Payments in the Digital Age

With the ability to make a purchase with your smartphone or watch or reusable coffee cup, it has truly become a digital world out there.

And if the recent Australian consumer turnout to the notoriously American-loved tradition of Black Friday is any indication of future trends, the migration to this new world is only going to increase.  According to AusPayNet’s recent findings highlighted in their 2018 Annual Review, Australians continue to flock to online shopping with e-Commerce transactional value increasing 16.7% from last year and ATM withdrawals decreasing by 4%.  Whilst it will be a while before Australia becomes a cashless society, it is clear that Australia is well prepared being ranked 10^th amongst 118 countries for its digital readiness.  So what are the implications of such a seismic shift in payments?  Who will benefit?  What are the risks?  How can institutions leverage this trend?

Keeping Pace in the Digital Race

Consumers will naturally gravitate towards processes that make their lives easier.  Paying for a well-earned smoothie after a long run using a watch and without the need to carry cumbersome cash.  Immediately transferring money to a friend after he buys a round of drinks on a Saturday night using a smartphone.  Replenishing the stock in your pantry with a click of a button on the smart fridge.  It is undeniable that in addition to online shopping or the ease of tapping a payment card to make a purchase, convenience has become a key motivator for digital payment innovation.

Financial Institutions and even historically non-payment related companies such as Apple and Google are looking to make the consumer journey quicker and easier.  Vying for some real estate in this digital realm are also the smaller fintechs that can typically mobilise and adapt to change rapidly.  These smaller players are introducing valuable services and offerings in the Australian payments market, but also more broadly in leading, data analytics, wealth management.  The emergence of digital banks or neobanks is also providing the traditional financial institutions a run for their money.  These banks operate entirely in the digital space and might be attractive to consumers given their ability to potentially offer higher interest rates for accounts and lower fees given the lack of overhead required to maintain physical branches.  Competition for a consumer’s digital payment is fierce, which means that companies that can quickly innovate and provide an offering to consumers that leverages the thirst for convenience will win out.

KYC: Know Your Customer = Keep Your Customer

Understanding how different demographics are transacting in the digital age is invaluable in tailoring the transaction journey for the end user.  Innovation is not necessarily the only means of attracting and retaining customers.  Simply refining existing processes can ensure relevancy in the digital market.  For example, the use of a mobile number or email address instead of the traditional BSB and Account Number to transfer funds.  In a recent article published by KPMG, “Banking on the Future”, Generation Y professionals (defined as aged between 18-30, university educated, relatively well paid, tech savvy and global minded) were identified as an important target for financial institutions in the imminent future.  These young professionals will be instrumental to how financial institutions will shape products and services in the payment industry as they represent 22% of the population and 50% of the workforce in the next five years.

One example is the preference for invisible payments – this demographic enjoys the convenience of making a payment without having to reach for their wallet.  Uber is a perfect example of allowing the user to launch a service without having to exchange payment credentials with the driver for every transaction.  It is set and forget.  Financial institutions should look to tap into the preferences and attributes of specific demographics in the digital age as this will enable products and services to be personalised to their customers.  The aim is to demonstrate relevancy in this ever-changing payment landscape, but also to ensure customer satisfaction and retention.

Fraud Evolution

The speed with which payments can now be made introduces a new challenge – how can the payment industry continue to provide assurance to a customer that the transaction is still secure?  In the past decade, the payment industry has worked tirelessly to introduce EMV capabilities via microchips to physical plastic payments cards that provides an additional layer of security for card-present transactions.  With a heavy sway towards online shopping now, the industry must ensure that this payment channel is secured in such a way as to provide consumers with confidence that they are not compromising security for convenience.  The payment industry implemented EMV Three-Domain Secure (3DS), which is a messaging protocol to enable consumers to authenticate themselves with their card issuer when making card-not-present (CNP) eCommerce purchases. The additional security layer helps prevent unauthorised CNP transactions and protects the merchant from CNP exposure to fraud.

Even with these security protocols in place, CNP fraud is increasing.  In response to this trend, the payment industry is working with AusPayNet to put together a collective CNP Fraud Mitigation Framework.  The aim is to collaboratively establish a framework to reduce CNP fraud by understanding the immediate fraud threats, but also planning for future changes in the digital payment landscape.  The industry is also undertaking an approach to promote security and interoperability within card payments in a remote payment environment, which is currently referred to as the Secure Remote Commerce protocol.  One of the key tenets for this initiative is the use of tokenisation, which is a strategy that Indue has implemented with its mobile payments offering.  Tokenisation involves the transposition of original payment credentials (i.e. payment card number) with a digital ID or token.  This removes the sensitive nature of the payment data and renders the information useless to a fraudster.  In the fast-changing world of digital payments, the potential fraud opportunities will undertake the same degree of evolution.  It is critical that the payment industry adopt fraud prevention strategies that align with the speed with which payments are evolving.

Digital payments is certainly the way of the future.  The Australian payment industry as a whole will benefit from not only all of the new capabilities that will be introduced in the near future, but also the competition that will generated by all of this industry movement.