Contactless, ‘one-touch’, instant payments are on the rise. And as consumers move towards alternative payments systems that offer more safety and control, the need for greater interoperability in payments systems is spurring new innovation and regulation in the industry.
The indisputable relevance of alternative payments in a post-COVID business landscape
The year 2020 saw a surge in digital transactions and with it, instant payments. The main driver for this has been consumers seeking real-time access to and instant information on payments. Tokenized payment instruments like digital wallets have also become extremely popular the world over, offering consumers the choice of contactless, instant payments that are secure. And this is only expected to go up in future, as consumers use e-commerce for their daily transactions.
As payments get more digitalized, payment experiences are being embedded into customer purchasing journeys. Much of this is being fuelled by other emerging trends such as voice recognition, RFID, smart appliances (Internet of Things), ambient sound triggers, and even brain-computer interfaces. Adoption of analytics and financial management tools, coupled with trends such as Open Banking and the New Payments Architecture are paving the way for more innovative solutions and supportive regulations to meet the demand.
New regulation and their impact on e-commerce in Europe
In Europe, instant payments are fast becoming the “new normal”. This is being driven by the innovation of newer fintech players focusing on mobile payments and real-time services, customers’ need for real-time services, and businesses who are looking at real-time payments to enhance their cash flow management, reduce fraud and provide added value to their customers.
Several regulatory measures have also been established in a move to accelerate the adoption of instant payments in Europe. For example, the European Retail Payments Strategy (RPS), introduced in September 2020, is one such effort to regularise instant payments in EU by the end of 2021.
Need for greater interoperability
The RPS focuses on improved cross-border payments (International non-EU), greater interoperability between payment and other technical infrastructure, and achieving a competitive and innovative retail payments market that ensures high levels of consumer protection. Earlier in 2020, the Euro Retail Payments Board (ERPB) also established a framework for interoperability of instant payments at the point of interaction.
In March this year, European Commission launched a public consultation document that aims to identify and address the challenges to the wider adoption of instant payments in the EU. In another development reported in the Financial Times, the EU is also planning for a post-pandemic bloc-wide digital wallet to give people a seamless way to digitally access public and private services. Cryptocurrencies are also in line for consideration; for example, PayPal, which now lets users link their wallets to Coinbase to buy a range of cryptocurrencies.
So how does all this impact consumers and businesses?
For instant payments to work smoothly, a high level of interoperability in payments systems is required. This in turn benefits all participants in the payments ecosystem. Interoperability can increase sales volumes by encouraging existing customers to transact more and in newer ways, while opening access to newer customers. With higher interoperability, end users including consumers, merchants, governments and other establishments find it easier to make and accept payments.
Service providers which cater to these end users, such as banks, processors, networks etc. can earn revenue from payments in interoperable systems that would otherwise not be possible with non-interoperable systems. Interoperability in payments systems can also improve cost efficiencies, while enabling superior risk management.
But despite these seeming advantages, more work needs to be done to achieve the high levels of interoperability that are required between various systems and schemes to get instant payments to work. As the payments landscape in Europe evolves, effective collaboration between ecosystem partners will be critical in ensuring a smooth uptake of efficient pan-European instant payment solutions.