Digital Ecosystems: the Answer to the Accelerating Payments Challenge

New technologies, emerging competitors, cybersecurity threats and changing member expectations are transforming the payments marketplace dramatically. As the payments ecosystem evolves, credit unions will need to find new value propositions. Around the world, consumers are expected to make 726 billion transactions using digital payments technologies by 2020 according to the 2017 World Payments Report released by Capgemini and BNP Paribas. Emerging markets will lead this growth with advanced technologies such as the Internet of Things (IoT), contactless bank cards, augmented reality and wearable devices — all fueling the growth of cashless transactions. Fact is, near and far, change isn’t just coming: It’s here. And it isn’t going away anytime soon. Based on analysis of payment trends, the Capgemini/BNP Paribas 2018 World Payments Report says debit cards account for the highest share of noncash payments at 46.7 percent, while credit cards trail behind at 19.5 percent. Noncash transactions between 2014 and 2015 rose 11.2 percent, their highest growth of the past decade. Contactless cards are seen as the “new normal,” especially in Europe. In France, the circulation of Visa contactless cards doubled to 40 million in 2015 from 20.3 million the previous year. The U.K. was the biggest market for contactless payments in Europe, with cards in circulation reaching 106.9 million in 2015. Checks, on the other hand, look to be on the way out, and declined 13.4 percent in 2015. The study did not specify the number of check payments made. The Emergence of New Payments What are the environmental elements driving this change? The World Payments Report highlights the emergence of new payments driven by a number of converging factors:
  • The dynamic regulatory landscape including the requirements of PSD2 compliance.
  • The proliferation of fintech.
  • Changing corporate and member expectations for value-added services.
  • An increase in payments-enabling technologies.
“By 2021, more than 15 billion machine-to-machine (M2M) and consumer electronic devices are expected to be connected,” says the report. The only thing holding this growth back currently is the dual impact of scalability and security. Much of this growth will result from higher volumes of low-dollar transactions. These transactions will also provide vast amounts of data, enabling FIs to track preferences, behavior and overall activity, leading to customized use cases. Now more than ever, ultra-tailored customer experiences coupled with uber-relevancy is possible. Where will it happen? No surprise: mobile — and beyond. The yearly growth rate for e-payments is expected to slow down to 17.6 percent between 2015 and 2019 as more transactions move to mobile payments, which are on track to grow 21.8 percent during the same period. Driving this is the continuous move to mobile devices. “Within this new and dynamic ecosystem, payments industry participants must strategically reassess their roles,” says Anirban Bose, Head of Global Banking and Capital Markets for Capgemini. In order to thrive, “Banks must embrace this opportunity to enhance their offerings in collaboration with fintechs and third-party developers. Breakthrough technologies and significant industry advances, such as Open APIs, instant payments, blockchain and regulatory standardization, will encourage collaboration.” What Are the Implications for Credit Unions? The intersection of emerging payments technologies, dramatically elevated member expectations, a new regulatory environment, emerging markets and new players, as well as increasing impact of nontraditional competitors, are transforming the payments ecosystem. This transformation requires credit unions to reassess the ways in which they provide value to their members and what needs they are filling. The proliferation of new technologies will dramatically change both security and regulatory components, while the increase of data from these transactions will make new value propositions possible. The WPR 2017 study identifies regulations, competition, consumer expectations and emerging technologies as the primary drivers of change in the future. The integration of customer analytics, improved fraud management, dynamic wallet solutions and other value-added services will have positive impacts for both the consumer and the merchant. Add to that advanced analytics, Open Banking APIs and conversational AI, and financial institutions could see a new opportunity to create differentiated experiences that improve member satisfaction, increase loyalty and generate revenue for the provider. But take heed: The provider of this advanced banking ecosystem doesn’t necessarily have to be a legacy bank or credit union. The Emergence of Digital Ecosystems In accordance with digital integration as a core strategic component for today’s competitive businesses, digital business ecosystems and platforms are fast becoming the go-to business model for the digital economy. In fact, according to Accenture, “Ecosystems are the new bedrock of digital,” and “the top 15 public platform companies already represent $2.6 trillion in market capitalization worldwide.” At a high level, an ecosystem is defined as a complex network in which various parties are interconnected. The platform provides the nuts and bolts upon which the ecosystem develops its connective tissue. Joel Keylor, cofounder & CEO of Tresle, a platform that connects established private companies with buyers and their capital, explains: “Platforms simply require a user base and a central message for those users to engage and network around. For example, iTunes is a platform for musicians to showcase their art and for fans to listen to music. The ecosystem is all of the various Apple products and services that connect and align to generate a desirable customer experience.” Specific technology companies that make up this bedrock? Think Alibaba, Alphabet, Amazon, Apple, Facebook, LinkedIn, Net ix and Twitter. Even nontech sectors are following suit, with companies as diverse as Disney, GE, Merck and Schneider embracing the ecosystem model. According to CIO.com advisor and contributor Nicholas Evans: “These ecosystems are driven by customers demanding more intuitive, real-time, integrated solutions and services whether in financial services, manufacturing, transportation, healthcare, entertainment, public sector or any other industry vertical.” Specifically, in the financial services sector, by working within ecosystems, payments players are poised to create the next generation of payment rails, bank networks and alternative forms of payment. CO-OP — A Payments Ecosystem Digital integration involves accessing information — any data, any format — in a real-time, unified way. It’s about creating a framework or a business model that allows suppliers, users and builders to come together and create an infrastructure where people find value. That’s where the platform economy comes in. It’s something that lifts the provider building the platform and also allows others to stand on it. Platforms allow other businesses, developers and users to plug into them to build their own products and services, a process that expands the value of the platform. For CO-OP, the recent focus has been on building an ecosystem for credit unions, similar to the platform Amazon provides for its sellers and customers. CO-OP’s massive platform already serves as a powerful conduit for credit unions. For example, a suite of Open Banking APIs allows credit unions to plug directly into existing apps so they can benefit from the power of CO-OP’s ecosystem while maintaining their own brand identities. Once those platforms and networks are created, the question then becomes, how do you digitize access points and solutions for end users? “Simply put, the more platforms exist, the more we will see them integrated,” says Tresle’s Keylor. “We see this in the news today. When a big story is posted to CNN, for example, which is also a platform, it automatically spreads across blogs, social media, email services.” Platforms don’t always stand alone. They can complement each other too — the way Twitter and CNN’s news sites may work together to engage readers. Credit unions might think about digitally integrating with a platform that provides access to financial education. Financial literacy, access to credit, reaching out to the underserved — these are common social responsibilities that credit unions are deeply, deeply passionate about. They’re already doing things in a localized linear way. So, if you want to take the platform and ecosystem approach, you have the ability to use a digitized platform to connect users to financial literacy — and think about it in a more expansive way.” In a way, the credit union model is based on the same general philosophies of the platform economy and the digital business ecosystem. A credit union by its very core, the foundational principle has always operated with platform-style thinking. It was built to connect members to places that allowed them access to cash or credit. In an analog way, we created this business model 100 years ago. As your organization continues to think about integration as the new innovation, reframe it within the context of platforms and ecosystems. Digital integration is really nothing more than identifying the most adept platforms upon which to build a member-centric organization and then identifying the best partners within the ecosystem to support both your technology and business strategy goals. The result: members will benefit tremendously because of the options and choices offered through platforms.