October 7, 2016
The role of electronic payments in 2016 goes far beyond basic transactions performed in vast networks to move funds from one person or entity to another. Just like banking is no longer somewhere you go but something you do, payments have turned into an experience rather than an action.
FinTech startups offering payments solutions have turned customers into experiential omnivores constantly seeking for a better experience. In modern payments, customers are looking for a seamless experience and unconventional UI rather than for a utility. Agile financial technology companies nowadays are able to turn bill payments (and other services) into a smooth and seamless, almost one-click process.
The idea that the greatest tech companies aren’t really tech says a lot about the importance of customer journey as a success factor. Payments services like PayPal, Venmo, Square Cash have raised the bar for new entrants by offering more than an opportunity to send funds.
As the UK government fairly noted, good services are verbs, bad services are nouns, which the abovementioned companies have proven to be true. As the British authority further elaborated, To a user, a service is something that helps them to do something – like learn to drive, buy a house, or become a childminder. Notice these are all verbs.
Thinking of payments beyond transactions means understanding the value of transparent, seamless payments services. So, what else do modern payments mean?
A recent report by Moody’s suggests that electronic payments added $296 billion to GDP in the 70 countries studied between 2011 and 2015, which is equivalent to the creation of ~2.6 million jobs on average per year over the five-year period, or about 0.4% of total employment in the 70 countries.
Countries with the largest increases in card usage experienced the biggest contributions to growth. Some of the biggest increases in GDP were recorded in Hungary (0.25%), the UAE (0.23%), Chile (0.23%), Ireland (0.2%), Poland (0.19%) and Australia (0.19%).
The increase in electronic payments resulted in almost the same percentage of increase in GDP between 2011 and 2015 for emerging markets (0.11%) as for developed countries (0.08%). However, developed countries were reported to be at a more advantageous position as they experienced a higher percentage of GDP growth per 1% of increase of card usage than developing countries.
In terms of consumption, each 1% increase in the usage of electronic payments produces – on average – an annual increase of ~$104 billion in the consumption of goods and services, or a 0.04% increase in GDP, assuming all the other factors remain the same.
One of the most important implications of electronic payments (whether domestic or international remittances) is the opportunity for disadvantaged groups of population to plug into the global financial system.
A notable example of the way electronic payments are put to benefit the developing world is the joint effort by Stellar, the Stripe-backed open-source payment network, and Oradian, a cloud-based software provider for microfinance institutions in developing countries. Those companies have developed a payment-transfer network inside Oradian – built on top of Stellar’s platform – that allows 300,000 Nigerians (90% of them women) to cheaply transfer money between microfinance institutions over the Stellar network.
International remittance services by FinTech startups are another case. They allow migrants to receive help from families abroad. Global remittances amount to ~$500 billion every year making it an important ‘tool’ for supporting families and individuals in need.
Security has been reported to be one of the benefits of turning to cashless payments for businesses as cash is more liable to theft, loss and fraud. In fact, 73% of organizations were reported to have experienced actual or attempted fraud, with non-electronic processes being the number one source of fraud.
Among the other important implications listed by the SunTrust Bank are better and faster ability to assess the health of their business operations (cash flows, profit and loss) through synergies with e-payments; ability to generate revenue from new channels and digital financial services (if they keep balances with banks and other PSPs); value-added services that come bundled with payments, or for making or receiving payments (loyalty, credit, marketing support).
Electronic payments create a meaningful data for governments and international organizations to have a better control over operations and ensure compliance. A vast stream of data enables the use of sophisticated tools to monitor trends in consumer spending and the retail sector, to decrease the scale of grey areas of business operations and have a more accurate estimation of the tax base.
Electronic payments also allow to extract insights on changing consumer behavior and respond to transformations happening in the society in a timely manner. Governments can also take actions to boost social welfare based on the accurate representation of financial activities of the population that electronic payments enable.