The future of digital payments

Podcast transcript

[00:00:01] Karen Dumville: Welcome to Pragmatism In Practice, a podcast from Thoughtworks, where we share stories of practical approaches to becoming a modern digital business. I'm your host, Karen Dumville, and today we're talking about a topic that nearly every listener can relate to, digital payments. We've all likely transferred cash through a digital banking app, or clicked instant checkout in an online cart at some point. This revolution in the retail world is surrounded by the functionality of digital payments and it doesn't just benefit consumers. There is a ton of potential for businesses in all industries from small to large.

How should business leaders be thinking about products, services, and infrastructure in the day of digital payments? I'm here with Ian Kelsall, product principal for banking, financial services, insurance, and fintech for Thoughtworks Australia, to discuss these topics and more. Hi, Ian, welcome to the show. Perhaps you could start by telling us a little bit about your experience in the banking and financial services space.

[00:01:04] Ian Kelsall: Hey, Karen. So good to be joining the session today. I originally started my career working for Credit Suisse straight out of university in derivatives trading platforms and so worked in that arena for four and a half years. Actually came out of working in financial services for about six years when I went into the startup scene into e-commerce and then came back into financial services with Thoughtworks, about nine half years ago now. That's really spanned across working for some of the big financial institutions, some of our clients there, working with some of the fintechs and paytechs that have grown out in Australia, which I'm very happy to succeeding.

Then more recently working with some of the new to market SMB lenders and helping them support small businesses with new financial products.

[00:02:02] Karen: Great, thank you. Clearly been watching this space with a keen eye. Let's talk now broadly about the digital payments ecosystem. Your role crosses banking, financial services, insurance, and fintech. What are you seeing across the board, and are there any nuances in these particular verticals? 

[00:02:21] Ian: There's been so much change in the space every day. It's actually like almost a full-time job just keeping on top of what are the new things that are coming to market every day, and new innovations in the space. We've seen a lot in terms of consumer changes at the point of interaction. Obviously, with a move from physical cards to digital cards and wallet, and so making even so web payments become even completely invisible functions. When you think about Uber taxis launched and part of their success of that was making the pain of payment go away.

In terms of payment products, we've obviously seen that incredible growth of buy now, pay later. Australia, particularly, has had some huge successes with that. I'll actually have to pay in Zip, but we're seeing that as a broader global trend in the UK, the US, and roll out into other markets. There's really interesting innovations that are happening really helping end consumers and small businesses. A lot of this is sort of pushing into B2B space now, helping them manage how they transact and making it more convenient and easier for them to actually make those payments.

I think some of the things we've particularly observed over the last five years around,  open banking slowly growing in terms of the amount of influence that it has within the payment space, and really putting pressure on some of those traditional rails players where they're providing more enhanced services. If you think about a lot of some of the original payment providers like PayPal, where it helped to make it more convenient for consumers, a lot of the things that are open banking now that are going to open out to consumers is helping it actually provide a lot more visibility of transactions, both from a merchant and from a consumer side.

Then even only this week, seeing Apple make the acquisition of Credit Kudos in the UK, that's definitely a foreshadowing their push into getting involved more after the launch of the Apple Credit Card into the UK and having a greater influence in that payment space. From my own perspective, really seeing organizations really consider payments more holistically, and thinking about where do they play in that space, whether it's something that's integral to their strategy, or it's whether it's a capability that they want to use as more of a utility from other providers because there's a lot of players out there that can help support them there.

[00:05:00] Karen: As you just suggested, there's a lot of benefits weighted towards the consumer. How would you articulate this new digital ecosystem changing the consumer experience?

[00:05:15] Ian: I think probably some of the focus is on real-time, like the speed of payments. That visibility of I made a transaction, I can see that transaction's gone out. There isn't this mental logistics that people have to do around. "I made this payment, but is that money available to me? Is it still pending?" All of these batch interim states that we've been very used to for a long time are all starting to disappear now and make it much easier for individuals to understand how much money they currently have based on what they've already spent.

