April 3, 2020
The year 2019 can be hailed as revolutionary for payment ecosystems, mainly owing to the erasure of the differences between traditional banks and innovative non-bank players. FinTech companies, together with PSPs (Payment Service Providers), adapted to the changes brought about by key financial companies, which included security innovations, implementation of NFC technologies, development & popularization of mobile/digital payments, and more.
The changes also affected traditional banks in 2019, making them realize that they cannot fully compete with FinTech companies in providing the whole range of financial solutions. These issues have led toward new cooperation opportunities between banks and new payments ecosystems.
FinTech companies continue to grow in the financial sector, raising the investments and shaping the industry with innovative solutions. However, it seems like new players have emerged on the horizon, represented by the BigTechs. Large technology companies like Alibaba, Apple, Amazon, WeChat, Uber, Facebook, and Google have entered the financial industry with their global user base, creating a visible tension inside the industry. The reasons behind the success of BigTech are no secret—they are recognizable, trustworthy, and they make customers’ lives easier.
FinTech companies are not capable of self-functioning due to the absence of full financial infrastructure and the ability to provide key financial services. Cooperation between FinTech and banks helps both sides to follow industry developments. On the other hand, BigTech companies are the ones that already have a huge client base and are able to segment them as well as regulate service pricing. These companies may severely impact a bank’s efficiency and profit.
Open Banking (also known as open bank data) is an evolutionary step for banks to keep up with the changing environment of new payment ecosystems. Open Banking was formed as a result of implementing the PSD2 (Payment Services Directive), GDPR (General Data Protection Regulation), and Open Banking Remedy (The Competition and Markets Authority’s (CMA)), which aims to create a new transparent financial services system for both merchants and customers. Open Banking provides third-parties (financial service providers) with access to consumers’ banking data through the use of API to enhance the quality of the services and create a more personalized experience. The implementation of Open Banking will allow banks to stay in the competition in a constantly developing financial industry.
BаaS (Banking as a Service) is one of the key components of Open Banking and the newest approach to delivering banking services and products. It allows FinTech companies and third parties to connect with financial institutions directly via APIs.
These two processes may seem similar since both of them are meant to provide access to banks, but there is a slight difference between them. As described before, Open Banking allows access to customers’ data, while BaaS provides access to a bank’s functionality.
How does BaaS work? FinTechs or TPPs (third-party providers) pay financial institutions to gain access to BaaS platforms and create new banking products. But there are a couple of ways through which BaaS platforms can be monetized. The main two methods include paying a fee for using the platform and charging a fee for each completed deal.
Together with BaaS, a new payment method (A2A) has started to gain popularity, especially across the European and Asian markets. A2A (account-to-account) is an alternative to card payments as another option of non-cash retail payments. A2A payment enables TPPs to generate payments directly from customers’ bank accounts on their behalf (with their permission) without using payment cards. This method may become an excellent option for merchants since the direct account-to-account payments have lower costs for payment acceptance. Card giant Mastercard has acquired Net’s (European PayTech company) A2A service with intent to strengthen the real-time payment assets and to expand its infrastructure capabilities.
Cards continue to be the main and primary payment method across Europe, with cards being the number one payment method in 11 out of the 18 countries. Booming smartphone usage had triggered new payment methods like eWallets to take their place in the payments landscape.
As for cards, they can offer customers trusted brand recognition (Visa, Mastercard), as well as advanced online anti-fraud technology (E.g., 3D secure). The eWallet (Mobile/digital wallets) has become a key payment option for e-commerce transactions with the main benefit of optimizing payment processes. eWallets are simplifying the process by reducing the need to enter payment and personal data and not requiring customers to share their card details with the merchants directly.
In the past couple of years, the usage of credit and debit cards has grown by 35% CAGR. With the appearance of giant players like Alipay (running through Alibaba) and WeChat Pay (run by Tencent) in the payment ecosystem, mobile payment transactions saw a spike of 123% in CAGR in China from 2013 to 2018. (According to the report of the People's Bank of China). These companies (Alibaba and Tencent) can be fairly called BigTech as they began as trading & mobile messaging platforms—they now dominate the market, taking the lion’s share of 92% of all mobile payments.
One of the main driving forces for the growth of non-cash payments is the QR code. WeChat Pay and Alipay introduced QR codes back in 2011. Recent numbers show that around $5.5 trillion mobile payments made last year in China were handled via QR code.
All the innovations and changes that appear yearly on the financial market make industry players quickly and consistently adapt in order to provide high-quality services and solutions for any business. At Maxpay, we always keep a finger on the pulse of trends, innovations, and legal policy updates so that we can continue providing excellent services to merchants of all verticals and ensure the safety of payments in the future.