Digital Payments — anytime, anyhow, and for anything

iStock Images — Pay anywhere, anyhow, and for anything

The widespread adoption of mobile phones throughout the world has had a far-reaching social and economic impact. Payments is one area that has seen the most significant mobile-tech-led innovation due to a “perfect storm” of tech breakthroughs and business environment changes. The world has come a long way since Dan Kohn sold a CD of the Sting Album Ten Summoner’s Tales for $12.48 via a credit card on NetMarket — the first digital payment.

A timeline of digital payments. Source: Visual Capitalist

According to the ‘Better than Cash Alliance,’ digital or electronic payment is “the transfer of value from one payment account to another using a digital device such as a mobile phone, POS (Point of Sales) or computer, a digital channel communication such as mobile wireless data or using SWIFT.”

The definition includes payments made with bank transfers, mobile money, and cards (credit, debit, and prepaid cards)

Today, merchant-level digital payment systems can be broadly bucketed into either point-of-sale payments (credit and debit cards, RFID enabled devices, and biometrics-enabled technologies) or contactless payments (mobile apps, web browsers, e-wallets, and machine-readable technologies like QRs) to send or receive a specific value.

Why are Digital Payments becoming more popular?

Digital payment services provide an affordable, efficient, and secure medium for transferring and storing money. The service is more beneficial in countries with a large unbanked population that demands cheap and safe money transfers. The alternative payment mechanism is cash for the unbanked, which is expensive to store and risky to transport. Hence large segments of the population in developing economies use overpriced (and dangerous) informal financial mechanisms, such as money lenders or hand-delivered cash transfers.

It is no surprise that digital payments have become a hot commodity in emerging markets because they facilitate account ownership and payments. As per the World Bank, 700 million people in developing countries accessed formal financial services for the first time between 2011 and 2014. Moreover, 62% of adults owned an account through a bank or mobile phone. Digitization, particularly mobile money penetration in Sub-Saharan Africa, played a massive role in enabling this change. The most widely used payment services are deposits and instant digital money transfers between customers. Widespread mobile payment adoption boosts financial inclusion and reduces transaction costs in developing countries.

Global Picture of Payments. Source: McKinsey, 2019

Who is using digital payments? — Emerging Markets

China is the global leader in digital payments. Globally, digital commerce and mobile payments are close to $5.4 trillion in transaction value. Chinese firms contributed an estimated $2.9 trillion in 2020, while the United States came second with $1.3 trillion. The primary pillars of the Chinese system are digital wallets and QR codes. It primarily runs through the country’s two major big tech firms: Alipay (through Alibaba, China’s largest e-commerce platform) and WeChat Pay (through Tencent, China’s largest social media company). With close to a billion digital consumers domestically, Chinese digital payment firms have rapidly developed and scaled their platforms and are now targeting overseas markets.

Growing internet access and smartphone proliferation have generated new businesses in the developing world, including money transfer platforms, e-commerce operators, and ride-hailing services. In addition, retail stores and the services sector (e.g., entertainment, tourism, and health) use mobile payment applications such as PayPal, PhonePe, GooglePay, AliPay, and WeChat Pay for customer transactions.

Government initiatives are also fuelling digital payments through e-wallets and POS machines. Examples of these trends abound across Africa, Lat-Am, and Asia. According to The Economist, Kenya, Tanzania, and Zimbabwe are the top three developing countries regarding mobile payments usage. Moreover, mobile money expenditure accounts for substantial portions of the GDP of these countries — 55%, 65%, and 21% for Kenya, Tanzania, and Zimbabwe. Kenya's M-Pesa was a pioneer of the digital payments movement, which steadily transformed a cash-fuelled economy in 2007 (80% of transactions were in hard currency) into a cashless society by 2017 (80% of transactions done using digital tools).

Digital Payments Macro Trends, Source: PWC

Similarly, in Latin America, an Argentine digital payments interface, MercadoPago, was launched by Ecommerce giants MercadoLibre in 2003. Since then, the platform has expanded to several countries — Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. MercadoPago boasted more than 132 million unique users in 2020 who could use virtual wallets instead of conducting transactions via traditional banks. During Covid-19, MercadoPago saw the number of transactions done through their platform double.

What can you achieve with digital payments? — Success stories

In 2016, the NPCI (National Payments Corporation of India) developed a real-time payment system called UPI (Unified Payments Interface) to allow fund transfers between two bank accounts in real-time through a mobile platform. In September 2021, the volume of UPI payments crossed 3.65 billion transactions worth over INR 6.5 trillion. This system has sparked interest from many other nations' central banks and governments. In July 2021, the NPCI launched the solution in Bhutan. They also partnered with Mashreq Bank to offer the UPI platform in the UAE. More recently, the central banks of India and Singapore launched a project to link their digital payment systems, UPI and PayNow. The project will allow fund transfers across the two networks without onboarding the other payment system.

Some nations have also created open, secure, and interoperable payments platforms. A case in point is Mojaloop (an open-source platform for the use of payment network providers).

UPI transaction volume and value Source: Entrackr

It is now the core technology in Tanzania’s IPS (Instant Payment System) and the Pan-African mobile money system Mowali. Mojaloop can serve as the archetype for partnerships between the public, private, and philanthropic sectors in developing and scaling up interoperable payment systems.

Elsewhere, frustration with the traditional banking model for B2B transactions, both inefficient and overpriced in a world of instant, low-cost payments, has led to the intensification of non-bank providers. As a result, new players and solutions compete with a bank and card-based solutions at scale, like cloud-based clearing company, VertoFX.

VertoFX aims to solve the issues SMBs face exchanging money and payments by building a digital marketplace to trade currencies and submit cross-border payments to suppliers. The platform targets essential pain points in the B2B global payments industry, which is forecasted to grow to close to $200 trillion by 2028, or over six times larger than the retail payments space.

Future Trends in Digital Payments Source: Visual Capitalist

The $4.1T digital payments ecosystem faces a notable transition, catalyzed by a wave of global advancements and disruption. As the industry expands its reach, consumers and investors alike can benefit from the shift towards a cashless economy. In addition, as transactions rise, several technological innovations could be instrumental to shaping the evolution of the digital payments industry.

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Ex-Microsoft. Ex-@McKinsey. Ex-IBM. X-Factor :-). Movie Buff. Love Comics. TEDx Speaker. Dogfather. Startup Advisor. Rockmetric. Uniris, Rubix Data Science

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Samiran Ghosh

Samiran Ghosh

Ex-Microsoft. Ex-@McKinsey. Ex-IBM. X-Factor :-). Movie Buff. Love Comics. TEDx Speaker. Dogfather. Startup Advisor. Rockmetric. Uniris, Rubix Data Science

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