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A new era for payments is dawning in Singapore
THIS is the dawn of a new era for Singapore's payments system. As part of its Smart Nation vision to become "a leading economy powered by digital innovation", the government has been working on a range of initiatives to digitise payments.
PayNow for example, launched in 2017, made it possible for consumers to use the new electronic funds transfer service FAST (Fast And Secure Transfers) to pay anyone almost instantly using only a mobile phone or national identification number.
Singapore is also transitioning to open banking, as envisioned in the Payment Services Bill (PSB) 2019, and is leading the region for its advanced open banking readiness.
Open banking is the practice of sharing a consumer's financial information electronically and securely and opens the value chain for more collaboration between financial and non-financial institutions. Application programming interfaces (APIs) give third-parties access to financial information efficiently, which promotes the development of new apps and services, and a better experience for consumers.
The result of this could be broader use of digital wallets - online services that are used for digitally facilitating and storing payment transactions and instruments - and a growing competitive challenge to the use of credit and debit cards.
Singapore is unique in being a market where debit card spending is declining. The growth of wallets in an open banking environment would probably hasten the decline of debit cards, while boosting the use of account-to-account transfers and fundamentally displacing value-pools in the market.
Today in Singapore, you can pay with alternative payment solutions such as GrabPay at a growing number of places, including eateries such as Subway and Killiney Café, and sports chain Decathlon. And as more merchants go online and seek ubiquitous payment solutions, there has been a sizable impact on the merchant acquiring business, which has been a key driver for a fast-growing and very attractive payments market over the past several years.
The traditional model is destined to become commoditised and the question remains - do incumbent acquirers have what it takes to meet digital-age standards?
In Singapore, the government's efforts to move towards a cashless society has helped to decrease cash usage, making credit cards the most popular non-cash instrument, owing largely to broad acceptance and rewards for card usage.
Contactless payments have made card usage even more popular, and growth in card transaction volumes will be further accelerated as contactless payments become more permissible. The Land Transportation Authority (LTA) has been a key driver of this agenda by moving to accept contactless credit and debit cards for account-based fare payments on buses and trains.
Singapore consumers are also enthusiastic online shoppers, with around half of all age and income groups reporting that they frequently make purchases online. This growth is also good for credit cards, which account for 67 per cent of online purchases.
Though the trend over time has shown a move from cash to card, a new transition is also under way - that of digital wallets. Seventy per cent of Singaporeans use a digital wallet and transaction volumes are growing daily. Part of the appeal is that wallets are easy, versatile, and fun, providing access to a broad range of online-to-offline (O2O) services, including transportation, reservations for meals out and ordering meals in. The major banks and fintech innovators like Grab and Fave Pay are vigorously pushing O2O capabilities, which could prove to be a strategic domain in the emerging race between cards and wallets.
REGULATIONS KINDLING THE CHANGE
By requiring banks to allow third parties to link to their payment platforms and bank accounts, the PSB is opening the field to different types of service providers and establishing a flexible regulatory framework to encourage competition and innovation.
The PSB also aims to make payments more convenient, faster, and cheaper, while protecting users against the risks that may arise with new payment technologies. This will change the game, ultimately forcing incumbents to create new business models that leverage these new opportunities.
For example, because the PSB promotes interoperability, this could help decouple merchant acquiring and solve the problem of accepting an abundance of payment choices, which is already fragmenting the system.
What Singapore merchants want is a one-stop shop. Fragmentation is an inconvenience for everyone - consumers can't always use their preferred method of payment, and technological complexity leads to higher operating expenses for merchants. Some smaller merchants, for example, are left with no choice but to regularly hire a dedicated finance person for reconciliation. This could lead to increased competition and even thinner margins for the merchant acquiring business.
The result of this technological innovation is a challenge to traditional business models. Globally, the merchant-acquiring business has always been a key driver for a fast-growing and very attractive payments market.
McKinsey & Company research found that global payments revenues grew by 11 per cent in 2017 - the highest rate in the last five years. Closer to home in Singapore, credit card acquiring has been an attractive market and saw S$1 billion in revenues last year. Online credit card transactions have become the biggest source of revenue growth for Singapore's merchant-acquiring organisations, with revenue from online transactions growing 16 per cent annually.
However, despite optimistic top-line numbers, new forms of acceptance (such as QR codes) are combining to challenge incumbent models with low-cost options while also providing a superior customer experience.
The value pool is at risk for some acquirers, where both transaction revenues and terminal rentals for point-of-sale (POS) devices are shrinking. Acquirers are no longer able to demand the transaction fees they once did, nor the terminal rentals for POS machines. Some acquirers in India have faced these challenges, with typical monthly rentals of POS machines shrinking to 10 per cent of original value.
The traditional acquirer processing model is destined to become commoditised, as merchants gravitate toward solutions addressing a holistic set of business issues. Innovative acquirers in diverse markets are investing aggressively in value-added services that address needs beyond payments, including point-of-sale lending, inventory or order management solutions and customer analytics. In addition, merchants' expectations for the onboarding process are rising as they become familiar with innovative acquirers, such as Paypal and Stripe, which bring new clients on board in less than five minutes.
There remains opportunity, however. Acquirers have the potential to capture significant new value by leveraging digital and analytics capabilities. A leader in this space is Square, which offers streamlined payment acceptance along with business services such as digital marketing, customer relationship management and support for invoicing, accounting, and, in some cases, lending. As a testament to its diversification model, it is reported that more than 60 per cent of Square's revenues in 2017 came from beyond payment services.
Will Singapore's acquirers be able to act on the example of these fintech innovators? Or will they allow investors backing digital attackers to write the script for the restructured market? The potential for small and medium-sized businesses to move from incumbents to innovators is particularly great, as these firms are constrained in administrative resources and hungry for integrated solutions that solve multiple pain points. Addressing these pain points will be crucial both for increasing margins and expanding market share.
SMART MOVES IN MERCHANT ACQUIRING
It is impossible to predict precisely how things will unfold in Singapore; however, there is a fundamental need to expand the business model. Incumbent acquirers should weigh each of the following recommendations in crafting their strategy:
- Reinvent the business model: Incumbent merchant acquirers must reinvent themselves to become a smart one-stop shop, by transforming from traditional acquirers to omni-channel providers handling a full range of payment alternatives. They should also consider forming partnerships to achieve the optimal configuration of services beyond payments (for example, POS software, business-management solutions and cloud-based analytics solutions).
- Tap into niche revenue opportunities: Established firms unwilling to invest the resources necessary for a comprehensive offering may pursue niche strategies. One option is to become a recognised centre of excellence for a subset of high-growth product verticals, customer segments or use cases. Two possibilities are integrated rewards or payments platforms with at-table restaurant solutions and service industry solutions with prepayment capabilities integrated with scheduling.
- Become a digital-first, data-driven business: Established acquirers should reinvent internally to respond promptly to evolving customer needs by digitising legacy processes, building digital marketing and data-analytics capabilities, and developing an agile operating model and culture of innovation to attract top digital talent.
- The writers are from McKinsey & Company. Jatin Pant is a senior partner and a leader in the Global Banking practice; Bharath Sattanathan is an associate partner with the Financial Services practice. Both are based in Singapore.