Fantom Confidential 7: Global Insights

Our latest, and seventh installment of Fantom Confidential: Insights.

Digital Currency Global Overview and Forecast

By Fantom Innovation Labs

Digital Economy Market Overview:

Global Overview:

Global Non-Cash Transaction Analysis: [9]

• During 2015–2016, global non-cash transaction volumes grew at 10.1% to reach 482.6 billion
• Emerging Asia (with 25.2% growth) and CEMEA (17.1%) fall in the developing growth with a recorded growth of 16.5%.
• Notable growth rates were recorded in Russia (36.5%), India (33.2%), China (25.8%), and South Africa (15.1%).
• The 10.1% growth rate was above the 9.1% rate predicted in World Payments Report (WPR) 2017 mainly because of Indian Government’s demonetization program, announced in November 2016.
• Market share of emerging markets has more than doubled from 14.1% of total non-cash transactions in 2006 to 33.7% in 2016, while during the same period the share of Europe and North America decreased by 9.2% and 12.4%, respectively. These figures emphasize the high-growth potential of emerging markets.

Analysis of top ten Global Markets: [9]

• USA remain on top reaching 148.5 transactions in 2016, an increase of 5.7% over 2015.
• Russia surpassed Japan to become the seventh-largest market.
• The most rapid growth came in Russia, which recorded an increase in transaction numbers of 36.5%, to reach 17.3 billion transactions
• China, with 25.8% growth and 48 billion transactions, recorded the second-highest growth rate.
• Four APAC countries: China, South Korea, Australia, and Japan, accounted for four of the five fastest growing markets in the top ten.
• India is expected to overtake Australia by 2018 and Canada by 2019

E-Wallet Payments

• Non-Cash Transactions conducted via E-wallet 41.8 billion
• Out of 41.8 billion, 29.7 billion transactions were done via payment apps and e-wallets offered by big techs to their customers
• Big techs Market share of total global non-cash transactions is still below 10%, so it presents big opportunity for big techs.

Countries with Minimum Cash Transactions:

Accessibility and Acceptance Devices: [8]

Australia stands out with a high penetration of point of-sale (POS) terminals and low number of ATMs. In March 2018, consumers had access to some 965,000 POS devices, 28% more than in 2012. By comparison, the number of ATMs has increased by 3% to 31,712.

Global Overview on regulatory standpoint on Cryptocurrency:

Open Banking Assessment:

When mapping the open- banking readiness versus open-banking potential of these markets, in terms of openness in the market with respect to new competition, adoption of standards, degree of data-sharing deals between banks and third parties as per open-banking norms, enhanced CSM procedures, and the maturity of instant payment schemes. We observed three categories: pioneers, followers, and conservatives.

Among the pioneers, it is interesting to observe that countries with higher per-capita non-cash transactions such as Sweden, the Netherlands, the US, and the UK, are more mature open-banking markets.

Among the followers, Belgium and France have not made significant progress in open banking, because they wish to protect existing systems and participants in their markets that are fairly consolidated and dominated by a few large banks.

Conservative countries are taking a wait-and-see approach and rank low in per-capita, non-cash transactions

Digital payments Overview and growth: [26]

• Total Transaction Value in the Digital Payments segment amounts to US$3,952,706m in 2019.
• Total Transaction Value is expected to show an annual growth rate (CAGR 2019–2023) of 12.5% resulting in the total amount of US$6,335,811m by 2023.
• The market’s largest segment is Digital Commerce with a total transaction value of US$3,208,184m in 2019.
• From a global comparison perspective it is shown that the highest cumulated transaction value is reached in China (US$1,585,555m in 2019).

Transaction Value: [26]

Total Transaction Value in the Digital Payments segment amounts to US$3,952,706m in 2019.

Total Users: [26]

In the Mobile POS Payments segment, the number of users is expected to amount to 1,601.8m by 2023.

Average Transactions per user: [26]

Market Overview Australia:

Payment Methods: [1]

• Cards and Direct Entry:

• Cash and Cheques Use:

Overview of different payment methods from 2012 to 2017 [1]

Smartphones and Internet activity:

• 9 out of 10 people owns a smartphone
• 3 in every 5 smartphone owner use them to make online payments [4]
• Banking, Social networking and Entertainment are top three online activities. [3]
• 14.4 million online shoppers in December 2017 [2]
• 25$ billion spent online in February 2018 [2]
• QR codes and New Payment Platform (NPP) are quickly gaining popularity.

