There is a quiet revolution occurring in the payments sphere that is gaining momentum: payment transaction sizes are falling while volumes are rising in consumer and business payments.
While behavior and technology are moving in the direction of continuous payments, the existing infrastructure of large financial institutions remains suited toward large, infrequent payouts. This dichotomy presents a new challenge for the industry. Payment providers that want to best serve their clients will have to evolve to meet the expectations of operational automation in payments.
We can think of the recent shift in the payments landscape and the role of payments providers as evolving from moving “rocks” or larger, more infrequent transactions, to managing the flow of "water," or a continual stream of smaller transfers.
In decades past, businesses handled payments in batches, periodically processing massive payments. In turn, payments providers and clearing systems developed the infrastructure and operating models to meet this need. As technology has advanced and commerce trends have evolved, payments have gradually increased in volume but decreased in average dollar amount, and banks have had to adapt to moving these smaller “pebbles” more frequently.
The rise of digital commerce and payments, the emergence of IoT applications, and the buildout of real-time-payment schemes are accelerating this trend of payments atomization, causing the role of the traditional payments provider to change even further. Making payments is becoming easier and more seamless, altering the expectations of both business and consumer clients when it comes to the payments process.
Small businesses and large organizations alike have been increasingly adopting digital payments and are expected to turn to real-time payments to enhance their cash flow management, reduce costs and fraud, and gain customer insights. In the U.S., B2B digital payments continue to rise, while payments collected by check have fallen from 64 percent in 2007 to 44 percent in 2016, according to AFP. Among consumers, the move to real-time payments is also underway. Forrester predicted that P2P will reach up to $17 billion by the end of 2019, up from just $5 billion in 2014.
With this shift to digital and continuously flowing payments, the “pebbles” that banks have adapted to moving have quickly turned to “water.” But unlike the shift from moving “rocks” to “pebbles,” simple adaptations of existing policies and procedures, business models, and infrastructure will no longer be sufficient to manage the flow from the tap.
Equity trading underwent a similar game-changing transformation in the early 2000s when the decimalization of price quotes, deregulation, and the emergence of algorithmic execution and low-latency trading technologies resulted in a dramatic increase in volumes and a related material decrease in average fill sizes. Ultimately this “rocks to water” shift led to market structure and competitive landscape changes.
To succeed, banks will need to fundamentally rethink how they deliver quality services as transactions miniaturize due to rapid technological and behavioral changes.
Ironically, while digital B2B payments have many advantages, processing such payments increases complexity for the receiver because electronic payments coexist with check payments. The transactions are made across multiple, fragmented payment mechanisms including ACH credits and debits, wire transfers, purchasing and other types of cards, and single-use accounts. Additionally, remittance information for digital payments is typically sent separately, including email, EDI, and regular mail, which makes reconciliations harder. In contrast, check payments typically include remittance advances that list the invoices paid and describe the discounts and adjustments taken.
However, emerging technologies are enabling payment providers to deliver automation, speed, and intelligence in the payments process and to better cope with these trends of payments digitization and atomization.
As more of life is lived through a digital screen, banks will also need to integrate smaller transactions and invisible payment flows to meet consumer demand. Mobile app payments have more than tripled in the past four years, with the size of payments getting smaller and smaller. As payments continue to atomize, the payments providers that can handle tremendous volume at a minimal marginal cost will be the most successful.
To thrive in this new paradigm, banks will need a new approach that moves away from a point-to-point model for all payments to operational automation that can handle downward pressure on fees. Payment delivery infrastructures, for example, will need to keep up with the massive scale of payments but also be built with modular technology that is future-proof and adaptable to changing payment needs.
The gradual yet sustained disruption of the payments industry has made it difficult to spot the overarching shift toward a world of continuous, free-flowing payments. The transition from “rocks to water” is just one of a number of irreversible trends impacting payments, but by adopting new technologies, banks can capitalize on this quiet revolution.