In collaboration with WHITEPAPER Digital Payments Materialization & Beyond TABLE OF CONTENTS 1 Introduction & Overview 3 2 Market Dynamics – Digital Payments 3 3 Key Drivers 4 3.1 Customer 4 3.1.1 Smart Devices & Data penetration 4 3.1.2 Digital Onboarding 4 3.1.3 Seamless Customer Experience 4 3.1.4 Merchant Network Options 4 3.2 Technology 5 3.2.1 Internet of Things (IoT) 5 3.2.2 Distributed Ledger Technology (DLT) 5 3.3 Regulatory 6 3.3.1 Open Banking 6 3.3.2 International Transfers 6 3.3.3 Immediate Payments (Local) 7 4 Digital Payments | Ecosystem 7 5 Strategic Challenges & How Are Financial Institutions Overcoming It 9 6 Conclusion & Way forward outlook 11 2 1. INTRODUCTION & OVERVIEW laggards are countries with less than 250 transactions per year per inhabitant. The non-cash payments typically constitute digital payments. The global payment landscape is rapidly Another dimension to understanding adoption is the changing and offers newer innovative solutions to retail segment mix, i.e., Corporate/Bulk volume vs Retail and wholesale customers. As customers adopt these volume. Economies which have high per-transaction payment solutions, there is an increase in payments value (more than USD 1000), is said to have a high volume and value worldwide. Over the last few years, percentage of Corporate transactions. In contrast, the global payments revenue has been growing economies with lower per-transaction value (less than consistently at 6-8% across geographies. USD 1000) have a higher percentage of retail transactions. It has been observed that a higher percentage of retail transactions is a reliable indicator of greater retail digital adoption. Source: BIS, Cashless Payment Data & IBS Intelligence Research The COVID-19 pandemic is expected to have a downward impact on the global payment revenue by The above representation demonstrates some key around 7-8% in 2020. However, the reduction in ATM economies and their positions in digital adoption and cash withdrawals reduced by 40-50% on average Retail/ Corporate mix. All countries are moving towards globally. With reduced cash transactions and physical the bottom right of the chart, i.e., towards digital contact due to social distancing norms, the pandemic adopters with a high retail mix. has been a black swan event in digital transaction adoption. The increase in digital transactions has been Singapore, Sweden, Australia, Korea & Canada are such observed across developed and developing countries. digital adopters with high retail volumes. Usually, most This white paper explores the growing importance of country policies and infrastructure gravitate towards digital payments, its dynamics, drivers, challenges, and this bucket. Most of these countries have local payment the outlook for the future. innovations brought by their regulators to enable digital commerce. For example, Sweden has Bankgirot 2. MARKET DYNAMICS – DIGITAL and Swish,and Canada has the Payments Canada body PAYMENTS that looks after digitisation and retail payment systems. Singapore has a similar body Electronic Payment Technical Committee (EPTC), which looks after Adopting digital payments is a complex function payment systems and digitisation. consisting of payment infrastructure availability, compliance with local and global regulatory and The key differentiator for digital adopted countries is messaging standards, charges on payment systems either a government-appointed regulatory body or an and retail merchant acceptability of digital payments. industry body that creates standards for local digital Different economies across the globe typically have transfers. Also, the growing penetration of Fintech different levels of maturity in digital payments. players aids in the growth of digital transactions. The focus of such entities is usually on immediate, An essential dimension in understanding global digital convenient, and consistent payments. payment dynamics is the number of transactions per inhabitant in a country. Digital adopted countries are usually defined as the ones which have a high number of cashless transactions per inhabitant (more than 250 transactions per year per inhabitant). In contrast, digital 3 1. Focus is on Real Time Gross Settlement Retailers and Fintech players generally simplify the Systems(RTGS) – to be used by Treasurers, Banks, and digitisation process in retail payments, making it easier Money Market participants. to operate and provide immediate transfer from anywhere and everywhere. It has been observed that 2. After RTGS is well adopted, the governing bodies adopting digital payments is relatively easier for retail typically shift the focus to Retail payments, with customers. Key drivers enabling digitisation are listed immediate payments, low cost and