Fintech and other new technologies are constantly in the news highlighting the impact artificial intelligence (AI) or big data will have on our lives.
By Paul Kent
The rise of robotics and bots are replacing today’s workforce and we are unsure of the skills we will need for jobs of the future. We often hear about the the rise of mobile with 20-billion connected devices expected by 2020, the latest social platforms and the opportunities this will create for smart businesses.
These new technologies are enabling digital payments or digital interactions at the point of payment; they are acting as enablers but the biggest trend we are starting to see in changing the way we pay is with the consumer themselves, and their demand for a richer, seamless or frictionless experience at the point of sale.
In the US the demand for a personalized consumer experience is rapidly increasing as Millennials now outnumber baby boomers and they are maturing in terms of their economic strength and social influence. This drastic change in customer dynamics is exacerbated as GenZ’ers are quickly becoming more relevant to retailers. GenZ’ers are naturally digital and devoted to Snapchat and Instagram.
Yet it is not the US that is winning the race to a cashless society: this mantle is held by Sweden with more than 75% of their transactions already electronic.
This is at the opposite side of the scale when compared to South Africa who have more 60% of all transactions conducted in cash and rising as high as 90% in rural and peri-rural areas, where an informal retail sector and low-income levels are more prevalent.
Payment options for SA retailers
In South Africa we have a very different experience when purchasing in-store vs online with online usually providing more choice when it comes to payment options, primarily driven by the ease to “roll out” or “add on” digital payment options at the gateway. Yet, irrespective of online or in-store, payment by nature has always been transactional and the driver of evolving payments over history has primarily been the consumers demand for convenience and trust.
The move from cash to paper (cheques) or cheques to card was driven by convenience to the consumer to carry less cash and improve the convenience factor at the point of purchase.
This move from card to mobile or card to other will be driven by these same factors – the consumer’s need to find an easier, better, and a more secure way to pay for the things.
In practical terms, in South Africa we have seen the convenience factor of in-store card payments evolve from zip zap machines to electronic terminals. We have experienced trust or security improvements with the introduction of EMV (CHIP and PIN cards) and more recently we have seen the use of QR Codes as a method of payment change the purchase experience in restaurants.
At the end of 2017 a large retailer announced the acceptance of Bitcoin as a payment option at its head office, however it is yet to be rolled out to stores. At present these type of trials are gimmicky and beyond the average store owner and we are yet to see alternative wallets reach any critical mass in South Africa.
In recent years the biggest change in payments has been the introduction of contactless payments. They are significantly decreasing the interaction time at the register and when it comes to convenience, contactless competes with cash for low value transactions. In markets such as the UK contactless payments now account for one third of all card payments and is one of the main reasons why cash is no longer the primary method of payment.
Obstacles facing payment service providers and fintechs
In most emerging markets, the challenge for fintech companies is access to transactional accounts; in South Africa we are fortunate that this is a relative strength.
Our challenge is usage within these account with limited card acceptance capabilities at retailers. In formal urbanised areas, it is rare not to be able to use your card for purchases but move out of the city and it is estimated that only one out of 10 retailers accept card payments.
The main reasons are lack of knowledge of benefits of going cashless, the misconception of the cost of digital payments vs cash, tax evasion and lack of access to card acceptance facilities.
Looking further ahead we will start seeing how information is used in winning the hearts of customers.
South African banks, together with banks in most countries have a monopoly in accessing the meaningful data needed to deliver this personalized customer experience. But as consumers become increasingly willing to share bank account credentials with third parties, this dominant position becomes vulnerable. In the European Union, new laws such as PSD2 have regulated access by third parties to customer account information via application programming interfaces (APIs).
In South Africa, banks are picking sides to either collaborate with fintech or compete and we are starting to see “made for purpose” customer experiences at the point of purchase.
Navigating the regulatory landscape
For PSPs (payment service providers) and banks, the ability to access and service this sector at a price point that makes commercial sense is the key problem to solve. This is hindered by very costly regulatory and compliance requirements, where the cost to onboard a new merchant (retailer) is far greater that the revenue earned on a few transactions each month.