The significant reduction in costs of those transactions as well. We're seeing the traditional rails players that they're not able to actually, justify those costs of the transaction charges anymore. Really having to look for what are value-added services that they can put on top of that? Things like transaction categorization. Really being able to help provide consumers visibility of like, oh, okay, I made that transaction three weeks ago. I can see it on my transaction record, but I don't really recognize what it is. A lot of the value-added services around the data that sits around a transaction, helping understand that.

I think a lot of it's around, it's a two-sided coin here around the simplicity of being able to help people better understand that, but there is actually more complexity coming into play as well. There's a lot more choices of payment options for consumers and businesses to take advantage of. Really being able to understand what are those choices and what's best for them, I think is something that is increasingly becoming a challenge that organizations are going to be able to need to help support those consumers and businesses.

[00:07:06] Karen: You talked about obviously a lot more options now and one thing we're seeing is the potential now for this to really serve underserved communities. Just on that specifically, what progress have you seen in companies extending their services to these groups?

[00:07:24] Ian: It is one of the promises of things like open banking is around access to credit, making it much easier for businesses to get an understanding of people's credit history if they're in a community that is either underbanked or unbanked entirely. If you think about use cases around individuals who may not have a credit card history in terms of building up that credit history, they may be a renter. The ability to be able to qualify for credit loans, being able to use transaction data from payments to be able to go, "Actually, look, I regularly pay my bills. I pay my rent. You can see that I regularly have access to services."

Really payment as a true indication of people's behavior, and be able to give that indication of it. I think as well as from an underserved community standpoint, we've seen some real innovation around what's been happening throughout COVID. Think of Sterling Bank in the UK, a lot of the functionality around payments has become very composable now. It's like lots of small pieces that can be actually knitted together in really innovative ways. If I think about one use case that I saw a merge out of COVID was if you were an individual who was at high risk in terms of catching COVID and you had to engage with a carer to be able to do your day to day shopping.

Previously, probably the only means of doing that, be able to provide funds to that carer would be to do a transactional or to give them cash. Sterling actually developed, during that, the ability to digitally issue a standup card that was linked to the individual's account. That specific card could have a designated amount of funds with a specific spending categorization and limited to a particular retailer or merchant. That could really then help provide for that carer to go, "Actually, I'm going to do this personal shopping at Tesco or in the UK," where that user's comfortable about that. They feel confident about providing those funds to that user.

There's really these interesting little use cases, where I think those who are thinking about what are the functionalities that we want. What problems do we want to solve for our customers? They're expanding, whereas it would've been probably quite challenging to meet these specific niches before it's become a lot more accessible to be able to look at these and go, "Actually, we can put that together fairly quickly."

[00:10:08] Karen: That's great. I think we're probably all happy to see that added benefit of the accessibility with this emerging trend. How are we redefining good customer experience with digital payments? What are some of the specific recent examples that you've seen with companies evolving the experience?

[00:10:30] Ian: As I said before, it's almost a full-time job to keep up with this. There seems to be something coming new out every day. I think previously, real-time was a nice to have, and I think that now that and a seamless experience is becoming like basic expectations. Even what people would regard as small annoyances in the transaction flow, if you think from an e-commerce environment, have now become key differentiators for organizations that are providing payment services so that there is no friction in that checkout flow.

It doesn't give a consumer the opportunity to reconsider as they're stepping through five screens to complete a payment transaction. It's like, "Oh, do I really need to do this." It's something that, that has been really smoothed out. A lot of what we talk about now is that these things becoming much more embedded and invisible. It's where we are really seeing that increasingly any payment providers or those who are developing payment capabilities are looking to really make that as seamless as possible.

As I mentioned before, Uber pioneered that from a taxi standpoint. Where I think it's going even further is what we're seeing, it's increasingly pushing to biometrics and the increase of as a service subscriptions. If you think about the way that we buy digital services now, is that a lot as a service subscription type services and that we've already made the transaction in the past, we've made that decision, "We're going to engage with the service. We don't necessarily need to reconfirm that every time we're making an additional purchase."