Cryptocurrencies:

Interest in cryptocurrencies has increased significantly in recent years, together with a sharp run-up in prices and the emergence of new products and intermediaries that facilitate trading in them. The prices of Bitcoin and other cryptocurrencies, the total market capitalization of cryptocurrencies reached a peak of over US$800 billion in early 2018, but has since fallen back to around US$200 billion.

In Australia, [23] around A$6 billion of cryptocurrencies were traded (bought and sold) at Australian digital currency exchanges (DCEs) in 2017.
Around 60 per cent of the total trading value for that year took place in the month of December alone, when cryptocurrency prices and activity spiked higher. The study estimated that Australian DCEs had around 313,000 customer accounts at the end of 2017.

Australia’s New Payments Platforms:

With the New Payments Platform (NPP), the Australian Government and financial industry collaborated to create the necessary supply-side push for Australia’s payments industry.

Advantages of NPP:

Businesses: A 24/7 payments system through the NPP ensures that transactions are no longer restricted to business hours. Improved tracking and receipt of payments, due to richer data, will help businesses lower costs. For example, better remittance information will streamline reconciliation processes.

Banks: Non-cash transactions are expected to increase under the NPP, resulting in higher revenues for banks as they deliver new value-added services and develop an ecosystem of offerings around their core banking solutions.

Card operators and payment processors: Overlay services through the NPP can enable network operators to offer new card products, for example, contactless payments.

Future of Digital Payments in Australia: [15]

• The factors shaping the future of payments in Australia will have effects on the revenue potential for the players in 2020
• The future market is likely to see close to stable growth in revenues (i.e. less than 1 per cent per year)
• Pricing will be affected by the shift in mix and pressure from regulators and new entrants.
• Emerging innovative and non-traditional competitors will be increasing their market share to up to 10 per cent of revenues by 2020.
• Payment-chain participants could benefit by providing value-added services to business customers
• Transportation companies, Health and Human Services departments that are not typically associated with payments will drive significant investment in new solutions that increase customers convenience
• Traditional financial services providers in Australia must embrace change to serve consumers and corporate customers or risk being pushed further from their customers’ minds

New Entrants and Top Trends:

1. Fintech
2. major part of the digital future
3. Australia is ranked in the top 5 countries globally for fintech activity [10]
4. 600 new fintechs are opening in Australia [11]
5. More than a third of the digitally active population now use services provided by fintech organisations, with adoption expected to reach 43% in 2018. [12]

Block chain Technology

1. Australian Stock Exchange (ASX) announced in December 2017 that it will replace the CHESS clearing and settlement system with distributed ledger technology
2. Block chain technology and cryptocurrencies have featured more prominently in the digital economy since 2017
3. Central banks around the world are investigating digital currencies including Sweden’s Sveriges Riksbank, the Bank of England, the People’s Bank of China and the European Central Bank
4. Australia is also taking a lead role in the development of international block chain standards through the International Organization for Standardization (ISO).[14]

Faster Payments

1. More than 30 countries have now switched on faster payments systems
2. By the end of 2018, banks holding more than half of all deposits will be using the real time payment [13]
3. A number of firms including SWIFT, Ripple and Transfer wise are progressing solutions to increase the speed of international remittances

Global Payment Trends: [24]

1. Banks becoming platform to aid collaborations, retain payments role. [24]

1. Globally, payment infrastructure is being transformed to become faster and more inclusive to new players that will launch valuable offering for retail and businesses. [24]

1. Payment vendors and banks are expected to consolidate their operations to form larger groups. [24]

1. With Europe’s 2nd payment service directive comping into force fintech and TPPs are expected to leverage open APIs to examine available opportunities. [24]

1. Alternate payment channels such as contactless and wearables gain acceptance. [24]

1. Banks and fintechs explore distributed ledger technology to transform cross border payments. [24]

1. Instant payment processing likely to become the new normal. [24]

1. As Cyber-attacks are rising, regulators are focusing on compliance with current cyber security and data privacy laws. [24]

