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Emerging Trends in the Global Payments Market

Author: Zhou Liping, Zhou Yaping

The structure of the global payments market is quietly changing

Has the innovation in payment methods, led by mobile payments, fundamentally changed the structure of the global payments market? We can observe the internal structure of the global payments market in 2015. In terms of market participants, new mobile payment providers continue to enter the market, breaking the previous dominance of a few large organisations such as PayPal, MasterPass and Alipay. New winners continue to emerge and the market structure continues to evolve. In the Chinese market alone, several organisations, including Alipay, Bankcard, NetBank Online, WeChat Pay, Jingdong Pay, Baidu Pay and Apple Pay, now dominate the mobile payment market. In terms of the structure of payment instruments, according to the Global Payments Report 2015, the payment amount and market share of major payment instruments at the beginning of 2015 are roughly shown in Table 1. In terms of the regional payments market, the internal structure of the global major regional payments market is broadly shown in Table 2.

Overall, credit card payments continue to account for the largest share of total global payments, followed by emerging e-wallets, with debit cards ranking third. Specifically, credit card payment volumes (40% and 42%) are the highest in North America and Latin America in terms of total market volume, ranking first globally. In Europe, the Middle East and Africa, the leading payment method is debit cards (29%), which is also the most commonly used payment method globally. Asia-Pacific leads in emerging mobile payments, with e-wallet usage at 341 TP3T, ranking first globally. In terms of card payment volumes, North America is the highest globally, with credit and debit card payments accounting for around 65% of the total market, followed by Latin America at 49%, EMEA at 42%, and Asia Pacific at 39%.

In North America, the most financially developed region, the volume of card payments is the highest in the world; however, in the Asia-Pacific region, where commercial banks play an important role in the financial system, the volume of card payments is the lowest. This suggests that the structure of the development of the payments market does not correspond to the financial structure of the country, and that the volume of bank card usage does not fully represent the development of commercial banks in the region. The reason for this is obvious: behind the payments competition, various financial institutions are involved, including credit card issuers and acquirers.

Regional differences are also evident in the development of payment methods. For example, direct debit and electronic invoicing are only present in Europe, the Middle East and Africa, while these payment methods are absent in North America, Latin America and Asia-Pacific. The Global Payments Report 2015 indicates that some common trends in the future of the payments market across regions include a decrease in card payments and a slight increase in bank transfer payments. Trends in other payment methods vary by region, with e-wallets likely to see an increase in payment volumes outside of Latin America, while trends in cash and prepaid methods may vary significantly by region.

Overall, as global e-commerce grows steadily, e-wallet payments will continue to increase and may be the number one payment volume globally, but the growth may not be as fast as expected. With internal competition and structural changes in the payment system, traditional card payments (debit and credit cards) are likely to stabilise their market share through new technologies such as near field communication (NFC), which will lead to a significant position in the global payments market over the next 5-10 years.

Payment technology development and applications continue to evolve

The development of mobile payment technology and various analytical algorithms has completely disrupted the traditional structure of the global payment industry. Where to shop and how to pay has become a competitive focus of the industry and is being explored in depth. Global investment in fintech continues to increase and digital currency technology is maturing. According to incomplete statistics, total global investment in fintech has shown a compound annual growth rate of three times since 2008, reaching approximately $2.97 billion in 2013 and $12 billion in 2014. By 2020, total investment is expected to exceed US$20 billion. In particular, investment in fintech has increased in Asian countries (e.g., China and Japan) due to increased consumer acceptance of "Internet-plus" services and improved return on investment. It remains to be seen whether the pace of development of payments technology can be accurately predicted (similar to Moore's Law for computer technology).

From a hardware perspective, smartphones have become the main mobile payment carrier, integrating online and offline mobile payments. Other mobile payment tools (e.g. smart bracelets) are still emerging, but have yet to challenge the leading position of smartphones. From a software technology perspective, key trends for future mobile payment development include:

Near Field Communication (NFC) has become an important mobile payment technology.NFC originates from the contactless RFID technology invented by Walton in 1983, which enables data exchange between multiple devices such as digital cameras, PDAs, computers, and smartphones.NFC mobile payment started to develop after the introduction of NFC-enabled smartphones into the market in 2012, and has become a successful business model innovation for mobile operators and mobile payment platforms a successful business model innovation. Currently, well-known smartphone brands and card organisations such as Visa are the latest leaders and competitors in NFC mobile payments.

