Disruptive Innovation in Payments
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Disruptive Innovation in Payments

By Bharat Berlia June 01, 2018 - 6,919 views

We could have written paeans about FinTech a couple of years ago, but to do so now would be to sing praises about what is already the norm. FinTech, the inevitable result of finance services making use of technology to enhance solutions and services, is the single largest disruptor in the world of finance.

In addition to being a disruptive development, FinTech has evolved into becoming almost conventional, replacing legacy methods and making them seem archaic. Yet, a closer observation reveals that there is a lot of disruption taking place even within contemporary FinTech. Technology has driven FinTech to continuously evolve itself, and newer players continue to give a run for their competitors’ money almost every day.

In this article, we briefly recap the growth of FinTech and contextually place this growth in a situation that continues to bring disruptive innovation in payments. We shall also take a look at certain trends driving this disruption, and what we can expect from this exciting development in the near future.

The growth of FinTech

While it may sound like a fancy term, FinTech isn’t actually very new. Using technology to drive financial procedures has been around since the 1900s in various forms. From being able to wire money to someone in a different part of the world to modern peer-to-peer payments, FinTech has come a long way.

Barclays opened the first ATM in the world in 1967, and Wells Fargo kick-started the world’s first online checking account in 1995. PayPal came to being in 1998, and online transactions and payments have grown exponentially ever since. Apple Pay, which was announced in 2016, was another watershed moment, as it heralded a new smartphone-based payments solution. Finally, blockchain-based payment technology gave rise not only to cryptocurrency, but also to smarter payments, seamless insurance claims processing, loan disbursals, and contactless payments. We had recently written an article about how Blockchain is bringing winds of change to the insurance sector.

Drivers of the change

As we can see, FinTech has evolved dramatically in the last few years due to rapidly evolving technology. However, market behavior and changes within finance sector have also been major drivers of change. In this section, let us take a look at three aspects of this disruptive innovation in payments.

  1. Technological development

It goes without saying that technology is a big reason for disruptive changes in FinTech. In particular, artificial intelligence and blockchain have caused tremendous changes in the finance sector, propelling drastic changes that have taken even FinTech players by surprise. For example, PayPal and other peer-to-peer payments solutions were taken by surprise when cryptocurrency came to being. Blockchain in fintech is the single-most disruptive situation at the moment.

Cryptocurrency players like Bitcoin etc. were taken by surprise when Ethereum-based legal peer-to-peer payments application started to be launched. For instance, blockchain-based claims processing, stock purchase, and Ethereum-based P2P payments solutions are quickly taking over traditional smartphone-based payments applications. Smart contracts have enabled seamless and secure transactions, making financial procedures more reliable than they ever were. In fact, it wouldn’t be an exaggeration to call blockchain a cultural phenomenon.

For an industry that focuses much of its energy on building and maintaining trust, blockchain and smart contracts-enabled applications are almost a godsend. It wouldn’t be an exaggeration to state that technology itself is driving change and causing more disruptive innovation in the field of FinTech. Those who aren’t part of this exciting evolution will quickly be left behind.

  • In-store mobile payments are touted to exceed $503 billion by 2020.
  • Just in the US, a whopping 150 million people are expected to use in-store mobile payments.
  • The spending ability of mobile payments users is very high. They spend twice as much as non-users do, and earn at least $70,000 a year.
  • Security-related doubts have been a hurdle for mobile payments adoption. 47% of cybersecurity professionals felt mobile payments weren’t secure enough at the moment, as opposed to just 23% feeling confident.
  • Public Wi-Fi is the greatest vulnerability with respect to mobile payments, with a threat figure of 26%. This is closely followed by stolen devices, a situation whose threat figure is 21%.
  1. Market trends

Increasingly, users have come to expect a lot more than what technology can offer at the moment. We can describe this as a market that’s so spoiled by choices that even the most disruptive technology no longer feels like disruption. Consumer behavior has shifted from being awestruck by disruption to expecting innovation by default. In other words, services that do not seem innovative enough for consumers simply get ignored.

This has forced most industry players to closely study consumer behavior and surpass their expectations. This isn’t usually possible because users have come to expect a lot more than what technology realistically allows us to do. Yet, FinTech companies and solutions providers have to work harder to keep pace with market expectations ad and focus on driving change.

Adopting innovation and complex technologies such as artificial intelligence, data analytics, and blockchain will help FinTech companies to surpass market expectations and bring value to the services they launch. Data analytics, in particular, can help FinTech entities to study consumer behavior closely and launch FinTech products that match market expectations.

  1. Industry changes

There are a number of changes within the industry that are propelling disruptive changes within FinTech sector. Banks are desperate to retain their roles in the finance space, and payments intermediaries may simply vanish, because of smart contracts and distributed ledger technology. The same distributed ledger technology is helping FinTech organizations to make cross-border payments instantaneous, giving rise to new corporate and consumer solutions that will enable instant international payments a reality.

Fintech companies have also begun to make use of open APIs, machine learning, and robotic process automation to enhance the experience. Most importantly, a lot of FinTech activity currently is focused on thwarting cyber-attacks, ensuring data privacy and safety, secure financial transactions, and eliminating payment frauds. Blockchain, smart contracts, artificial intelligence and machine learning are currently top on the list of FinTech companies to make all this and more happen.

Last but not the least, the industry is also focused on compliance issues. Regulators across the world are concerned about grey areas within blockchain, and FinTech companies continue to bring disruption while making sure that they comply with regulations. This is an interesting space that will continue to evolve, as governments across the world bring their own regulations regarding FinTech solutions.

Grey areas within disruptive innovations in payments

Disruptive innovations currently will focus on adoption of blockchain based technologies, making international instant payments a reality, and ensure that security of transactions is absolute. There are many questions in the world of payments technology at the moment. It remains to be seen if retail and online payments will split in two, or they will merge together to form a new kind of payment solution. There will also be concerns about how payments data will be used, and who is going to benefit from and monetize all that data. There are also rumors of national digital currencies being launched.

However, it is not clear who is going to launch it first, and what it is going to look like. While payments will continue to see disruptive growth, the future is not very bright for payments intermediaries. Consumers and merchants will certainly benefit from seamless distributed ledger based technologies, but intermediaries will simply not benefit. The insurance sector will witness hugely disruptive events and may witness a parallel InsurTech movement.

The financial world is also likely to get more fragmented, according to a Deloitte white paper, and customers will be able to enjoy tailor-made experiences. However, the same white paper warns that disruptive changes to payments and increased fragmentation will result in customers losing track of their spending. In our opinion, helping consumers track their spending, and bringing power back to users are areas that have great potential in the future for further disruption.

The key takeaways are:

  • Payments are no longer limited by cash and have moved to digital channels
  • There is a lot of competition for payments businesses
  • Businesses are under increasing pressure from regulators
  • Disruption alone isn’t enough for FinTech. Compliance and meeting market expectations will be very important.
  • Blockchain will continue to influence FinTech in a surprising number of ways
  • Security and data privacy will be of paramount importance

A case in point is Money 20/20, a space where innovators in the digital payments and FinTech world is set to gather. Money 20/20 will see all these points discussed and challenged, with new brainstorming sessions that will help all stakeholders to understand the future of payments clearly. In fact, Indus Net Technologies will be present at Money 20/20 to discuss, showcase, and collaborate with other important players in the FinTech space.

Looking ahead

As discussed above, digital payments will continue to revolutionize financial sector globally. Payments will increasingly depend on instantaneous and secure transactions, fueled by blockchain. Banks will continue to focus on retaining their payments role but will find themselves being disrupted by innovative FinTech companies. Payments intermediaries may lose out a lot as merchants and consumers will find it easier to make payments go through.

Open APIs will further fuel innovation while distributed ledger technology and smart contracts will make instant payments a reality even across borders. however, global cybersecurity threats may increase, and FinTech companies will need to focus on improving security. A solution is to enable smart contracts and adopt Ethereum-based technologies to ensure immutability of transactions. Automation, machine learning, artificial intelligence, and data analytics will all continue to play a part in payments innovation.

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