If you think about, again, the Amazon one-click type services, was that they innovated on this. Where we see this going even further is from a biometric standpoint, is that you provide the acceptance as you engage in that service and then in terms of reading your biometrics, whether you're entering a store or whether you're using your fingerprint or facial recognition, the engagement of, with that service and actually passing things into your checkout, that you're actually completing that as a service. Again, removing the pain of paying.

What I would say is that we all need to be really considered about, when we're implementing these very seamless experiences that we are making sure that consumers are aware of what they are actually consenting to and authorizing. Because as we push that consent and authorization for payment and push it really into the background, it becomes really important that we're actually being very conscious of, do consumers actually understand what they're doing, and are they able to course correct or change that interaction if it was a mistake that they made, and how do we do that in a ease and convenient way?

Because the likelihood otherwise is that it will create more downstream, operational impact with an organization that's trying to provide that service with failure demand to call centers, or to support services going, "How do we remediate this issue if a consumer didn't mean to buy that or engage with that service?"

[00:13:58] Karen: That does lead this on the topic of data and privacy. Talking about proceeding with caution and consumer awareness, what are the concerns there and specifically, what are some of the considerations as to how we use that data?

[00:14:14] Ian: Probably like the previous business models were a lot around like clipping the ticket of a transaction and extracting rents through that clipping the ticket, now a lot of it is around the actual data around a transaction itself. You think about how rich that metadata is, and what intent when you buy something, that communicates about who you are, where you're doing that transaction, who that transaction's between. There's some really key considerations around how do we actually deal with that data, and if we're as organizations using that data for purposes, do our consumers or do our customers understand how we're using that data and in what purpose?

A lot of the things around, in our region, Australia, that are consumer data rights, also really empower consumers around what data they're sharing with organizations and for what purposes. This is globally being more widely adopted in Europe, like PSD2. In the US, a little further behind, but their private sector is helping support some of the space, given it's a more global demand. I think that is really where organizations are really thinking about, "If we can see this transaction, what is the data around that transaction and what can that help me actually do?"

As I said, that payment and spending behavior is a much better indicator of a customer's general overall behavior than perhaps previously where Google made its money in terms of search intent. If you're completing a payment, you've definitely committed to a service or you're engaging with a brand, and so what does that actually communicate?

[00:16:09] Karen: Thinking now about companies determining whether to build a payments option themselves or onboard a financial payments product. What are some of the considerations and options?

[00:16:21] Ian: This is really coming up quite a lot of times with our current clients. I've recently gone through this with a client where, it really depends as an organization where you see payments as part of your business model, as part of your products and service and customer experience strategy. Where are you choosing to engage? Which parts of that do you want to differentiate on? How important is that part of their engagement? There's so many options now. Previously, it was probably either build it yourself or engage with a single provider for a large set of that capability which didn't give you a lot of flexibility.

As I previously mentioned, a lot of this has become a lot more composable now and there's so many options and players that you can actually start to knit together to create something that's very unique to your organization and providing that real flexibility to go, "Actually, these are the pieces that I want to thread together, through API integrations," and going, "Actually, this is the experience that we want to provide to our customer. Where are the parts that actually we're going to build on top of that experience?"

A lot of the newer players to this market are really thinking about B2B to B2C, of how do they go end to end, and, "Okay, what's the end customer experience that we want to provide? How are we making sure that we're supporting the interim businesses from that engagement standpoint, and providing a lot more optionality around, how do you pull together those different capabilities that they're offering? I would be very skeptical about an organization choosing to build something completely from scratch in this space unless they really see it as something that is going to be a key differentiator for their business.

[00:18:11] Karen: You touched on just briefly there a couple of times, that point around differentiation. Something for companies to consider. What specifically might the points of value be for a company to focus on in this space?

[00:18:26] Ian: The challenge with payments is, it's a real layer cake. There's lots of things there where you can choose to be a provider to another organization, either a little higher up or a little further down this layer cake. As an organization, you can really choose to think about the capabilities that you're going to offer and then where to differentiate. If you're thinking about what's the actual interaction point of that transaction, where is the experience between a customer to a merchant, and what is the capability that you're providing there?

