Payments are probably the financial activity most affected by innovation, undergoing radical changes in recent years, with important implications for competition and financial regulation. “Innovations in Payments: opportunities and Challenges for EMDEs”, authored by Dorothee Delort and Jose Antonio Garcia Luna and published by The World Bank in 2022, discusses how Emerging Markets and Developing Economies (EMDEs) can reap the benefits of payment innovations and leapfrog in the development of their payments markets.
The rapid transformation in the payments industry has been prompted by the adoption of new technologies and business models, by the emergence of new market players, and by changes in the structure of the market. This is having a profound impact not only within the payments industry but is also shaping major developments in the real economy including, first and foremost, the surge of e-commerce thanks to its continuous evolution into a truly digital and convenient alternative for sellers and buyers.
For payments providers, customer payment services have evolved from being merely a “support function” for banks’ broader financial intermediation activities, such as deposits and loans, to a separate and differentiated service offered by a growing number and variety of providers. This is reducing fees and margins. Moreover, payments are increasingly becoming a source and provider of data that is used by enterprises for better targeting potential new customers with their offering of other financial and non-financial products and services.
From the perspective of consumers, many of the barriers or deterrents to the use of digital payments are gradually being overcome. In many cases the payer’s experience has been totally transformed by making the actual payment process “invisible” and frictionless, like in the case of ride-hailing or meal-ordering apps or “one-click” online ordering. In plain terms: thanks to innovations like mobile wallets or super apps—combined with fast payments and other technologies—customers now find it more convenient and less costly to make and receive digital payments, while enjoying a smoother user experience.
Innovations are also redefining business models for payments. As a result, while competition has increased and is only intensifying, it may paradoxically lead to renewed concentration and an oligopolistic equilibrium. Indeed, payments may evolve once again into a concentrated market served by a relatively limited number of providers, although, unlike in the past, these providers could be technology giants and/or large telecommunication firms, rather than banks.
While innovation has already transformed the payment experience of many users, it has not fully permeated to certain payment streams, like international remittances and other forms of cross-border payments. The Committee on Payments and Market Infrastructures (CPMI) has reported that cross-border payments lag behind domestic payments in terms of cost, speed, access, and transparency. Innovations also have not yet had a meaningful positive impact on various types of government payments: many developing economies continue to struggle to find ways to digitize their government payments and collections effectively and be able to achieve objectives like improved controls and increased transparency.
If developing economies can greatly benefit from many of these innovations in payments, regulators and supervisors also need to carefully consider their multiple facets and risk implications. They should continue to create an enabling environment for innovation in their financial sector, while at the same time develop the necessary regulatory, oversight and other needed institutional capacities.
In any case, an increased focus on innovations should not lead regulators and other stakeholders in developing economies to write off proven strategies and methods to accomplish important objectives like financial inclusion and stability.
Related:
Future of Finance: Publication page
Future of Finance: Technical note on innovation in payments
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