The Future of Retail Payments
Note: This article is a continuation of the previous article titled ‘Understanding Retail Payments — Cash and Cards’
In the previous article we had analyzed Cash and Card payment methods and had developed a simple framework to understand the different stages of payment processing.
To understand various the processes involved in a payment process, we can consider the entire payment process to happen across a set of layers as follows,
1. The Instrument that carries monetary value and is required for the initiation of a payment
2. The Interfacing layer, responsible for accepting and relaying payment related information from the users or operators to the backend processing systems and vice versa
3. The Backend / Processing layer, responsible for recording and processing the payment transactions between the accounts or banks
In this article we aim to take a look at the evolution of digital modes of payments and derive insights on what the future of retail payments might look like.
The First Truly Digital Modes of Transaction
By the later part of the 20th century, banks had started adopting computerized systems to enable the processing of transactions and interfacing too was increasingly being carried out over telecommunication lines. However, these systems were largely operating in silos. This mandated the need for manual intervention between the two layers to ensure the smooth processing of payments. The manual intervention between systems proved to be a bottleneck and was also prone to human errors.
Systems needed to relay information between them to overcome this bottleneck. The advent of the internet solved this problem as it brought with it the ability for systems to communicate with each other. This truly removed the need for any type of manual intervention required between the interfacing layer and the processing layer.
Integration of Technology in Retail Payments
The increased efficiency demonstrated by digital payments opened a new frontier of efficiency for banks and other organizations that operated in the payments space, pushing them to quickly adopt these new modes of payments. With interfacing between systems becoming possible by the internet, the ability to integrate across the various payment processing layers opened up. New devices and technologies were developed to fill in the new opportunities in this space.
For example, The Point-of-Sale devices that we see today were developed to communicate directly with the Interfacing / Processing layers, removing the need for manual intervention. This has been the trend in the evolution of payments systems — More sophisticated and interconnected devices that can communicate with each other have removed the need for manual interventions and have hugely improved the rate, time, and accuracy of payments processing. This was a major disruption in the payments space, as for the first time, the user was able to perform payments without the need for any type of interaction with another person.
Over the years, the addition of newer technologies in payments has helped displace the requirement for manual intervention required across the various layers and has significantly improved the speed and reliability of payment networks. This translated to better servicing and better response times for the users.
Has Digital replaced Cash?
A look at the worldwide statistics for retail payments (conducted in 50+ countries across 6 continents by G4S Cash Report in 2018) shows that though Digital modes of payment have risen significantly across the countries, Cash still remains to be a major part of the retail payments. On a global level, Cash continues to be the most commonly used instrument for retail payments, though the scenario has started to change in the most developed economies of the world. (G4S Cash Report, n.d.)
Though the various layers of payments processing, and the enabling technologies have all drastically changed over the past few years, the key factors that a user considers before they choose their preferred mode of payment have remained unchanged, barring the addition of few additional parameters (such as Remote payments i.e., allowing users to make payments remotely or from anywhere).
To understand the shift towards digital modes of payments, we can take a look at the factors that users consider when they decide on their preferred mode of payment.
This once again seems to prove that Digital modes of payment are not a strict upgrade over Cash. Like Card payments when they were introduced, Digital modes of payments are a better alternative depending upon the need and situation of the customer.
How will the Future Landscape look like?
From the historical trends we have observed, we can draw upon some insights as to how the future landscape of retail payments might look like. The below diagram aims to depict the evolution of payments systems over the years, and as an extension try to predict what the future might hold for us.
Fueled by the advent of the internet and the widespread adoption of Wireless technologies, the Retail payments landscape has continued to grow and evolve. Over these years, we have witnessed the development and growth of new payment technologies, such as, Mobile Banking and Online Payment solutions, which now form the backbone of the payments industry.
Continuing on this trend, one can hope for the future landscape to digitize and democratize digital payment instruments, further reduce the requirement for manual interventions across the payment value chain and enable even more secure processing platforms for payments (such as blockchain).
Concluding Thoughts
The scenario of payments in retail has continuously evolved keeping the convenience of the user in mind and it is fair to assume that it would continue to be so. However, as we progress towards making payments more convenient and accessible to the user, it is necessary to keep in mind that the goal of innovation in the payments space should not be centered on replacing the status quo but to provide a solution to address the user’s needs.
References
- G4S Cash Report. (n.d.). G4S Cash Report. Retrieved from G4S Cash Report: https://www.g4scashreport.com/
