Payments $5.4trn
The value of the global digital payments market.
Paymentology
by 1946, the ‘Charge-It’ card could only be charged locally. The ATM, for its part, only appeared in its modern form in the 1970s – and even then progress was slow. As recently as the new millennium, just $1.2bn of American purchases were done by card. That might sound like a lot, until you realise it’s less than a quarter of today’s figure. How, then, to explain the situation less than two decades on, where the world of payments has been utterly transformed? One where the digital payments sector is worth over $5.4trn? One where, if the statisticians are to be believed, 6.1 billion people – that’s over three-quarters of the global population – might be using digital payments by 2023? There are many answers to these questions, from worries around social distancing to exploiting new technology. Ultimately, though, it can all be understood by something far more modest: demand. With customers finally becoming comfortable with the power of open banking, they’re leading a revolution in the way banks offer services.
“Customer demand is crucial for change – in line with API technology – as the missing link and necessary foundation for data exchange.”
Not that embracing digital payments is always
easy. From difficulties around collaboration to legal questions, getting to a world where 76% of humanity pays for coffees and shopping and nights out via their smartphones is far from simple. Yet by encouraging collaboration between traditional institutions and third-party fintech companies, and working to connect commercial and retail customers, banks are proving every day just how much can be done to smoothen the road ahead. It goes without saying that this has colossal implications for banks, their staff, their consumers – to say nothing of the businesses that actually serve them.
You don’t get a pay
By the standards of some of their neighbours, Germans have taken to digital payments cautiously. Just three years ago, researchers at McKinsey reported, cash still accounted for two-thirds of consumer-to-business transactions in the Federal Republic. That contrasts to places like the Netherlands, where 56% of transactions are done online. The situation further north, for its part, is even more impressive. In tech-savvy Sweden, for instance, the government has encouraged citizens to embrace digital payments in all their variety. These days, just 15% of Swedish consumers now prefer to use cash compared with cards or apps. To put it another way, when Christoph Berentzen joined Frankfurt’s Commerzbank, he had his work cut out. Arriving in 2018, he discovered he was
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developing the institution’s API essentially from scratch; work that’s only intensified since he became Commerzbank’s head of API in January 2020. A tough ask – yet listen to Berentzen talk and it becomes clear that offering new digital solutions to customers was absolutely crucial to Commerzbank’s future prosperity. “Customers want to do banking and payments any time, any place and with any tool,” Berentzen explains, “so banking needs to be integrated in business processes outside the bank. In order to keep their relevance, banks need to enhance their solutions and extend their customer reach.” Even for a risk-averse country like Germany, this claim rings true. According to one recent poll, after all, nearly 30 million of Berentzen’s countrymen and women will have digital bank accounts by 2025 – enthusiasm shadowed across the continent. In Hungary, for instance, the number of accredited fintech providers increased by 25% in the first quarter of 2020 alone. And even in those countries that saw less dramatic growth, like Liechtenstein and Malta, you can still find at least 60 similar companies. This is echoed, too, by work at specific banks. HSBC, Barclays and UniCredit are just a few of the big European banks to have jumped into payment APIs over the past few years.
What explains this shift? One reason, surely, is coronavirus. With social distancing the order of the day, why would you handle grubby coins, or hand over your debit card to a gloveless stranger, when you can easily make payments with a swipe or a click? According to work by Plaid, one of the brightest stars in the fintech firmament, 60% more Americans are using fintech products than before the pandemic. In the European context, meanwhile, new legislation has spurred on innovation. Passed by the European Union a few years ago, Payment Service Providers Directive 2 (PSD2), obliges banks to open their payment services to other companies – and lets consumers add their bank account details to other platforms. These legal tweaks have boosted technological innovation. An example comes from Germany, where N26, a neobank based in Berlin, has seen its customer base skyrocket to around 2.5 million users (up from barely a third of that in 2019). But though he concedes that PSD2 forced banks to “do the groundwork” for more exciting products and was reasonably important in building public awareness in fintech, Berentzen suggests that market demand was ultimately the key driver. “Customer demand is crucial for change – in line with API technology – as the missing link and necessary foundation for data exchange.”
Teutonic order
What does establishing a banking API from nothing actually look like? Perhaps surprisingly for an industry characterised by hipster programmers and
Future Banking /
www.nsbanking.com
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