Digital Payments – Areas of Growth & Implications for Regulators

First, let’s define what we mean by digital payments: They are synonymous with mobile payments, i.e. payments linked to smartphones and mobile networks. Digital payments have become ever more important in the financial space, since an increasing number of fintechs develop mobile phone apps to handle digital payments. The COVID 19 situation has pushed the digital payment business further since non-cash transactions became way more important, due to social distancing measures.

3 major growth avenues currently exist for payment apps:

• Extension of card-backed payments systems

In the developed world (in particular North America and Western Europe), operators use the existing card payment infrastructure (in particular point-of-sale (POS) terminals) and deploy it to mobile phone apps. Examples are Google Pay, Apple Pay, and Samsung Pay.

• Super apps

In China, in particular, payment apps such as AliPay and WeChat have developed into so-called super apps providing all sorts of financial products. The product range includes payments, e-commerce, financial services (banking, insurance, investment), mobility/delivery (ride-hailing, food, logistics), deals (coupons, discounts on dining, travel, etc.), and chat.

• Extension of peer-to-peer mobile phone payment systems

The success of p2p systems in Africa (in particular M-Pesa in Kenya and Nigeria) has lead to their extension to regular retail payments. Telecom operators now also offer financial services (interest yielding deposits and insurance).

This growing importance of digital payments has 4 major consequences / concerns for regulators and, in turn, the companies’ business models:

• Regulators increase regulatory oversight including capital adequacy requirements.
• Higher compliance cost means lower margins for payment platform providers, triggering the need to diversify into higher margin (banking) products.
• This, in turn, reinforces the need for new regulation.
• Data and cyber security, financial fraud and absence of common regulatory standards across countries become crucial topics as digital payments become increasingly international.

Finally, as the number of providers and solutions grow, the interoperability of digital platforms, in particular through API (application programming interfaces), will become a major issue.

Source: Economist Intelligence Unit – Going digital: Payments in the post Covid world – August 2021