Biometric authentication may become an important mobile payment security technology. As the convenience and efficiency of mobile payments continue to increase, accurate identification of personally identifiable information has become a key prerequisite for ensuring the security of mobile payments. Since the invention of fingerprint identification technology in 1891, biometrics have been evolving, with the latest technologies including DNA, fingerprint, voice, facial features and vein recognition. Of these, fingerprint and hand shape recognisers have the most mature commercial applications. Increasingly efficient peer-to-peer payment models require highly accurate personal identification technologies, making biometrics, previously used in highly confidential situations, one of the best options. Although not yet widely available, the trend is clear, with major mobile operators, payment institutions and others investing in this secure technology.

Mobile cloud computing has begun to provide important technical support. Since 2007, the concept of cloud computing has emerged and become popular. innovative payment technologies such as NFC directly challenge the limited computing power of mobile devices, thus creating new opportunities for mobile cloud computing. As an independent computing platform, mobile cloud computing can provide better data storage, processing and exchange services for various applications (e.g., payments) in mobile devices. As application technologies such as mobile payments continue to evolve, mobile cloud computing will highlight its powerful capabilities and continue to reduce the computing burden on smart devices. Of course, this also requires higher Internet transmission speeds and quality, which is the current trend in network development.

A complex payment system is quietly taking shape

Payments are no longer just part of the public financial infrastructure; in recent years, they have gradually become part of business models and new marketing tools. Competition in the market is far from over. New players (e.g., third-party payments and various mobile payments, web-based e-wallets such as Android Pay) continue to enter the payments market, while existing players (e.g., commercial banks and credit cards) have not yet been defeated. On the contrary, they are returning to the market in new forms (e.g., bank web-based e-wallets) through technology and business partnerships, making the payments market extremely competitive. A complex payment system has now been created through deep collaboration between mobile payment technologies, credit card systems, commercial banks, e-commerce and traditional businesses, bringing new experiences to consumers.

Competition for payment scenarios (remote and on-site payments) is inevitable when a variety of payment organisations have access to cutting-edge payment technologies and the ability to provide efficient payment services. The higher the consumer's preference, adaptability and stickiness to a particular payment scenario, the greater the likelihood that the organisation providing that scenario will become a dominant force in the future payment system. Internet e-commerce and third-party payment organisations were among the first to enhance their service capabilities by disrupting traditional on-site payment scenarios and focusing on third-party payments to expand into financial services such as wealth management. As more and more offline commercial organisations accept the invitation of third-party payment institutions to provide on-site third-party payment services, the traditional credit card market and its traditional on-site payment scenarios are really starting to face intense impact.

Nowadays, as third-party payment institutions accumulate large amounts of capital and have the necessary capital to expand commercial credit, the emergence of various alternatives to traditional credit cards is almost inevitable. For example, PayPal's Affirm, Apple Pay, and China's "Ant Chanting" and "Jingdong Baijiao" can provide consumers with convenient credit loans directly in consumer transactions. This not only directly increases merchants' sales and profits, but also saves consumers the cost of delayed purchases. Of course, the consumer must pay a corresponding interest rate for this efficient service. The immediate impact of this innovation is that customers gradually become less dependent on bank credit accounts, enhancing the financial attributes of third-party payment institutions and potentially eroding the original business model of the economic system, changing the financial structure and the rules of the business community, and enhancing the possibilities for the realisation of digital currencies.

The convenience of credit card alternatives and their payment services have dealt a death blow to traditional credit cards. As a result, credit card providers are fighting back. in 2015, with the help of new near-field payment technologies, credit card providers around the world attempted to increase the use and stickiness of credit cards among their customers. Surveys of the U.S. payments industry confirm this trend. In the 2015 Advanced Payments Report, the question "Which organisations are driving the growth of mobile payments?" the question was answered by card networks such as American Express (82%), mobile operators (78%), PayPal (76%), third-party payment providers (73%), new internet companies (72%), banks and financial institutions (72%), Google (68%), merchants ( 63%), startups (62%) and mobile network operators (53%). In short, looking at 2015, the new growth engine for mobile payments in the US is credit card organisations, followed by handset manufacturers, third-party payment providers and mobile network operators. This also broadly reflects the current competitive structure of the global payments market, albeit with slight country-specific variations.

