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The dynamic nature of emerging markets creates challenges that have never confronted the developed world, but also opens up opportunities for innovation and growth. Payments is an area where this dynamism is already well-established. Over the next ten years (and beyond) we’re set to see even faster changes in the payments landscape, building on the accelerating growth in electronic payments and the advent of new and disruptive market players. And the emerging markets will be at the forefront of this payments transformation.
Macros drivers for Emerging markets
A combination of digital native expectations and governments’ desire to boost financial inclusion and reduce the use of cash is fuelling rapid growth in electronic payment and bringing a new breed of mobile and FinTech innovators into the payments market.
Favourable demographics: the drivers of online payments
The emerging markets are home to 85% of the global population and nearly 90% of people under 30 reside within the emerging markets. Given the demographics, these markets are currently finding themselves at a ‘sweet spot’ where population trends favour the growth of online transactions, which are in turn curtailing the black economy and stimulating economic growth.
The need for financial inclusion: driving new technologies and innovations
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 e-banking and now mobile money, which has helped to create pockets of strength even amongst the less financially inclusive countries.With the cost of serving customers considerably lower for automated teller machines (ATMs), interactive voice response (IVR), mobile and online banking, these alternative banking channels have seen a massive increase in adoption both at the retailer and customer end.
FinTech innovation promotes inclusion
By opening up the banking market to non-bank players, regulators are bypassing the requirement for banking institutions to being able to provide a full spectrum of financial services. This has brought about what is increasingly being known as the ‘FinTech Revolution’.
Improving acceptance infrastructure
Governments are promoting developments in card acceptance infrastructure, and in turn increasing debit and credit card usage in emerging markets. Branch and ATM growth rates from 2012–2014 in countries including China, India, Indonesia, Malaysia, Thailand, Philippines, Taiwan and Hong Kong show a fall in the numbers of branches.
Customer adoption and rise in e-commerce
Increasing convergence and integration between e-commerce and mobile technology have radically changed the shape of the payments marketplace. While most transactions in emerging markets are still being made with cash, the shift to electronic and digital methods is happening rapidly with some countries moving away from cash faster than others.
The emerging markets are constantly innovating in the field of payments, from using low cost mobile money for remittances to enabling differentiated banks for financial inclusion. We are now set to see even bigger innovations in these economies. Whether measured by value or volume, the payments business in these markets is vast and will continue to expand between now and 2030. A number of factors and trends – some already impacting the industry – will play a critical role in shaping the nature of this expansion and driving innovation:
Tech-savvy generation driving change
The millennials’ comfort with technology is driving businesses to provide new and more innovative ways of enabling transactions, reflecting the demands of this tech-savvy generation.
Customer-centric business models
Customer-centricity will be the main driver for differentiation in the payments industry, and industry players must apply this thinking for their businesses to grow. Some of the disruptive business models that have emerged in emerging economies are:
Alternative payment systems
The payments business, traditionally dominated by banks, is witnessing increasing competition from new entrants, most of which are non-bank players. These include retailers, telecommunication providers, technology companies, start‑ups and others players that specialise in niche value-added services in the payments processing chain. With the emergence of these payment systems, the PSPs are divided in to two main categories: 1) traditional players and 2) disrupters or alternative payment system providers. Traditional players’ strengths include their range of offerings and an established reputation, which provide customers with a higher comfort level. On the other side, the disrupters are looking to develop faster, more versatile and easier-to-deploy payment options. As a result, alternative payment models are gaining increasing acceptance.
Leapfrogging in technological development
Emerging markets are spearheading some of the key developments in payments. Here we set out some of the technological advances and solutions that could change the face of payments if they turn out to be scalable, resource efficient and sustainable:
Payments is a dynamic arena. Different markets have distinctive growth patterns and development trajectories, and even among emerging markets, countries will grow at different speeds. Change will vary by market depending on macroeconomic factors and the competitive and regulatory landscapes. Download our report to read more about some of the key trends across markets.
Convergence across markets
In the emerging economies, cash and paper-based payment instruments are still the main basis for retail transactions. With the advent of electronic payment instruments and systems, there has been a slow shift from cash to other e-payment models and channels like debit cards, credit cards, wallets, ATMs and electronic fund transfer systems (real time/non-real time). Some of the common trends that appear across the emerging world.
There have been concerted efforts by different countries to introduce and promote retail e-payment instruments and systems and enhance the development of the acceptance infrastructure, in parallel with development of centralised fund transfer systems
The revamp of technology systems that manage retail e-payment instruments is a common trend across emerging countries. For example, in India, NPCI has revamped the central ATM switch for processing and promoting all retail ATM transactions
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, where necessary, intervening to protect the rights of retail and commercial customers. Payments has always been a crucial part of this and attention is now broadening into the e-payment arena:
Opportunities, challenges and the way ahead
Looking at the innovations and growth drivers, it’s clear that the payments market is dynamic and there are multiple opportunities for competitive development. However, emerging markets can be complicated and unpredictable, which will open up challenges along the way. The developments that we believe will enable the market to realise its potential and help drive the emerging world towards a cashless world are:
Regulators playing an active role
For the e-payments ecosystem to survive and grow in the emerging markets, it needs regulators that can balance growth with security.
Retail infrastructure growth
In a low margin business like payments, where each individual transaction yields only a couple of cents as profits, large scale infrastructure investment is hard to justify. The ability to generate high transaction volumes is the solution to this problem in emerging markets.
Mastering data analytics
Emerging market payment executives taking part in our 2014 payments survey see advanced data payment analytics as the most important trend in the market. They see analytics as a key source of differentiation, with early adopters able to master the potential.
Dynamic and viable business models
By leveraging the strengths of traditional players, including their range of offerings and an established reputation, along with and the nimbleness and interoperability of new PSPs, these models could totally transform the dynamics of the payments industry and, if scalable, improve returns for players all along the value chain.
New channels and products
The growth of digital technologies has also accelerated new channels like e-commerce and m-commerce, which are opening up new ways for consumers to make purchases such as tapping their mobile phone or a wearable item (like a watch) onto a contactless payment terminal or reading a quick response (QR) code. The adoption of these new innovations within emerging markets could help create new revenue channels and reduce overheads, positively impacting bottom lines for companies and governments alike.
Use case expansion
Regulatory support, advances in technology and accelerating customer adoption of these technologies have opened up new avenues for e-payments. Payment of fees for educational institutions, payment of taxes and fines to the government, payments to merchants and retail institutions and toll and transit payments are among the options which can now be facilitated using a simple mobile app.
Australia, Global Emerging Markets Financial Services Leader, PwC Australia
Tel: +61 (2) 8266 5746
India FinTech and Technology Consulting Leader
Tel: +91 9820280199