If you think about Apple, for example, in terms of their digital wallet offering. That became a very natural component of people's lives because it's basically replaced an action of pulling out a card out of your physical wallet and presenting it to the merchant. Really, they've inserted that experience and made it very smooth to actually bring that card to the top level of your Apple iPhone and present that to the market. They've not had to disrupt too much of that end-to-end value chain and they've managed to insert it in there.

Apple are now using that to their advantage and so their acquisition of Mobeewave about two years ago, they're now actually looking to replace the actual POS terminal itself, and so now you can have a merchant with an iPhone and a customer with an iPhone and it's just a simple tap between one to the other. There's that real point of interaction there where you can think about innovating. There's then the payment product itself and so what is the next buy now, pay later product going to be? That was the innovation away from pure credit cards.

People still need some sort of credit capability. Although the buy now, pay later industry is very cautious to separate itself from a pure credit play. What are the ways in which you can provide a way for a customer and a merchant to transact that are beneficial on both sides? I think that is really some innovation there given that some of the challenges around that buy now, pay later model, for example, previously the same as credit card model where it's not necessarily benefited both sides of that model and there's some innovation there.

Then as I mentioned before as well, around the data that this transaction creates, there's some really value-added services that can be created around the transaction. If you think about fraud detection services or actually helping ensure that a transaction doesn't default on the payment. Again, a lot of the stuff that's opened out by open banking. These are pain points that businesses that often become really tiresome like follow-up actions and tasks to do around, "Okay, this payment failed. I need to actually like go back to this customer and retry that payment."

There's a lot of now these value-added services that are actually helping automate some of those services and go, "Actually, we'll retry for a number of times. Okay, it didn't complete from this account. We have these three other accounts that the customer's nominated actually to try that before we actually have to go back with a manual intervention and reengage that." Or scheduling tasks to follow up to and send messaging to the customer going, "Hey, this payment failed. Can you come back and actually complete this digitally through this service? A lot of these value-added services that are built around a transaction to actually help just smooth out some of the pain points that can happen with a payment.

[00:22:02] Karen: Lots of options there for companies. Obviously, digital payments is a global phenomenon. Specifically thinking about emerging markets, how would you describe the adoption of digital transactions in those markets? Is there an opportunity here for businesses?

[00:22:21] Ian: You see the growth of digital payments in markets like Southeast Asia. The expansion, I think like one of our clients, Gojek, has done an incredible job in terms of expanding the number of services that it's been able to offer its customers by having a platform that really facilitates very smooth payments for a broad range of services that originally from a food delivery service and expanding out into a more fintech offering. That is really a function of just like the population scale that you have there. Payments has often been a very, the winner is by the scale and increments because a lot of it as I said before was like taking a clip of the ticket.

Being able to access a tremendous scale from a population standpoint if you look across Southeast Asia, so Malaysia and Indonesia, particularly, Gojek is doing a phenomenal job there of being able to look at that and going, "How do we actually engage with those markets?" I think it's something that organizations potentially looking to go into those emerging markets, they really need to consider, do they really understand some of the cultural and regulatory nuances that exist in those markets? Because we've seen quite a few players that are trying to replicate and expand into geographies. They're not necessarily understanding some of those areas.

If I think about Facebook trying to push into the South American market, they've really met heavy regulatory resistance around that because it's not been something that they've recognized as trying to displace some of the established financial institutions as well as engaging from a regulatory standpoint. Really a push back on that. We saw similar from with India, really pushing back on Google and Facebook initially around some of the payment services that were being embedded into messaging. It's something that there is definitely tremendous opportunity. Talking about from the underbanked or underserved before, there's so much opportunity to leapfrog from legacy constraints that a lot of existing Global North markets have around infrastructure.

