THE CHANGING RETAIL PAYMENTS VALUE CHAIN
June 3, 2020
On 28 May 2020, we entered our 9th Green Shoots session discussing the topic of the changing retail payments value chain. Our seasoned retail payment experts: Reuben Lai (Senior Managing Director & Co-Head, Grab Financial Group), Jeremy Tan (CEO, Liquid Group), Joel Yarbrough (VP Asia Pacific, Rapyd) and Milind Sanghavi (Head of Digital Payments, OCBC Bank) shared their views on the changing payments landscape and developments trending in a COVID-19 world. We also had a special 10-minute item on key e-payments initiatives by Jo Yeo, Head of the Payments Development and Data Connectivity Office at the Monetary Authority of Singapore (MAS). Some highlights from the session:
Here are some resources from the session:
- Q&A with Speakers: below
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Let us get through this together and be stronger, when the green shoots start to appear.
Q&A with Speakers
Question: With the trend going digital, the concern for most businesses will still be the cost of the transactions. Do you foresee that transaction fees will drop across the different cashless acceptance modes?
Response: Reuben Lai - This should go down over time. 2-3% is really credit card rates. There are many lower cost options.
Question: E-wallets are often touted in the region as a means to reach the unbanked. However, considering the substantial number of refugees and stateless residents in some of the countries in the region, who have no means of even opening a bank account, how could e-wallets help this group, particularly when eKYC is a requirement?
Response: Reuben Lai - E-wallets were being used to disburse government aid for bottom 40 (underbanked) consumers in Malaysia. Efforts like that really accelerate.
Question: Right now every country has their own preferred e-payment systems. Would there be a day where there will be only a few global players and how will this scenario develop?
Response: Joel Yarbrough - I don’t think we see any real evidence in favour of consolidation on the wallet level, but there is a huge value in cross-border interoperability (e.g. PayNow <> PromptPay (TH) <> UPI (IN) …) that drives extra value to all of the participants, and merchants and consumers will choose what brand they want to use when they transact, knowing the acceptance is ubiquitous.
Question: What would be the impact on usage of merchants for a country like Myanmar, where most of the merchants are small, low in digital literacy and are so used to using cash, that they see no obvious reasons to go digital? Is there any solution to help them go digital and adapt to the new normal?
Response: Joel Yarbrough - There are a lot of merchant solutions (e.g. BharatPe in India) that provide a super simple way for merchants to accept e-payments, and give the merchant good information on their business, and ultimately advertising services, and access to working capital credit.
Question: Would you be expecting consolidation of payments companies in the market especially when there are more new players or would interoperability between multiple different wallets, etc., improve?
Response: Reuben Lai – That is my prediction - fragmentation is too confusing for the consumers.
Question: Real time payments rails and value added services are real assets for driving account to account payments; but the reality is that bank incumbents are still putting up artificial barriers of entry to potential non-bank entrants, even from the cost perspective. Isn’t this unfair and goes against the grain of allowing interoperability across the payments ecosystem?
Response: Joel Yarbrough - “Yes”. The banking systems need to be able to get paid (wholesale) for the infrastructure they manage, but access to the form factor should be made very broadly available to different types of licensed actors as well (wallets, lending, insurance, etc.).
Question: Would cyber/mobile security be a major threat? How are these being mitigated?
Response: Joel Yarbrough - “Push” payment methods on your personal mobile device are actually much safer than web payments or many card transactions, because the device can be very well secured to you personally, and there’s a lot of data available to review to evaluate the risk (and compliance) of the transaction.
Question: Would you say that for businesses, payments, being a commodity service, will become just a hook to offer VAS and earn revenues there, just like check in accounts were for banks? That should also make banks to either reshape or join in with FinTechs around.
Response: Joel Yarbrough - Yes. VAS (advertising, rewards, credit, information services) are where the earnings will come from.
Question: How do real time payments deal with large merchant/high valued transactions disruptions, such as a bankruptcy or an airline flight cancellation? How do they ensure consumers get their money back?
Response: Joel Yarbrough - Great question - there isn’t a good solution today for any “push” method, because buyer protection / refunds, etc., aren’t really built into the product. What I’d expect is the issuer (your wallet provider) offering the service, and contracting directly with the merchant (over and above the basic rails) so that buyers would prefer their instrument vs other wallets, etc. (e.g. “Pay with LiquidPay on Traveloka and get free travel and cancellation insurance”).
Question: What happens in heavy cash-based societies where people do not want to transact in a manner that tracks their spending power? For example, after demonetization, we have seen more cash in the Indian economy than before. So while more consumers will transact digitally, it is not going to change overnight, not for the majority. How will Grab deal with this when their core business is down 90+% and ancillary businesses such as delivery or food is marginal even if it is seeing double digit growth.
Response: Jeremy Tan – The sense is there is a different tipping point for every market. Most markets are generally becoming more cashless, some are a little “ahead”, some are less so. Every disruption, like the latest contactless advisory by WHO, pushes everyone closer to cashless. How much each market reverts back to cash really depends on whether a good majority has gone cashless, whether consumers, merchants are realising that it is more efficient to use cashless.
Response: Joel Yarbrough - Cash is likely still going to be a choice, but even in cash-heavy societies it doesn’t help merchants to borrow, data does, it’s slower for anything except face to face purchases, and it’s dirty. In a multi-channel world where remote, multi-channel commerce will be important to serve customers, cheap electronic payments will have advantages even traditional businesses owners will come to recognise.
Response: Reuben Lai – Though the move to cashless will not be an overnight change, we are seeing a structural shift that will spur wider adoption of digital financial services. Consumers/businesses are accelerating adoption of virtual options to access and fulfil their banking needs while transacting in the world of social distancing. We see this as a self-reinforcing long term trend because the fear of infection via physical cash/cards will remain front of mind, using e-payments becomes an ingrained habit in previously hard to convert consumers, and we see many merchants highly motivated to adapt and shift their businesses online to meet consumer demand
MasterCard did a recent consumer poll (30 April 2020) that showed that 75% of consumers polled in Asia Pacific say they will continue to use contactless payment methods even after the pandemic.
Response: Milind Sanghavi - As we discussed there is always a section of the population that will prefer cash and in those “populations” cash will continue to have a larger share. But as the group discussed, on a larger scale cash usage should be impacted. