Emerging Markets Driving the payments transformation

According to a report by PwC over the next 10 years and beyond we are set to see even faster changes in the payment landscape and the emerging markets will be at the forefront of this payments transformation.

Their research suggests that by 2030 payments will be more than just about the movement of funds. They highlight in their report that payment service providers (psps) will, ‘develop enhanced value propositions based on individual accessibility coupled with customer convenience and changing lifestyles, whilst ensuring adequate levels of security and risk mitigation.’

Before covid19, the shift had already begun mainly by non-traditional players, the emergence of new solutions and the development of strategic partnerships and collaborations. The research mentions that the young ‘tech-savvy’ populations of the emerging markets will help to lead the shift in payments expectations among retail and commercial consumers.

The drive for innovation will also accelerate development in areas such as blockchain technology, which aims to simplify international remittances and reduce transaction times by more than half.

In the research paper by PwC, they examine the current state of the payments industry across the emerging markets and they identify key drivers and developments already underway and determined what is required to realise the market potential between now and 2030. A key focus of the paper is the steps being taken by merchants, customers, payment companies, regulators and payment solution providers, towards creating a successful electronic payments infrastructure.

In the first part of their report titled, ‘setting the pace,’ they mentioned something called macro drivers for emerging markets where they discuss digital expectations and governments desire to boost financial inclusion and reduce the use of cash transactions, which aims to fuel rapid growth in electronic payments. This will bring a new breed of mobile and fintech innovations into the payment market.

Customer expectations in these emerging markets are also going to drive a significant change in the payments industry in these countries.

The emerging markets are home to 85% of the global population and India and China’s people represent more than 1/3 of the world’s population. People want to be able to buy things online fast with ease and no restrictions or major concerns for security.

In India most online transactions, around 75% of them are from people under the age of 30. This implies that it is the under 30s that are going to stimulate economic growth. It is a similar trend with Indonesia, as the stats show that those age between 15 and 34 years old are likely to be the ones transacting online the most. These trends are also apparent and similar in Brazil, Philippines, Malaysia, Turkey and South Africa.

It’s also worth noting that the younger age group specifically those aged 15 to 34 have a strong appetite for new technology. We know them as the tech savvy generation that have helped transform the digital economy. In terms of payment innovation, the report suggests that over the next several years a tipping point will be reached and consumption will be an all-time high. This age group will be the key drivers of growth in electronic payments in emerging markets. The other drivers of growth in this sector according to this report includes rapid urbanisation and an increase in literacy and education levels. They further explain in their report that is the tech savvy generation that has transformed digital solutions from being a convenience to an essential part of how they transact.

According this research, the statistics in this report state that 2 billion adults worldwide are un-banked. Traditionally banks have been the primary means for accessing financial services but now it’s more about how to deliver affordable and accessible financial services which may be more digital because of the need and demand.

‘To meet the need for financial inclusion, there has been a rapid expansion of new technologies and innovations, which are helping to make it more economically viable for banks to reach the ‘unbanked or ‘underbanked’ populations.’ Technology has leapfrogged from branch banking to ebanking (electronic banking) and now mobile money. Several governments are making financial inclusion an integral part of their national plans.

The Indian government, for example, launched the ‘Aadhaar’ card programme. The ‘Aadhaar,’ programme exists to provide a 12 digit individual identification number issued by the Unique Identification Authority of India on behalf of the Government. The reason for this is so that it enables online and cost effective identification for India’s citizens.

In Mexico, there have been concerns about the costs of using credit facilities and the lack of competition in the banking sector has led to financial reforms aimed at improving regulations and lowering the cost of borrowing.

Pwc state that, ‘regulators in emerging markets are now waking up to the huge costs, risks and inefficiencies that come with cash transactions. They recognise that economic growth is directly proportional to the increase in usage of electronic payment methods, as it acts as a tool to combat fraud and ‘black’ money (income illegally obtained or not declared for tax purposes) and also promotes access to formal credit and savings instruments thereby driving GDP growth.’ Because of his measures are being taken to build a sustainable electronic payments ecosystem. We also know that covid19 has further pushed the need for digital, cashless payments.

Although a full service banking is the dominant and often most preferred banking model in the world, regulators in markets like Singapore, Hong Kong (China), India and Indonesia have introduced a differentiated banking licence for both bank and non-bank players aimed at furthering financial inclusion.

They also state in their report about fintech innovation and how it promotes inclusion. Funding for financial tech start-ups more than doubled in 2015. Using innovative fintech is a key enabler and regulators are encouraging fintech firms to make financial services more secure and convenient for the customers.

According to their report one of the questions they asked was, ‘which part of the financial sector is likely to be the most disrupted by fintech over the next five years?’ and the top four were;

Consumer banking
Fund transfer payments
Investment and wealth management
Small and medium enterprise banking.
This report also mentioned information relating to improving ‘acceptance infrastructure,’ which is about how to accept more electronic payments depending on the infrastructure available such as ATM machines or terminals. Governments in emerging markets are promoting developments in a card acceptance infrastructure and therefore increasing debit and credit card usage in emerging markets. It is also worth noting that branch and ATM growth rates have fallen in countries like China, India, Indonesia, Malaysia, Thailand, Philippines and Taiwan, again highlighting that the use of online payments is a growing trend.

Point of sale transactions also known as POS transactions have also seen an increase in the emerging markets sector due to the rapid adoption of point of sale terminals by SMEs and smaller merchants in these areas, however more needs to be done on the reach at the moment as SMEs in emerging markets as not all SMEs have high investment capital and so they are somewhat restricted in the way they can accept payments from customers. Because of this some businesses in emerging markets only accept cash payments, so by having mobile point of sale platforms this opens up a better more affordable channel for them to accept non-cash payments from cards and mobile point of sale systems. Being able to accept payments via a mobile device is often more convenient for customers and this require less upfront costs for merchants/businesses. Many merchants are seeking to replace the traditional fixed payment terminals and are now using mobile point of sale devices.

Because there has been a rise in rapid development of new payment concepts and mobile infrastructures this has also enabled a rise in e-commerce businesses, specifically in Asia Pacific countries. According to this report emerging markets are now driving the ongoing global acceleration of e-commerce spending. One of the major drivers of this has been from smartphones, tablets and Internet and mobile access, as they have cash free and card free financial transaction opportunities.

Technology users – The younger generation
Also, the millennial’s comfort with technology is driving businesses to provide new and more innovative ways of enabling transactions reflecting the demands of this tech savvy generation.

It is also apparent in this report that 50% of consumers in the age group of 18 to 24 years old are more likely to try new technology enabled payment tools whether this is renting films online, subscribing to watch football matches online, purchasing food, or renting a car using digital means, a lot of customer behaviour is being driven by experiences and innovations created outside financial services including things like accessibility where customers want it now and they don’t want to wait.

There are also alternative payment systems such as mobile wallets where some people in India and China have gone from having no bank history to being able to make payments via a mobile phone.

In their report they mention a term called ‘leapfrogging,’ where they discussed leapfrogging in technological developments. They mention emerging markets are spearheading some of the key developments in payments and they set out some of the technological advances and solutions that could change the face of payments if they can be scalable, resource efficient and sustainable.

Social media payments
The main one they mention is social payments which is about making payments through social media. They further explain that people under the age of 25, account for 40% of the population of Asia which is in the emerging markets sector. To make the most of the growing social media phenomenon social networking sites are needing to facilitate financial transactions by introducing alternative payment systems. Because of social media customers can easily make purchases online and they now have a more customised banking experience where there is a shift from bank to non-bank transaction providers.

Emerging Market areas
China focus
In 2015 the total value of mobile payments reached an increase of 445% than the previous year. smaller cities in China that are underserved by local banks are prime targets of major non-bank players and they are planning to offer more online mobile payment options the regulations are shaping the competitive landscape.

Brazil focus
About 40% of adults hold a bank issued debit card in 2015. This is a growth from the previous years. There has also been a growth in credit card usage and transactions.Banks in Brazil have also been promoting payment digitisation. They have launched local payment schemes and investments to try and increase point of sale penetration. Furthermore, the government in Brazil have also been trying to promote epayments by providing incentives like tax benefits.

Mexico focus
Mexico is known as a market dominated by local payment methods. Credit cards are the leading mode of payments for online purchases, with debit cards only accounting for 15% of e-commerce purchases. Mexico are still using cheques, however this is decreasing which is a good sign. New regulations have been introduced to try and increase and promote electronic payments especially as most transactions have been cash based.

India focus
Regulators in India are among the first in the emerging markets to promote financial inclusion initiatives. The government are also providing grants. India’s payment industry stand outs and definitely has an above average growth in non-cash payments. There has been a strong adoption of electronic payments in India and there has been a rise of new market entrants. Mobile banking transactions tripled between 2012 and 2014. Mobile wallet transactions have also seen a huge increase.

South Africa focus
South Africa’s payment ecosystem is growing and they are working on easier access to payment solutions to poor and remote communities. There is a huge market for remittance platforms in South Africa.

Nigeria focus
The rapid adoption of innovative technology has led to payments systems in Nigeria making progress in increasing financial access and reducing the cost of transactions.With a limited credit culture in Nigeria, the most common payment card is the debit card followed by pre-paid cards. Although these cards are predominantly used for ATM withdrawals, POS transactions and online banking are growing rapidly. Also as 60% of Nigeria’s ATMs are located in just one region of the country and as many people use cash there and they can’t always get access to a cash machine (ATM), this has paved the way for mobile banking to be an immediate success in Nigeria

Usage of innovative payment options like wallets, mobile payments and one click payments In Nigeria, meant that usage of mobile-based payment systems has increased due to the wide access to mobile phones as a payment option.

The role of national regulators and industry associations
A key regulatory aim is building security and trust in the payments system by understanding, monitoring and protecting the rights of retail and commercial customers.

With the development of electronic payments and cashless transactions, frameworks, policies and guidelines need to be developed. Most emerging markets have also introduced a common set of legally enforced regulations.

Covid-19 impact on the payments sector in emerging markets
The covid19 crisis is having a significant and widespread effect on global payments across sectors. According to McKinsey, the most striking and potentially lasting impact is an accelerating pace of change in the industry. With the Covid19 pandemic this has further meant that the use of cash has been reduced across the globe including in emerging markets.

There has been a huge shift in buying behaviour and more than ever people are purchasing online. Mckinsey highlighted how covid19 will see a decline in cash usage. Furthermore, covid19 underlines the importance of fintech in emerging markets. According to the World Economic Forum on this topic they mention that,‘financial inclusion in developing markets has become even more important during the pandemic,’ and that ‘fintech firms can use this opportunity to build their reputations and merge stronger once the crisis has passed.’ Mobile solutions in the emerging markets are also proving to be a lifeline in emerging economies and this is further highlighting the importance of having secure, and good technology in place.

Overall, the pandemic has accelerated the move from physical to virtual banking.There is huge potential for the payments sector in emerging markets. The shift to electronic transactions has placed a big need for merchant acquiring companies to update and differentiate their service offerings. Furthermore, the impact of covid19 on technology advances and the desire for cashless payments will enhance this sector and disruptive technologies and developments will see huge growth potential.

Mckinsey | PwC | Emerging market payments | Emerging markets payment innovation | Who is driving payments innovation?