How will the new era of payment fragmentation impact the financial sector in APAC?
The Asia Pacific (APAC) region’s desire to become the leader in payments have set forth waves of innovation to keep up with customers’ growing demands. Banking software firm, Temenos Group, reports that revenue from the payments sector in APAC will reach USD1 trillion in 2020– up from USD0.7 trillion in 2016. The market is also expected to double in size compared to anywhere else in the world. Consulting firm, Mckinsey, further reports that the region already accounts for approximately 75% of global payment transactions. However, in spite of the payments sector being lucrative, the financial industry in APAC has taken a more conservative stand due to the sector becoming increasingly fragmented.
Why is the payments sector becoming more fragmented?
Payment fragmentation has provided consumers with a wider array of choice due to the growing number of market players and the push for innovation in the industry. However, the increase in competition has rendered it more challenging for merchants to deliver their services. Competing innovation labs have also made regulating the industry more challenging. It is presently difficult to build a more robust risk, regulatory and control framework across multiple innovation labs in a digital landscape.
The implementation of innovative technologies in the payments sector need to be carried out in a more collaborative manner between market players, from payment firms, to banks and financial institutions, to improve the chances of consumer adoption.
Below are some of the promising innovations that we are seeing in the sector:
- Integration of application programming interfaces (APIs) to build a seamless payment experience
API’s integration within the payments sector has brought about various opportunities including security, authentication and new methods of consuming payments data. At the recent Seamless Asia Summit Singapore 2019, Prasoon Sinha, Deputy CEO of Wave Money shared that “API is a language where one component of an IT system talks to another. It allows the increase of data sharing between financial institutions with security, creating an ecosystem of innovation”.
The use of APIs is expected to provide avenues for payment firms to tap into new monetisation platforms that reach customers faster. An example is PayNow, a Singapore's funds transfer system, which banks like DBS and OCBC can access through its API. The API enables transactions from a network of nine banks, including Bank of China, Standard Chartered and Citigroup. The buy in for the customers of these banks is that they are now able to use this make payment transfers without incurring additional tax or costs across supported networks.
- Payment giants jumping onto the crypto bandwagon
Visa, PayPal and MasterCard are key market players and account for more than USD17 trillion of yearly global payment volume. These three payment giants are also one step ahead of banks by joining the Libra Association in support of the Libra Coin launch – a cryptocurrency introduced by social media giant, Facebook. The Libra Coin is ultimately a project aiming to significantly reduce transaction and payment costs — especially for cross-border transactions within APAC. Another example of social media platforms collaborating with payment firms is Line, who partnered with Visa to work on new blockchain and digital payments solutions in Japan. More payment giants are also establishing their footprint in APAC with payments firms like WorldPay expanding to Australia later in the year. WorldPay is a new heavyweight disruptor collaborating with established payment networks and banks servicing most local firms.
What are potential drawbacks from the increasingly fragmented payments sector?
- Too many payment options
Having too many options for payment creates noise in the market and may deter people from changing over to new platforms. It can also cause instability in the financial system when payment merchants fail to comply with new regulations.
As a result of this, the Payment Services Act was implemented this year in Singapore to have regulatory oversight of all payment systems. These regulations aim to ease the burden of regulators as companies are enforced to comply with the Payment Services Act. FintechNews further reported on the growing number of mobile payment options that users can choose from in Singapore. This alone highlights the need to cover all payment options in the Act, as well as the need for a regulatory framework overseeing potential risks across all payment platforms.
Importantly, fintech companies offering electronic wallets without a banking licence are now prohibited from using wallet funds to make loans. Prior to this, electronic wallets, payment account issuance, domestic money transfers and merchant acquisition services were not regulated and caused trust issues and concerns about security of payment.
- Trust and security issues
Online payment fraud is on the rise worldwide with the increase of consumers using digital channels to make their purchases. As a result, payment security is a top concern especially within consumer finance. According to Research and Markets’ report, losses from online payment fraud covering e-commerce, digital travel, and online banking transactions, could double between now and 2023.
Fear of fraud is one of the main reasons why many internet users in Asia are wary about online payments. However, the convenience of making online payments trumps this fear which may induce a taken-for-granted attitude towards security.
In the hope of securing the trust of their customers; e-commerce sellers, payment providers, and financial institutions are encouraged to invest in cybersecurity to mitigate the risk of online payment fraud. Mobile biometrics is among the most trending technologies that financial fraud professionals deem most effective in combating online payment fraud.
How will businesses continue to be affected by the fragmented payments sector?
With the rise in fraud rates across the APAC region – what concerns do you see for yourself and businesses? If you would like to gain more insights on APAC’s payments sector, please fill out our contact form below to get in touch with us. Alternatively, please follow us on LinkedIn for more updates on the financial industry.