By Daniil Saiko
The way money exchanges hands is a constantly evolving process. As a result, the payments landscape will continue to transform the way companies and retailers do business. But as traditional forms of payment are increasingly replaced by digital options, payment systems are becoming progressively more complex, involving a multitude of players.
In 2019, there are three areas where changes have the potential to greatly impact the payments industry:
1. Going live. Batch data processing has been the longstanding means of processing high volumes of data. The process works by grouping a set of transactions that have been collected over a period of time. The information is then pooled, entered, processed and the results are produced.
But in today’s digital world, businesses and consumers expect immediate, transparent and up-to-date insights into their cash positions. Consequently, the industry is rapidly moving towards live data processing.
Live data processing operates continuously, reading the incoming data and updating the results immediately. Live processing will not only speed up the time it takes for transactions to occur, but it will also allow consumers to experience faster service and allow providers to reduce operational costs. The shift away from batch data processing and towards live systems will intensify in the coming year.
While attending a Ripple Conference in San Francisco in October 2018, I realized just how much progress has been made. Most people associate Ripple with blockchain and cryptocurrencies, but the company is making huge strides in live data processing. As more people begin to implement technology like Ripple’s xCurrent, consumers can expect to see transactions being processed at a faster and more efficient pace.
2. Embracing FinTech. Technology has created a paradigm shift in the business world and this is overwhelmingly apparent in the financial services industry. Traditional banks have realized they need to keep up with the cutting-edge, nimble and flexible financial technology (FinTech) companies and are beginning to explore how to adapt their payment systems for this new world.
Canada’s “Big Five” banks are spending hundreds of millions of dollars to advance their transactional processes with a specific focus on retail customers. These institutions are taking stock of how they deliver payment transactions and are shifting from the batch system of processing towards instantaneous and live transactions.
As traditional payments processors look to upgrade their systems, they are increasingly relying on FinTech firms. Large institutions were initially resistant to utilizing these new technologies, believing their internal infrastructures were enough. However, as the large banks carve out new lines of business, they are gradually partnering with FinTech companies to integrate technologies into the core infrastructure that traditional institutions can provide. These partnerships marry the size and scale of a big bank with a leading-edge FinTech to collectively expand the speed and power of payment processing.
This trend is expected to be a driving market force in the overall financial services industry. The lines between traditional financial institutions and FinTech firms will blur further as more digital-based banks rise to prominence, especially in frontier markets like Central and South America.
3. The rise of crypto. The numerous booms and busts we’ve seen in the cryptocurrency market over the past few years has left many people wondering whether cryptocurrencies can ever be reliable tools for making payments. While many investors and speculators have lost tremendous amounts of money this year, this only affected certain segments of investors in the retail market. Many long-term investors who initially invested their money in the last several years have experienced positive gains and still consider these forms of digital payments a reliable source of value and a medium of exchange.
The fact remains that cryptocurrencies are a growing source of alternative payments and will continue to have important implications in the payments industry. Behind the bad news, cryptocurrencies also experienced positive developments within the realm of data and testing. Conceptually new methods of looking at trust in digital mediums are being developed, with innovative algorithms and social constructs.
The key to large scale adoption of cryptocurrencies will be improvements to user experience and overall behaviour. Crypto itself is only a means for solving problems. The payments industry needs to figure out ways to adopt this technology in a way that retailers and customers can benefit. For example, the Lightning network uses blockchain to offer near-instant payments in any amount, while charging much lower fees. It has built another layer on top of existing crypto technology to create a useful service. Finding new ways to implement this existing technology is imperative to market adoption.
Despite the number of previous technical issues that have been resolved, the next areas that present a challenge are the regulatory and legal spheres. In particular, the Canadian government has been cautiously optimistic in their approach to cryptocurrencies.
There has been a great deal of research done in order to better understand how these currencies fit within the existing space. This work has been primarily spearheaded by the Bank of Canada. For example, Project Jasper, which is a collaborative research initiative between the public and private sectors to understand how distributed ledger technology (DLT) could transform the wholesale payments system, recently concluded its third phase.
The hope is that the Bank of Canada will be able to provide guidance based on its multi-year experience in studying and implementing solutions. For the next federal election, it will most likely garner interest and remain a talking point, in terms of promoting innovation in Canada.
The proliferation of alternative forms of payment will continue to evolve in 2019 as the payments industry moves from exploring digital currencies to implementing them. As the payments landscape evolves in the years to come, the way consumers process transactions and how financial institutions interact with alternative currencies will ultimately shape where the industry moves.
The payments industry has been rapidly transformed by technology, and the challenge for businesses has been keeping up with those changes. Today, consumers expect transactions to be fast, easy and flexible. Organizations need to explore new FinTech solutions, either through their existing financial services providers or new partnerships. The payments industry will continue to evolve in 2019, and successful businesses will be the ones that embrace the change.
Daniil Saiko is director, technical sales and product, Cambridge Global Payments (www.cambridgefx.com).