic payment systems will become increasingly important in societies, particularly where consumers are largely unbanked or underbanked.
For online payments, simplicity and security is key
As a global trend, we are moving to a world where more and more customers are making transactions online,driven by smartphones and faster mobile broadband turn the simple mobile phone into a powerful internet access device, with an increasing universe of online companies that the consumer is unfamiliar with and does not know enough to trust. In this environment, the customer wants to have experience that is simple,especially if they are tapping on a small mobile screen, and in a way that does not increase the risk of their security being compromised.
Digital wallet adoption, as demonstrated by our doubling end consumer users to over 30 million in two years,is driven by the ease of use and by placing customer security at the heart of all processes and infrastructure.
Effect on banks and traditional payment methods
It would be hyperbolic, headline grabbing to assert that digital wallets mean the end to traditional banking. In fact, the reverse is true.
Using a digital wallet does not change the fundamentals of making a payment – consumers still have the choice of paying with their debit cards, credit cards or straight from the bank accounts. The digital wallet ensures they do so in a convenient and safe way.This is what drives some fundamental shifts.
As more and more transactions move from the off-line world to online, consumers are increasingly leveraging on the banking infrastructure rather than cash when paying with their digital wallet,which means that the volume of transactions for the banks also increases.
Digital wallets have helped enable online businesses to go global.Using a digital payment system allows otherwise smaller scale businesses to accept payments globally, even if customers are using the local payment option relevant to their country.
Digital payment companies need to constantly ensure their payment systems are compliant with local and national financial laws. This will allow previously unreachable customers to transact with the merchant, generating revenue,employment and increased volumes for bank processing.
Then there are entirely new markets that digital payments are opening up.
Digital wallets can help those in unbanked cultures, for example, in parts of Asia that have historically been cash-only economies, there is now a desire and a need to make online payments.These economies have often missed out on the first wave of becoming connected online, but are now seeing swift mobile adoption and getting online via their phones. This means mobile payments systems are already starting to act as catalysts towards growing spend online, as evidenced by the six million in Africa usingmobiles to pay for goods.
Or the underbanked – the FDIC estimates that there are roughly 10 million underbanked households in the US. These households are increasingly going to be joining the online payments revolution, by uploading cash to digital wallet systems in order to then make purchases with online merchants across the globe,with the cash ultimately flowing into the banking network.
So, not only are digital payments helping businesses expand globally,they are opening up entirely new markets via unbanked and underbanked economies and facilitating rapidly increasing transaction volumes for both online merchants and the global banking networks. Which really seems a win-win situation for everyone.
Published in Intercontinental Finance magazine, Issue 115/12