By Gurbans Chatwal, Head, Innovation and Horizontal Services Fiserv
COVID-19 has been a major disruptor. In addition to giving a push to digital payments in India, it has also laid the foundation for some guiding trends. The pressing need for carrying out contactless transactions meant these capabilities emerged as an essential service as opposed to a lifestyle technology for the urban Indian. However, the debate on ‘cashless versus less-cash’ persists. The industry is at an inflection point where members of the payments ecosystem need to rethink short-term priorities and shift focus to the guiding principles that will mark the transition.
Digital is in but Cash is still King
Though there has been increased awareness among consumers and businesses around the benefits and ease of using digital payments during the last year, cash continues to rule the roost. Accounting for approximately 90 per cent of India’s transactions, it is still the preferred payment mode for transactions in rural and semi-urban India. While factors such as universal acceptance, widespread availability, underdevelopment of digital payments mechanisms, and the absence of transaction costs favour cash, recent changes in payment behaviour present a timely opportunity for banks and Fintechs to articulate the benefits of digital payments and push them as the preferred payment method. This is also an opportunity to drive financial inclusion.
An Era of ‘Embedded’ Payment Experiences – a Watershed Moment for Finance
With over 687 million Indian internet users at the end of 2020, the same is estimated to reach 1 billion by 2025. These connected consumers are primed to adopt digital payments, and financial institutions (FIs) can encourage this by building user (merchant and customer) journeys that allow “finance” to pop up just when users need it. There are two primary business goals that FIs and Fintechs can target through embedded finance: (1) increased revenue potential for merchants, and (2) better engagement with end users.
Automation and integration across small businesses operations, and the need to enable better user experiences, are forcing a move away from traditional models to embedded finance platforms. That said, FIs face three key challenges in supporting this transformation:
1. With an increasing number of consumers jumping onto the digital payments bandwagon, it has become more critical to ensure safe and secure transactions. A weak security posture could negatively impact new users as they fear losing personal information, especially payments data, online. FIs and payment platforms must ensure that technology innovation and robust security systems develop simultaneously to effectively safeguard consumer data.
2. A shift to a more distributed “FS-as-a-Service” model across vertical Software-as-a-Service (SaaS) providers is required if FIs are to remain competitive in an embedded finance environment. Without this shift FIs could be fully disintermediated by third parties, losing access to customers and the ability to influence cross-sell of products, which is a major profit driver.
3. Customers are driving user experience and choice of payment channels, but FIs often find it difficult to ensure consistent brand and user experience in an embedded finance platform they do not own or fully control.
Value now is not created in technology code or architecture including monolithic platforms or even opensource components, but through a “network” in which the FI will not be in direct contact with the end customer. This will in the next 3 to 5 years allow more business services to be commoditised through opensource models.
The World of “Open” Technology Powering Embedded Experiences
It was the era of mobile banking that exposed the burden of the front office in financial service firms and brought the potential of APIs to the forefront. There is already an ecosystem of technology and product and service innovation that can boost embedded finance by:
1. Creating an open ecosystem for collaboration where opensource can thrive
2. Freeing up the IP trapped in large monolithic systems through cloud native opensource libraries
3. Leveraging machine learning to create alternate credit scoring models to allow easier access to capital for small businesses
4. Leveraging digital analytics to predict user behaviour and hyper-personalise services and products
5. Introducing payment options e.g., installments, buy now pay later (BNPL), etc. for end users
6. Implementing interactive interfaces, such as chat, voice, and video bots
The current technology landscape has the potential to propel the growing demand for real-time, self- service experiences. Artificial intelligence (AI) will not just generate insights for merchants, it will also create relevant choices for end users. In the open ecosystem, we will see freedom of choice across two pillars: (1) the technology stack, and (2) commoditised and API-based business services.
In the country’s quest for a less-cash economy, Fintechs and FIs in India are utilising technology to help bring in tailored solutions to address unique issues of businesses and individuals with digital payments capabilities increasingly integrated into everyday digital experiences. While this will help to bridge the gap in financial inclusion, accelerating innovation is vital to bank the unbanked and the under-banked.