You think about the US is so far behind in terms of a lot of payments because of this weight of legacy, that there is this tremendous opportunity in a lot of emerging markets. Particularly because of that population growth, but also because a mobile phone is the first computer device that people have in their hands. The number of services that that comes with in terms of identity, geolocation, that help provide support through payment facilities and allowing a lot of direct access that previously wasn't available because of some of the infrastructure in those locations.

[00:25:26] Karen: It sounds like a lot of research is recommended before embarking on those markets.

[00:25:31] Ian: Definitely looking into who have been successful in those regions and understanding really like how have they been successful. It's often because of that deep, contextual understanding of those markets.

[00:25:45] Karen: Looking over the horizon a little, what do you see as the next thing or things to watch out for in the payment space? What new products, innovation services can customers expect to see in the near term?

[00:25:58] Ian: It's always fascinating trying to do a bit of crystal ball gazing in terms of this space with so much popping up every day. We talked about before in terms of there are logical extensions in terms of some of the themes that we see and so convenience of access to funds being able to do that incredibly seamlessly. That's something my colleague, Darren Mason and I talk about, is around the idea of like everything becoming seamless and smooth. We're seeing it as an increasing prevalence after by now, pay later of products like salary advanced products that allow access to future payments of your salary.

Again, there's some caution around that in terms of making sure that consumers are understanding how much money that they're spending in advance of what they have. There's definitely some smarts around that. I see, as I mentioned before, around Apple pushing into that with Credit Kudos in the UK, I think there'll be some interesting things that come out of that. I definitely, as we see with some of the consolidation of the buy now, pay later players, so Zip, it's the acquisition of QuadPay and then Sezzle in the US, like really being able to make sure that they are maximizing the number of customers that they can access to be able to provide a broader reach around those products.

I think we will increasingly see some consolidation there as well as those buy now, pay later as we've seen with Afterpay pushing into partnerships and extensions to be able to engage more with customers outside of that pure transaction. Definitely more innovation around open banking and pushing into broader open finance. I think with a lot of investment products now around that space, what we are starting to see is increasing liquidity of some of those, what were more medium-term investment products like ETFs that they become part of a portfolio of much more accessible liquid products for consumers to use for transacting with.

Again, I think that also speaks to some of the short, medium, and long-term considerations is that they're increasingly being pushed together. How are consumers thinking about the money that they have in their transaction account versus the money that they have access to in a credit facility versus money that they have in investment products for medium and long-term? It definitely provides, potentially more opportunities for people who may have, and I know, for example, my mom, like she is very resistant to investing in investment products because she always wants to be able to have access to those funds immediately.

Even if that's not necessarily the case being able to need it right on point. Some of these more innovative investment products may provide that bridge to help go, "Oh, actually, I'm happy to have immediate access to these products, but other investment products, I'm happy to have more medium or longer-term access to." It may allow that. Then I think in terms of some of the things that are coming down the line from the being afforded from crypto is a lot more opportunities for more micropayment business models. You think about, we're in a world now where people are very happy to go for all-you-can-eat subscription services for digital services.

I think we may see the pendulum swing the other way and go into a lot more paper consumption models, which I know for industries like journalism may be incredibly beneficial where rather than people having to subscribe to, I know the financial times that they may only need access to a particular article because there is doing some research. These micropayment models for transactions that increasingly become a lot more affordable as we push into more digital currency models, which allow a lot more fractional exchanges and a lot cheaper points of transactions.

Then finally, I think to round it off, the data discussion, I think a lot of it is more interesting models around commercializing the data around the insights from a transaction. I'm really excited to see some of the things that come out of that from some use cases around open banking and open finance.

[00:30:44] Karen: It's fascinating, clearly a very fast-paced and dynamic area of the industry. It'll be really interesting to watch this space. Well, that's all we have time for today. Thanks so much for joining us, Ian, to talk to this topic. It's been an insightful discussion and thanks to our listeners for joining us for this episode of Pragmatism in Practice. If you're interested in learning more on this topic, you can deep dive in our latest issue of Perspectives, our online publication for digital leaders available on our website, thoughtworks.com. To listen to similar Podcasts, please visit us at thoughtworks.com/podcasts.

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