multi-channel/API below. based payments as a common emerging theme. For example, the Immediate Payment Service (IMPS) & 3.1.1 Smart Devices & Data penetration Unified Payment Interface (UPI) in India offers immediate real-time transfer across bank accounts. Increased penetration of smartphones, tablets, wearables, and the availability of increasingly more In addition to the local trends, global and regional economical internet (data) and the changing innovations are a massive driver for digitisation. Some demographics, is one of the main reasons for higher such key enablers are Open Banking, Swift GPI, ISO digital adoption. Initially, this did not translate to retail 20022, PSD2, amongst many others. digital payments adoption. However, as the smartphone providers moved towards greater device While the COVID-19 impact is expected to reduce security and easy payment options, retail customers overall growth of non-cash volumes over the next 3-4 started warming up to mobile-based digital payments. years, increased adoption of digital payment payments is expected to offset this decline. The adoption of 3.1.2 Digital Onboarding digital payments in the future would vary significantly based on geography. Asia Pacific region, China and The world is moving away from traditional branch India would play a significant role in increased digital banking and manually capturing detailed customer adoption. Ecommerce, in general, is expected to play a data towards onboarding. Banks and Fintech have significant role in the revival digital payments post the been offering products for new and existing customers. pandemic. This ensures seamless customer onboarding without having to visit the branches. Many countries across the The role of the local regulators would be an important world have forecasted a reduction in the number of factor in digital adoption. One such example is the branches soon. Seamless digital onboarding can be Unified Payment Interface (UPI) in India. Except for achieved through electronic KYC (Know Your March and April 2020, the adoption of digital payments Customer). Some regulators may waive this for niche through UPI has been increasing by volume and value. offerings such as e-wallets up to an amount. eKYC is enabled through a combination of innovations such as a citizenship database, 2-factor authentication through government-registered mobile, liveliness check through video, digital signatures, and recently distributed ledger technology, amongst many others. 3.1.3 Seamless Customer Experience A key enabler to Retail digital payment adoption has been seamless 2 or 3-click payment options along with enabling immediate payments for the transactions 3. KEY DRIVERS completed. It ensures that the customer is provided with a consistent and continuous experience. 3.1 CUSTOMER 3.1.4 Merchant Network Options Corporates and SMEs generally respond to what their customer needs, their financiers allow and what makes Ability to pay merchants using non-cash modes started their distribution network run most efficiently. Thus, in most economies with cards made popular by Visa, corporates typically use a mix of digital and physical Mastercard & Amex. After POS machines, tap and pay, payment methods while preferring digital due to its scan and pay (QR code payments) became a common lower administrative costs and real-time accounting. feature of retail shopping in an economy, the jump to Some industries such as logistics, retail and insurance API based merchant payments was easy. It is a logical are still heavily dependent on cheques and cash, but alternative of replacing cards with mobiles and POS there has been a substantial shift towards digitisation. machines with QR codes or mobile numbers. 4 Expleo Case Study #1 Objective : Help in the transformation the Core Banking and digital payment suite of the large payments bank in India How Expleo Helped: 1. Assist in the implementation of digital payment suites across channels such as micro ATM, Mobile Banking, SMS Banking, Online Banking, Agent Banking, Doorstep banking, amongst others 2. Assist across different payment types such ABPS, AEPS, IMPS, NEFT, UPI, RTGS, Bill Desk, NACH, RuPay The Bank leveraged postal services to deliver Rs. 2,000 Crore Cash through AePS in 75 Days during lockdown (Door step Banking) 3.2 TECHNOLOGY 3.2.2 Distributed Ledger Technology (DLT) The technology landscape in payments usually involves various linked systems, devices, banks, financial Distributed ledger technology is a digital transaction institutions and Fintechs offering the end customer recording system which has no common database and products is stored in multiple places across the globe at the same time. Once a transaction is confirmed, it cannot 3.2.1 Internet of Things (IoT) be modified, and it