Discover Global Network: Advances in Technology Bring a World of New Approaches to PaymentsPosted on Mar 23, 2023 by Jerry Fosker, Head of Network Alliances EMEA, Discover® Global Network
Note: The opinions expressed in this publication are those of the author. They do not necessarily reflect the official policies or positions of Discover® Global Network or other related entities.
How can central banks, banks and domestic payment schemes utilize P2P digital wallet solutions to gain access to traditional point-of-sale methods of payment, giving more local control over domestic payments, while easing the technical and operational burden on merchants and acquirers to implement new payment methods?
Peer-to-peer (P2P) payment providers and their users are increasing significantly in number around the globe, allowing you to send money directly to another person or entity from mobile devices through a linked bank account or card. They are an alternative to cash payments between individuals and are a simpler, faster and less expensive means of payment compared to traditional methods like check payments or bank transfers.
The Covid-19 pandemic has accelerated the adoption of mobile payments to the extent that P2P systems now seriously threaten the use of cards and cash for everyday purchases. Although this change has been most observed among younger generations, the switch is so widespread that it is now also seen among older people. It is estimated that by the end of 2023, P2P transactions will exceed one trillion dollars in the USA. Globally, the P2P payment market size was valued at $1,889.16 billion in 2020 and is projected to reach $9,097.06 billion by 2023.1
Financial institutions and fintech companies are now combining P2P payments into mobile wallets to provide the perfect solution—simple, fast and secure payments for the consumer with fast settlement and generally lower fees for the merchant when compared to traditional card payment channels.
But there are challenges.
Mobile wallets utilizing P2P payment methods are a convenient way for a user to make in-store payments and can be used at merchants prepared to accept account-to-account (A2A) payments. Also growing in popularity are mobile wallets using QR code technology. While this payment method can be functionally rich for both the consumer and merchant and does not need NFC access, there are drawbacks in terms of POS deployment and subsequent merchant acceptance. As for A2A payments, the QR code represents a different payment method compared to the card payment channels for merchants and acquirers, requiring POS upgrades and additional payment reconciliation steps.
New technologies have presented both challenges and opportunities. Customers want to use their smartphones and other innovative technologies to push and receive payments to each other and pay for goods and services with merchants. These technologies address financial inclusion aspects and reduce cash payments to encourage electronic and traceable transactions. However, implementing such payment facilities poses challenges, particularly in markets with an existing and extensive card payment infrastructure where larger merchants with POS infrastructure integrated into stock control or reservation systems would rather accept payments through their existing card payment channels.
Nonetheless, the advantages of digital wallets are numerous. No more filling in your card details every time you check out or fumbling for your wallet at the store. Your payment information is saved in one protected, central location. The card or account number is never stored in the app itself but is instead assigned a unique virtual number. This protects your money even if your smartphone is lost or stolen. Wallets are also much more flexible than cards in their functionality, with the capacity to update and add functions “over the air,” like other apps.
While mobile wallets aren’t likely to completely replace the most popular payment methods—debit and credit cards—anytime soon, they certainly are strong contenders for taking that top spot at some point in the future, since they offer a secure, contact-free, convenient and frictionless experience.
Digital Wallets and P2P Payments are the Future—But What are the Drawbacks?
The downside for the banking industry is that the growth in next-generation payment methods, such as P2P payments and digital wallets, is largely bypassing the banks and domestic payment schemes, coming at the expense of traditional payment methods. This space is dominated by technology firms such as Apple, Google and PayPal, who are reaping the benefits and diverting tens of billions in revenue away from banks (and domestic payment schemes and networks). These mobile wallets ride on the traditional card payment rails utilizing NFC technology, where a physical payment card is digitized and placed into a wallet on the phone, such as Google Pay or Apple Pay, providing the same user experience as a tap-and-pay contactless card transaction. This approach makes life easy for the merchant who has no POS upgrade or additional reconciliation steps to go through to support a new payment method, but the drawback is the reliance on existing large international card scheme technologies and payment networks, with the high fees associated with such transactions.
