24 April 2017
The future of payments powered by Britain
By the end of the decade, more than a third of people in the US will use their mobile phone or a wearable to pay for something every day. The UK is heading in the same direction, as British consumers are becoming increasingly aware of the ease and convenience of paying for items by simply tapping their phone, wallet or watch. Non-cash, non-card payments (i.e. coupons and mobile phone payments) are expected to be used for more than a fifth of transactions by 2020, up from virtually nothing at the start of the decade, says analysis from the Centre for Business and Economics Research.
Essential to this trend is the Faster Payments Service, which was introduced in 2008 by UK banks and enables real-time payments between bank accounts in the UK. Whether it's a taxi driver taking money for a fare, or friends splitting a bar bill, consumers are getting used to the idea of the money being in their bank account almost immediately. In a single minute, over 2000 Faster Payments took place in 2015, and this is forecast to jump to over 4000 a minute over the next decade, according to data from Payments UK.
But to be able to achieve this goal, there are still difficulties to overcome, which is why the Faster Payments Service is being opened up to non-bank payment service providers. Ultimately, to provide an alternative to debit and credit cards, that could reduce the friction currently experienced in the payments process.
At the moment card payments are effectively a proxy, telling a user's bank to authorise payment of a specified amount from their account to a merchant. But the idea is for payment providers to turn to proxy services to distribute funds instantly by simply using a phone number, therefore cutting out the need for users to exchange bank account details. This speeds up the payment process, as it removes the need to track down a sort code and bank account.
In the UK, mobile payment system Paym is making strides in allowing people to transfer money using just a phone number. Elsewhere, in January this year, Thailand launched an e-payments system where every resident has a 13 digit national ID number that can be used to authorise money transfers and bill payments, as well as to support the provision of government welfare payments PromptPay is expected to save banks and businesses in the country about £1.7bn a year.
Various countries now have their own real-time payments platforms, and the idea is to one day sync up the systems to work seamlessly between various countries. VocaLink, which operates the payments platform for the UK's Faster Payments Service, last year struck a deal with The Clearing House to bring the system to the US, where transactions typically take around three days to clear at the moment. The Clearing House operates around half of all banking transactions in the US, and this is therefore a significant step for Britain's fintech industry and to achieving payment globalisation.
Faster payments are especially crucial in emerging economies which want to move to a more digitised payments infrastructure, as the system will encourage more people to put their money in bank accounts rather than hoarding it in cash. Regulators internationally are pushing for the service, as it will make their country's banking systems easier to manage and operate.
"Real-time is important because if you’re dealing with a cash-based economy, you need to have certainty of the cash being moved. People need to know the money is going in their account and will not end up elsewhere," says George Evers, Global Product Director at VocaLink.
International roll-out of the UK's payments software is good for UK consumers and - by extension - consumers across the world. While we've got used to instant payments in the UK, the next step is to enable real-time payments across borders. For example, Britons should be able to pay a person abroad, or book a hotel in another country, and for the money to reach their bank account instantly. British businesses so far have been forward-thinking in adapting to changing British habits, but now they should think global.
Key developments expected in the next decade:
Cards most popular payment method
In the next 10 years, cards will outstrip cash and become the most popular payment method among consumers. Around 45% of purchases in the UK are currently made using cash, but this is expected to drop to 27% by 2025, says Payments UK.
Cross Border Payments
A recent study by analyst firm PayStream Advisors stated that the majority of accounts payable organisations now conduct cross-border payments. This is only set to increase and we are seeing new innovations supporting this trend. The Bank of England recently announced a partnership with Ripple, intending to demonstrate the synchronised movement of two different currencies across two different real-time gross settlement (RTGS) systems to “show how this kind of synchronisation might lower settlement risk and improve the speed and efficiency” of cross-border payments.
Paying by phone
Contactless services such as Google Wallet and Apple Pay are becoming more familiar with consumers, but many businesses still don't accept payments by phone. At the moment, indirect services such as PayPal still dominate non-cash or card payments. But payment providers are rushing to develop the service and before long most people will be paying for everyday items with their phones. Pay By Bank app allows people to make secure instant payments using their existing banking app on their phone, and an increasing number of retailers are signing up to the service. The next development will allow consumers to scan a QR code online or at the till to pay a bill directly from their mobile banking app.
Increase in the use of proxy services
A proxy service is a directory of information that allows user information to be stored and accessed independent of financial applications, allowing users to send money to their contacts without revealing their bank account information or requesting the recipient’s account information. Instead of using bank account information to authorise payments, customers send money using common communication and identification methods, such as mobile phone numbers, email addresses or national ID numbers.
An example of this already in use is in Thailand with PromptPay, which acts as a proxy database, allowing users to store a mobile phone or national ID number to authorise sending money from one party to another.