Are payments nearing a tapping point?

In his book The Tipping Point author Malcolm Gladwell provides insights into how trends are sparked and take hold. How what's not becomes what's hot; the case for something going viral; the cause of what some would call a 'WhatsApp moment'.

I believe we are on the verge of such a tipping point in the payments industry. The convergence of open ecosystems, device ubiquity and improvements in customer experience will - after many false starts -  deliver a cashless society.

Recently, the NY Times reported on the case of Sweden going cashless. In Sweden only 20 per cent of all transactions are via physical cash. The rest are electronic.

The ratio here in Asia is 75 per cent cash and 25 per cent electronic. So what has helped Sweden make this transition? And will Asia follow?

" The convergence of open ecosystems, device ubiquity and improvements in customer experience will enable the genesis of a cashless society."
Faraaz Ali, Executive Director and Regional Business Head - Cards and Lending - Retail Banking Asia Pacific at ANZ


To answer these questions one must look at the history of payment systems. From humble beginnings with the Diners Club card for restaurants in New York in the 1950's (yes, the same Diners card your granddad had) to the vast interconnected global ecosystem in existence today, the payments industry has grown exponentially in the past 60 years to enable global usage, settlement and billing in a matter of minutes.

Banks have been instrumental in driving this via the interbank associations (VISA, MasterCard, China UnionPay etc) helping consumers, merchants, acquirers and issuers operate in what is known as the traditional four-party model.

This network structure has leveraged the power of the internet to expand to all corners of the globe. The chart below shows a great snapshot of the growth in international payment volumes on credit and debit cards relative to other non-cash transactions.

This trend will continue as other players enter the open ecosystem, companies like Square, Apple etc. That will help bring costs down and make it easier for smaller merchants to accept payments.

Sweden has been a poster child in the payments world with one of the highest rates of credit/debit card usage in the world which has helped it drive a cashless reality.

Comparison on Non-Cash Transactions and Payment Mix by Region

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The second phenomenon that is more recent is the ubiquity of smart phones which has far outpaced any other means to access and process information.

This has enabled a huge growth in mobile and e-commerce as entire communities in rural and developing areas are now coming online and, more importantly, making purchases online via a stored value, debit or credit card.

While the total relative volume of these transactions compared with traditional face-to-face payments is still relatively low at less than 7 per cent, the growth rates in this sector have been strong at over 20 per cent year on year.

This has made mobile payments the holy grail of fintech with a staggering $US14 billion invested in 2015 by venture capitalists.

These investments in mobile payment development will further aid adoption as a combination of innovation and competitive pressure will drive down costs for customers while better device choices drive greater ubiquity.

Again, smartphone penetration in Sweden is one of the highest with Swedes using on average double the number of apps compared with the rest of the world leading to the higher smartphone based payments from customers and acceptance from merchants.

Internet access by Device – Desktop vs Mobile

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Last but certainly not the least is the customer experience dynamic. A decade's worth of effort has gone into making information access via browsers more mobile-friendly across industry sectors. Millions of apps have emerged that provide a richer user experience.

Banks are not far behind and have championed multiple efforts to drive legislation, industry collaboration and develop their own apps designed for information access and transaction management.

Singapore - like Sweden - is a great example of such collaborative efforts between the government (Monetary Authority of Singapore or MAS), banks and merchants to develop real-time payments systems such as FAST, InterBank GIRO and EzLink which has facilitates a great user experience.

Non-traditional players like Apple and Google are also doing their part by creating payment ecosystems within their phones that offers a seamless payments experience—both online and offline.

Despite these efforts, the online user experience dynamic still has a lot of room for improvement which requires collaboration between government, merchants and banks especially with regards to fraud detection and prevention - the single biggest worry for customers transacting online.

The payments market continues to evolve at a rapid pace. The sharp increase in non-cash transactions aided by better user and customer experience, smartphone ubiquity and an open ecosystem will drive further cashless adoption but online security, privacy and familiarity with cash remain as major obstacles towards this end.

So is there a 'tapping point' for payments in the near term for us across Asia? The growth in the space continues to be strong and the coming decade will see us making more taps. There's opportunity but the history of payments tells us it is not always predictable.

Faraaz Ali is Executive Director and Regional Business Head - Cards and Lending - Retail Banking Asia Pacific at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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