The basis for the long-term viability of digital currencies continues to strengthen

Regardless of the changes in the internal structure of the payments market, it is certain that innovations in mobile payment technology have led to greater efficiency in payment services, cementing the foundation for the long-term viability of digital currencies. The fundamental purpose of the initial emergence of digital currencies was disintermediation, i.e., to reduce the multiple currency exchange chains between consumers and merchants (e.g., cash to non-cash account conversions, currency exchanges, etc.) in order to save on transaction costs and increase exchange efficiency. For any digital currency to survive and be accepted by consumers in the long term, it needs to develop some basic spending habits among the consumer base, such as non-cash payment spending, to increase consumer reliance on digital currency transactions. Bitcoin has failed to trade in many countries because the volume of speculative transactions is much higher than the volume of its basic consumer transactions, and it has not developed a highly dependent consumer base or a solid foundation for survival.

Globally, payment institutions (commercial banks, credit card networks, third-party payment providers, mobile phone manufacturers, etc.) driven by mobile payments are experiencing profound innovation. Consumers, on the other hand, are also benefiting from the practical experience of digital currencies. Digital currency is no longer a theoretical novelty or just a theoretical discussion and large-scale financial transaction; it is beginning to permeate consumers' work and lives and is spreading. While a country's level of economic development is an important basis for the development of digital currencies in that country, it is not the only factor. Today, digital currency innovations are reaching end consumers in every country. There is a "spring" in the development of digital currencies globally, with many countries striving to achieve a cashless society and many more eager to experiment. Most countries are encouraging mobile payment innovations, while steadily developing various financial infrastructures and generally improving the service levels of their financial systems. Overall, the innovative development of mobile payments around the world has significantly strengthened the foundation for the development of digital currencies and pushed more countries towards a cashless society in the future.

Table 3 shows the ranking of the Global Digital Currency Index compiled by Citibank, in which the top 10 countries and regions are shown in Table 3. Based on the score ranking, Citibank classifies the digital currency stage of each country (region) into "Substantial Preparation Stage" (1-23), "Transition Stage" (24-45), "Formation Stage "(46-68) and "Initial Stage" (69-90). Each country's (region's) score index in the digital currency process is closely related to its domestic policies and financial infrastructure. Taking countries (regions) in the substantial preparation stage as an example, each of the leading countries (regions) has its own strengths in developing digital currencies: Finland ranks first, with consumers and businesses well adapted to payment technologies and financial innovations; Singapore ranks second, with good regulatory planning for business-to-business organisations and good digitisation of government funds, as well as a highly developed information and communications technology (ICT ) infrastructure; and the U.S. ranked third, with a vibrant innovation environment, a high rate of diffusion of the latest technologies by consumers and business organisations, and rapid growth in B2C e-commerce. The diverse consumer base in the United States leads to poor adaptation to digital currencies, whereas Sweden has an extensive ICT infrastructure and high adaptation to innovation by consumers and business organisations; Hong Kong has a good ICT infrastructure, liberalised regulation of financial services, and high adaptation to digital currencies in the telecoms and retail sectors; and Norway is ranked sixth, with a high preference for digital currencies in the retail sector and amongst consumers. The UK has a high preference for digital currencies among retail business organisations and consumers, and a government policy on the transition to digital currencies, but its current ICT infrastructure is poorly adapted to innovation; the Netherlands has a high degree of digitisation of government funds, and a high degree of adaptation to innovation among consumers and business organisations, but like the UK, its ICT infrastructure is poorly adapted to innovation; and Japan has a competitive private sector and telecoms, but cultural biases lead to high cash usage; Switzerland has good ICT infrastructure and high acceptance of innovation by business organisations, but other markets are poorly adapted to innovation; Denmark is ranked 11th, with high acceptance of digital currencies in the retail sector and improving financial services adaptation to enhance the reputation of digital currencies; Germany has a moderately competitive market and business organisations are well adapted to a wide range of innovations, but cash usage remains high; Austria has a moderately competitive market with a high readiness for digital currencies in the telecoms sector, improving its reputation through local innovations and corporate relationships; Canada has a high degree of regulatory freedom for digital currencies and a high degree of financial services availability and adaptability, but ICT infrastructure in similar markets is less adaptive to innovations.

China is ranked 39th and is in the transition phase of digital currencies. According to the report, China's strengths in developing digital currencies are its suitable environment for innovation and the high degree of digitisation of government funding streams, while its weaknesses are the telecoms sector's lack of preparedness for digital currencies.

Overall, global payment systems evolved rapidly in 2015, and the structure of the payments market continued to change in the face of market competition. Consumer acceptance of innovations exceeded expectations, and the adoption of innovative technologies, such as near-field payments, was very rapid, cementing the foundation for the development of digital currencies.