Access to the national payment system (NPS) is limited and PSPs need to partner with a bank, effectively limiting competition, increasing costs and reducing product reliability. As consumers, we regularly experience “system issues” when trying to pay by card, reducing the trust in the payment system and increasing the need to carry cash in our wallets.
In other emerging markets such as India and Indonesia, innovation and competition has been enhanced with the introduction of differentiated banking licenses to further increase financial inclusion in the economy.
Using differentiated banking licenses would create specialist payment companies that could change the payment landscape providing seamless transactions, introducing new technology to increase reliability, enhance security, improve the consumer experience and lower transactional fees to merchants.
According to Mastercard Cost of Cash for Consumers in South Africa Study, the costs of cash in South Africa is R23-billion, or 0,53% of GDP with these costs disproportionately carried by low-income earners, serving as a major barrier to financial inclusion. It does, however mean that stakeholders in removing cash are not limited to fintechs, banks and other financial institutions but also government and broader society.
Working together could increase the pace of change. A great example of public and private sector working together to drive adoption was in Mexico in 2014 when the Mexican government worked with the Chamber of Commerce and VISA subsidizing payment devices for informal retailers, and subsequently deploying 20 000 devices under this scheme.
Fintech scope and opportunity
With 66-million active SIMS cards in South Africa, the vast usage of mobile devices has created an opportunity for fintech companies and incumbent banks to connect with retailers and consumers to design payment products that improve the overall consumer experience, in many cases that means frictionless or seamless payments.
The exciting purchase of a new item or an amazing interaction with a brand will no longer be tainted by a clunky one size fits all payment process.
We are already seeing radical changes in international markets removing friction at the point of purchase and radically transforming the shopping experience. In Apple stores, queues are removed with so called “queue busting” solutions creating a purchase point anywhere in the store. Starbucks uses a pre-order APP allowing customers to customize their order, set default payment, and simply walk in and pick up their coffee. With UBER you simply get out of the car and walk away.
Consumers are starting to expect more personalised experiences where seamless default payments remain in the background.
With the rise in biometrics we are starting to see authentication integrated into the customer experience, replacing the simple pin entry and personalizing security. An example of this is KFC in China where facial recognition is being used when ordering and paying for the purchase.
This identification and authentication method coupled with big data, machine learning and AI could allow retailers to start predicting your purchase. Imagine a scenario where you walk into Starbucks, you are identified through facial recognition, and based on your purchase history, your behaviour on the day, what you are wearing and your mood, Starbucks predicts your order and by the time you reach the counter your order is ready for collection; you walk to the counter and pick up your “flat white to go” and walk out; the whole process from ordering to payment happens seamlessly in the background. It sounds far-fetched and futuristic but this scenario is already being tested in China.
Solutions for smaller retailers
In an economy with high levels of unemployment, retail businesses are often started out of necessity and, a thriving micro and informal sector is critical to reducing unemployment rates, and assisting in the survival of these business is paramount.
Accepting card payments in the informal and micro retailers sector greatly increases the survival rates of these businesses. According to a Mastercard study, Insights into the Informal Economy Report, merchants who introduced card acceptance reported an average increase in turnover of 50%, while those that introduced mobile payment acceptance via Quick Response (QR) codes saw their revenues climb by 10%.
There are more than 80-millions bank cards in circulation in South Africa, and this highlights an opportunity for smaller retailers, however accessing payment acceptance points has historically been a problem. This gap has created a great opportunity for Fintech companies to operate in a blue almost uncontested ocean.
Over the past few years, this South African opportunity has rapidly disrupted the payment sector, primarily through the introduction of increased competition, improved access, new technology and changing consumer expectations.
South African PSPs (payment service providers) such as Sureswipe, Ikhokha and Yoco are providing access to card merchant facilities to thousands of independent retailers who were previously excluded from being able to accept card payments and, since Sureswipe’s inception in 2008, the increase in competition to incumbent banks has seen merchant discount (transaction) fees almost half, putting millions of rands back into the pockets of independent retailers.
Paul Kent is the MD of Sureswipe