To avoid these snowballing revenue losses, banks and domestic payment schemes must begin to explore newer payment channels in earnest or come up with competitive moves to counter this growing consumer trend. Nearly half (46%) of U.S. consumers use at least one digital wallet, such as Apple Pay, Google Pay and/ or PayPal. In China, WeChat Pay is used by 82% of consumers and Alipay by 79%.2
With Apple Pay, Google Pay and others growing rapidly in popularity, domestic players are responding with wallets of their own. Many domestic card payment schemes are launching their own digital wallets in response to the growing popularity of digital contactless payments.
In fact, all of Europe’s domestic card payment schemes are transforming their card payment services into an omni-channel digital payment offering. Initiatives include in-app card payments and, above all, digital wallets. In the light of revised Payment Services Directives under PSD2, domestic European card schemes are embracing open banking and instant payment apps as big opportunities.
Many domestic schemes are currently investing in open APIs to enable connectivity to global payments, while 94% are planning to expand beyond their card products to create real-time payments schemes (like Sweden’s SWISH) and, unsurprisingly, mobile apps – such as that created by Brazil’s ELO in 2018 in partnership with iPass.3
With six in ten domestic schemes now either offering a mobile app or well advanced in their move towards mobile, domestic players are demonstrating how agile and flexible they can be.4
What’s more, their move towards open APIs shows they are ready for partnership. With a 12% market share in a trillion-dollar global payments market that’s expanding at more than 20% each year, acquirers and merchants would do well to integrate these schemes into their payment offerings—especially since they are also often cheaper to work with than the major tech players.5
However, two issues affect central banks, domestic schemes, banks or other digital wallet providers when providing a merchant payment service to customers beyond P2P or A2A payments that utilize NFC payment technology:
- Reliance on the large international card scheme’s contactless and NFC technologies and their payment networks.
- International acceptance interoperability. Digital wallets will be the world’s preferred way to pay—but consumers, merchants and PSPs need better service in access to NFC, contactless and cross-border transactions.
Is Partnering the Way for Banks to Catch Up in Digital Wallets?
The concept of partnering with an international payments scheme provides a quick route into the P2P and digital wallet space and provides the international acceptance that domestic schemes and the technology firms struggle with. Some also allow for domestic scheme independence while sharing the common technology required to gain mobile access to the POS both domestically and internationally, as well as providing the required digital wallet infrastructure such as tokenisation and integration into X-Pay interfaces.
This partnership model provides a platform by which the central banks and domestic payment schemes can achieve their aims and goals towards entering the P2P and digital wallet market with solutions which are accepted domestically and internationally at POS, but without requiring POS upgrades and additional payment reconciliation steps for merchants and acquirers.
This model also reduces the reliance on physical card payments and plastics issuance, serves the payments needs of the banks, issuers, merchants and consumers in their countries, provides payment choice, encourages competition in their markets, and reduces the cost of payments for their country, while retaining payment volumes and thus revenues.
This ability to bridge the gap with payment networks internationally has been a central impact to many of the moves taken originally by the banks in Turkey, whose domestic scheme (Troy) is now under the control of Turkey’s central bank, and that of the National Payments Corporation of India (NPCI), whose domestic scheme formation was driven by the government.
These two companies and twenty-nine other domestic schemes around the world are serving both domestic and international goals through their partnership with Discover®. Discover is working with pure digital wallet providers in EMEA to provide a solution that bridges the gap between A2A payments and traditional card payments by providing access to POS domestically and internationally via NFC technology. The solution allows for domestic scheme independence where they exist and provides the required digital wallet infrastructure, such as tokenisation and integration into X-Pay interfaces.
About Discover® Global Network
Discover® Global Network, the global payments brand of Discover Financial Services, processes millions of cardholder transactions each day. With industry expertise, innovative technology and a closed-loop infrastructure, Discover Global Network provides effective, customized solutions that evolve as needs change. Discover Global Network has alliances with 25+ payment networks around the world, and is led by three Discover businesses: Discover Network, with millions of retail and cash access locations; PULSE®, one of the leading ATM/debit networks in the U.S.; and Diners Club International®, a global payments network with acceptance in more than 200 countries and territories.
For more information, visit DiscoverGlobalNetwork.com