1. Robotic Process Automation and machine learning help payment service providers in frauds detection. [24]

1. Payment firms continue to invest in advanced authentication technologies to fight fraud and data breaches. [25]

Future Trends and Opportunities of Digital Payments:

Key Future Imperatives for financial Institutions:

Non Cash Transactions Forecast: [16]

1. From 2016 to 2021, the CAGR of worldwide non-cash transactions will be 12.7%, with growth in the more immediate future of 11.0% during 2016– 2017.
2. The highest growth rate, of 21.6% over the five-year period, is expected to be in the developing regions of Latin America, CEMEA, and Emerging Asia.
3. China is expected to continue on a high growth path through to 2021. China alone is estimated to account for 40% of global retail e-commerce, according to the country’s Ministry of Commerce.
4. Regulatory measures could have a huge impact on growth in the emerging markets. For example, China’s move to regulate e-wallet operators could significantly reduce the growth of non-cash transactions in the country.
5. India is one of the most promising markets, with high potential for growth in non-cash transactions

Various requirements of all stakeholders towards Digital Payments 2020 in the world

Potential for increased consumer benefit and growth stimulation in P2P, POS and E-Commerce: [17]

Ecommerce is booming worldwide. Having launched in December 2017, Amazon Australia had 10,000 sellers by March 2018, and expects to exceed 50,000 by the end of 2018. In 2017 retail e-commerce sales worldwide amounted to 2.3 trillion US dollars. The graph below shows trend for next 4 years.

From a consumer and retailer perspective there are several limitations of Digital Payments today:

• Often time-consuming, redundant und internationally diverse requirements for registration and KYC/ identification
• Frequent limitations for consumers to use noncash methods, while retailers need to comply with laws on mandatory acceptance of cash
• Increased bundling of retail and payment services by platforms/ online marketplaces leading to a discrimination of payment methods that limits the possibility for customers to use other preferred methods
• New providers (e.g. OEMs, operating systems) compel customers to use their proprietary methods and business models; also, a lack of transparency raise questions
• Different payment methods currently emerging, but still insufficiently integrated and reachable

Need for action in five areas:

Access to essential infrastructure will foster the availability of payment services

Consumers shall have the possibility to use the payment app of their choice in combination with the mobile device of their choice. This is possible with Android devices (e.g. Samsung and others); however, with iOS devices, consumers have no other choice but to use ApplePay. Consumers shall freely select the payment app of their choice and not limited by any given manufacturer of essential infrastructure.

New Emerging Technologies: [17]

1. Distributed ledger technology (DLT)

Banks are examining the potential of DLT in the short term to enhance customer experience (through its data integrity and security features). Over the longer term, DLT’s potential to bring efficiency to some payments functions, including identity management, remittances, and interbank payments and settlements, is also being considered. Crypto currency developments include Veem and Mastercard. In interbank payments and settlements, the Bank of England (BoE) is developing a DLT-based RTGS solution while UBS’ Utility Settlement Coin could enable FIs to directly transact securities with each other. Two wallet developments of note are Bitcoin Wallet and Exodus.

1. APIs and RTP

At present API are more used in B2C and C2B payments than B2B sector. Domestic and international RTP schemes, combined with virtual accounts and liquidity management solutions, could form the basis of a number of corporate business propositions.

Domestic RTP Scheme

• In addition to instant availability of funds, RTP gives corporates traceability and finality of payments.
• Request to pay (pull), soon to be enabled in the US and Europe, will enable new innovative offerings in B2C and B2B payments.

International RTP Scheme

• Large businesses operating in multiple countries are looking for speed and convenience for cross-border transactions.
• Several firms, such as Ripple, are building DLT-based cross-border solutions; however SWIFT, with its gpi, remains the standard for international payments due to its reach.

Liquidity Management Solution

• Corporates are not used to managing their liquidity in real-time and need robust real-time liquidity monitoring and management tools, which will help them to more efficiently manage their liquidity.

Virtual Accounts

• RTP will provide instant clearing and availability of funds for corporates, but the full benefits cannot be utilized without an instant reconciliation mechanism. Virtual account solutions (for example virtual IBAN) can address this challenge as they provide superior cross-currency payments and collections management in an in-house bank set-up.

1. AI, IoT and Smart Devices

AI technology offers a wide range of use cases that can help banks orchestrate different elements of the payments landscape.

Conversational Commerce

Spending via voice assistants is expected to grow as much as six-fold in three years. [17]

Digital Identity

Adaptive authentication is capable of supporting AI use cases for high risk and dynamic transactions.

Customer Retention

The growing popularity of AI agents such as Siri and Alexa will push PSPs to offer value- add services and new business models. Companies can monitor and understand customer behavior by using big data and analytics, expanding their portfolio of services.

Commercial Payments and Collections

Optimized treasury pricing will enable firms to capture more revenue while advanced analytics can help to avoid price leakages. Collections and debt restructuring for detecting payment patterns, borrowing trends, and their financial health in terms of delinquencies and late payments.

Analytics and Machine Learning

AI-based analytics for validating user ID as users have increasingly complicated digital histories. Customer segmentation according to their needs, enabling new opportunities for cross-selling and up-selling.

Challenges Faced by New emerging technologies: [22]

There are some challenges that are limiting the adoption of these emerging technologies. Once such challenges are addressed their true potential will be unleashed.

Technology

Challenges

APIs

Security vulnerabilities (malware, social engineering and man in the middle attacks),

lack of standardization

RTP

Interoperability, standardization, synchronization

DLT

Security, interoperability, scalability, cost-effectiveness, lack of regulatory clarity

Factors Limiting the Adoption of DLT (%), 2018 [22]

Cryptocurrency in South Korea:

Cryptocurrency Users in South Korea: [19]

Distribution of South Korean Bithumb users who invested in virtual currencies as of November 2017, by age group

Some Facts about Cryptocurrency users in south Korea:

• 1/3 person from working class use cryptocurrency [19]
• Overall 2 million users use cryptocurrency [20]
• 70% use it as investment while remaining 30% use it as a payment method.
• Average investment is between 5000–7000 dollars
• $6,000,000,000.00 — $15,000,000,000.00 dollars of Investment

References:

1. Reserve Bank of Australia, Annual Report 2018
2. NAB Online Retail Sales Index: February 2018
3. ABS
4. PayPal mCommerce Index Australia 2017
5. Business Insider “Fewer than 10% of people in Norway use cash”, 25 April 2018
6. The Guardian, “Cashing out? Why notes and coins may become a thing of the past in Sweden”, 20 February 2018.
7. The Guardian, “Revealed: Cash eclipsed as Britain turns to digital payments”, 20 February 2018.
8. Bank for International Settlements Limited
9. Capgemini Financial Services Analysis, 2018; ECB Statistical Data Warehouse, 2016 figures released October 2017; Bank for International Settlements (BIS) Red Book, 2016 figures released December 2017; Countries’ central bank annual reports, 2017.
10. EY FinTech Australia Census 2017, “Profiling and defining the fintech sector”
11. EY FinTech Australia Census 2017
12. EY FinTech Australia Census 2017
13. Finextra, “US banks launch real-time payments system”, 14 November 2017
14. Standards Australia, “Australia to Lead International Blockchain Standards Committee”, 15 September 2016.
15. The future of transaction banking and payments in 2020
16. World Payment Report 2018
17. World Payment Report 2018
18. Retail e-commerce sales worldwide from 2014 to 2021 (in billion U.S. dollars)
19. Distribution of South Korean Bithumb users who invested in virtual currencies as of November 2017, by age group
20. Bitcoin In south Korea, 2017; QZ.com
21. Most Active Bitcoin Users, 2018; news.bitcoin.com
22. Capgemini Financial Services Analysis, 2018; Capgemini and BNP Paribas WPR Executive Survey 2018; Total 101 responses received.
23. Reserve Bank of Australia, Annual Report 2018
24. Capgemini financial service analysis 2017
25. Capgemini financial service analysis 2017; The Nelson Report
26. Digital Payments, Statista Worldwide https://www.statista.com/outlook/296/100/digital-payments/worldwide