From Bitcoin to Apple Pay, banks must now contend with a vast number of new entrants to the payments space. As cash declines and digital payment technologies become more prevalent, Abi Millar speaks to Marion King, director of payments at RBS, to find out how banks are able to keep pace.
The World Payments Report 2015, which was conducted last year by Capgemini and the Royal Bank of Scotland (RBS), painted a revealing picture. With traditional, cash-based payments on the wane, the likes of mobile and contactless banking are becoming more prevalent. In 2014, non-cash payment volumes rose by 8.9% on average, growing faster than GDP across all geographies.
The report brought a few clear trends into focus. One is the pace of change in parts of Asia, where internet use is increasing and non-cash transactions grew by a staggering 27%. China has seen particularly rapid expansion, fuelled by the opening of the domestic payments card market to overseas competition.
Another is the rise of so-called 'hidden payments'; in other words, payments processed through non-bank systems that include the likes of mobile apps and virtual currencies. Now believed to account for 10% of the cashless economy, these transactions are an entrenched part of the payments landscape and a stumbling block for regulators. The report describes the issue as "too big to ignore".
"Because they aren't subject to regulation, there'll be a lack of consumer protection in terms of data privacy, fraud, dispute resolution and money laundering, so there's a risk to having payments that don't go through banking systems," says Marion King, director of payments at RBS. "The technology is clearly here to stay and is going to have a big impact in the future, so I think banking systems and existing regulatory frameworks have to be careful to offer the consumer the security that's so important for payments."
Time to make an appointment
King joined RBS in 2014, from her previous role as president of MasterCard UK and Ireland, where she sought to "create a world beyond cash". Her appointment came at a pivotal time for emerging payments technologies. The UK is currently the biggest digital economy in the world outside of North America, and RBS's customer base is growing well acquainted with cashless transactions.
Across the globe, around 80% of payments are still conducted via cash or paper. The UK, however, has reached the tipping point where cashless payments begin to overtake notes and coins. According to the UK Payments Council, 52% of transactions were made with cash in 2014, and this dipped below 50% for the first time in 2015.
Future projections are starker. By 2023, the number of UK cash transactions is expected to drop to under 13 billion, while their cashless equivalent surpasses 27 billion.
Some of this has to do with the rise of contactless payments, which are now commonly used in situations where cash would once have held sway. In 2015, UK consumers spent £7.7 billion in 1.5 billion contactless transactions, twice as much as in the previous seven years combined. Currently, around half of all debit and credit cards in circulation boast a contactless capability, and nearly one in eight card transactions use the technology.
"Consumers are very happy tapping for low-value payments, whether it's a cup of coffee, buying their lunch, or tapping on the London underground - and that is replacing cash," says King. "People don't have to carry cash in their pocket, and that brings safety, security, speed and ease. It's also good for merchants because cash management is a pretty expensive thing to do."
While she does not expect to see the much-fabled 'cashless society' any time soon, she does envisage a world in which, increasingly, the benefits of digital speak for themselves. Currently, 4.4% of UK adults claim they 'rarely' use cash at all, and cheques are faring even worse, with volumes declining 11% year on year. King feels that this shift is driven, above all, by customers' desire for simplicity and convenience.
"Customers just want ease and quick use of payments, which is enabled by smartphones and the digital capabilities that we have now," she says. "What we're seeing is customers transacting on the go, which means increased use of mobile banking - in one month at the end of last year, we saw over 13 million payments being made on our mobile app. You can put that down to lifestyle - people are short of time - so being able to transact in this way really helps them."
Business or pleasure?
If this rings true for personal banking, then it applies even more to business banking. Since 2008, the UK has benefitted from one of the world's most advanced automated clearing houses, the Faster Payments Scheme (FPS). A real-time interbank payment network, it enables payments to be sent between UK accounts at warp speed. King herself was formative in the development of this network: before taking the top spot at MasterCard, she was chief executive of VocaLink, which delivers the associated infrastructure.
Corporate consumers have become all but reliant on this service, typically expecting payments to arrive in their accounts instantaneously. King says that from a banking standpoint, this presents opportunities to help simplify the payments process.
"Strategically, I think it's important that as the market becomes more competitive, we simplify the value chain to help merchants and, ultimately, consumers in the cost of doing business," she says. "That will be invisible to the consumer - they just need those real-time, accurate safe payments, but we can take some of the cost out of the processes that sit behind it. We also want to help customers manage their payment flows and manage their accounts more accurately in real time."
This ability may give mobile banking services the edge, providing something that a non-bank digital wallet, for instance, does not.
"Over the past few years, we've seen an awful lot of different players inserting themselves into the value chain," continues King. "While we absolutely applaud competition and innovation, organisations that provide digital wallets, loyalty schemes and gateways all have a charge, and typically the charges land back on the merchant and, ultimately, flow through to the customer."
Of course, whatever the pros and cons, hidden payments are going nowhere fast. Cryptocurrencies such as Bitcoin provide user anonymity and inflation-resistance; money transfer services such as M-Pesa are giving millions of people in the developing world access to a formal financial system outside the remit of a bank. For this reason, banks may stand to gain through forming relationships with less traditional payments providers.
For instance, the digital wallet and mobile payment service Apple Pay is currently being rolled out across the world, hitting the UK last July. It enables mobile banking users to use their authenticated smartphone (or other Apple device) in the same way they would use a contactless debit card, after first registering their card in the Wallet app.
Come under threat
While there have been concerns that Apple Pay could threaten some bank revenue streams, banks (including RBS) have been keen to involve themselves. This, after all, is a sophisticated and forward-thinking payments system that's reliant on input from the banks.
As James Anderson, senior vice-president for mobile product development at MasterCard, told the New York Times in 2014, "There are schemes that don't respect and honour the payment networks. We want to invest in programmes that respect our role in the ecosystem."
Banks are also turning their attentions to the opportunities presented by cryptocurrencies. We are seeing a surge of interest in blockchain, the shared database technology that underpins Bitcoin. In September, nine of the world's largest banks, including RBS, announced they had joined forces to create a framework for using this technology in the markets. The potential is thought to be vast: advocates suggest it could save huge sums of money while improving security and data protection.
RBS has said it will pilot a project based on blockchain technology at some point in 2016. While the details are yet to be revealed, it is thought that the proof-of-concept will be demonstrated imminently.
"If we think about what the internet's done for the front office and the customer experience, then blockchain, in theory, can do something similar for the mid-office and back office," says King. "As a bank, we believe this definitely has a significant potential for the future; therefore, we're very much involved. I can't be specific in terms of what we'll deliver first, but there's a lot of work happening on this and it's something we'll monitor carefully."
RBS is keen to position itself as a bank for the digital age. With banks under greater pressure than ever to overhaul their legacy IT systems, it is working hard to ensure its payment services remain competitive in a changing marketplace.
"Payments are a critical part of what we offer our customers, and we transact a huge proportion of our customers' payments across the UK," says King. "We're therefore investing heavily in building new technologies that can embrace innovation, but at the same time protect our customers and what they have today. I think, going forward, we'll see payments be a key focal point."