A CLOSER LOOK Innovating Payments Financial technology, or fintech, firms are promising to revolutionize the person-to- person (P2P) and business-to-business (B2B) payments industry, and are already causing a seismic shift in this sector. Unburdened by regulation and legacy IT systems, new entrants focused on providing payment services are claiming to provide faster and cheaper transfer of monies, both domestically and across borders, than the established players. Swelling the already established ranks of traditional banks and fintech payment firms such as PayPal, technology companies Google, Facebook and Apple are all entering this space and are expected to grow rapidly. ClearXchange is a growing B2B payments provider, which was established by a collaboration of banks seeking to counter the fintech challenge. The traditional firms providing cross-border payment services, including Swift, Visa and MasterCard, are also under threat from new entrants and are working to improve the speed, transparency and predictability of cross-border payments to stave off further encroachments by fintechs. Swift has now signed up 73 global banks to its global payment initiative, which now covers 75 percent of the all cross-border payments. But that has not impeded the growth of new entrants such as Aligned Commerce, Traxpay and Payoneer, among others, with more likely to follow. Protiviti director Jason Goldberg shares his views on how disruptive new entrants have been in the payments space so far and makes some predictions for the future state of the market. What major innovation has taken place rails and solutions that allow firms to issue invoices in P2P/B2B payments? through a digital platform where their creditors can pay electronically. This has made payments faster Domestic business-to-business (B2B) payments but there are still delays. Cross-border payments have traditionally been made in the U.S. by check, are typically made via Swift and interbank transfers wire transfer or ACH. Over the last decade, the using decades-old technology, which is very large credit card networks – Visa, MasterCard, expensive, slow, and provides inadequate tracking American Express – have developed e-payables capabilities. It is unsurprising that cross-border Internal Audit, Risk, Business & Technology Consulting payments in particular have been targeted by fintech the use of prepaid cards as an alternative banking companies utilizing distributed ledger technology mechanism. Individuals can have their pay direct- (DLT) such as blockchain and virtual currencies deposited onto a prepaid card, which can be used to to speed up the process. The use of DLT allows pay bills and for goods, etc. However, even here, the companies, such as Align Commerce, to transfer card still needs to be loaded with funds using credit funds faster, cheaper, and in a trackable mechanism. card rails or EFT/ACH. Where a Swift transfer may take four or five business days, new entrants can promise transfers within two days and for about half the cost. Services such as Blockchain is a major disruptive technology these are a major disruptor to the payments sector, and it has the potential to reinvent and and more companies are launching new payment disrupt areas such as international payments. platforms every day. The most noticeable innovation has occurred in the P2P payments space, which has been driven by strong Is the use of credit and debit cards customer demand to pay via their mobile devices. in decline? Apple Pay is well known, but newer technologies From an innovation, disruption and protection include Venmo, PayPal.Me and Canadian firm perspective, Visa and MasterCard have been way Mobeewave has rolled out an app called PayMeTap, ahead of their competitors in preparing for the future. which allows users to pay and receive funds by a tap I don’t envision credit cards and debit cards going of their NFC-enabled mobile phone. Apple Pay is also away. If anything, the major change is likely to be rolling out this sort of tap-and-pay technology and the elimination of the notion of the plastic card and Facebook Messenger is also new to the scene. There a move to a mobile account. We have mobile and are many different types of eWallets and nobody wearables now, but in the future this may move to really knows which one is going to be most successful implantables and injectables. Biometric payment but they have all made payments easier. devices are already in development. So although the notion of a card goes away, the network stays. These innovative payment products all The technology behind those networks will likely offer faster speeds and an enhanced user shift, eventually. Blockchain is a major disruptive experience by reducing friction in the technology and it has the potential to reinvent and disrupt areas such as international payments. But payment process. for domestic payments, for now at least, blockchain is slower than the existing networks, which can These innovative payment products all offer faster process payments in a millisecond and are available speeds and an enhanced user experience by reducing almost everywhere in the world. This is not likely to friction in the payment process. Although some change in the next few years. also offer reduced fees, none have discovered a way to bypass the traditional rails when making payments Are customers and businesses or transferring funds. ACH and credit cards remain demanding cheaper services? the primary methods used to validate mobile devices The emphasis has been on providing faster and more or to transfer funds. The company that overcomes user-friendly payment services but fees are also an that hurdle will significantly disrupt the market. issue. At the moment, fees on credit cards remain A major disruption in the payments space to date and most of the P2P platforms charge but this is is occurring in the lower end of the market, which changing. One new entrant launched funds transfer services the under-and unbanked. Prepaid card services with fees attached but these were removed companies have moved beyond their core service to within a year. The company also removed more allow funds from prepaid cards to be transferred to restrictive conditions such as monthly limits due to other people. This change is effectively encouraging customer demand. This has enabled the company to protiviti.com A Closer Look · 2 capture a greater share of the market. I would expect many more P2P and B2B providers to go in the same Banks are responding to this fintech threat, direction. But most companies will need to retain and responding aggressively. Banks are not some limits to reduce losses from fraud or to restrict money laundering. likely to be disintermediated; they are more likely to embed real-time, P2P functionality B2B payment providers are more justified in charging fees since they offer a more efficient service that within their secure banking apps, and earn cuts costs for businesses, such as manual invoicing, fees from other payment interfaces. cutting checks, eliminating the need to use expensive bank wire transfer services, as well as Banks are not likely to be disintermediated; they are introducing payment tracking. Most companies have more likely to embed real-time, P2P functionality accountants and accounting departments to perform within their secure banking apps and earn fees these services but there is now a case to claim they from other payment interfaces. Some of the more are unnecessary. Over time, this argument may be innovative payment offerings, such as Mobeewave, settled as businesses become more accustomed to where you can make payment by tapping two phones using more frictionless services. It will be interesting together, will be more resilient to this renewed to see how the banks will respond once all businesses attack from banks. A greater innovation will be to move away from checks and traditional paper to be able to transfer funds in the same way between electronic payments. At that point, unless the next different apps. There is great promise for that new faster, cheaper, better thing has come along, it network technology. will be hard to justify charging fees because someone will figure out how to lower the cost on the same In the B2B payments arena, blockchain technology service and it will become commoditized. is very likely to be a truly disruptive force, especially for cross-border payments because it makes it so What further change can we expect to much faster. One of the issues holding this sector see in the next two to three years? back, however, is regulation. Because some of the new entrants do not hold funds nor transmit money, In the next two or three years, more P2P payments they do not require banking licenses. But this is will move onto mobile, which offers a frictionless likely to change and they will need to answer to form of payment. There will certainly be some the same regulations as banks and existing money consolidation in the payments space, with some transfer companies. eWallets being absorbed by peers and even by the more traditional players. Banks are responding to this fintech threat, and responding aggressively. Contacts Ed Page Atul Garg Managing Director Managing Director +1.312.476.6093 +1.704.972.9612 [email protected] [email protected] Tyrone Canaday Jason Goldberg Managing Director Director +1.212.603.5435 +1.212.471.9678 [email protected] [email protected] Protiviti is a global consulting firm that delivers deep expertise, objective insights, a tailored approach and unparalleled collaboration to help leaders face the future with confidence. Through our network of more than 70 offices in over 20 countries, Protiviti and our independently owned Member Firms provide our clients with consulting solutions in finance, technology, operations, data analytics, governance, risk and internal audit.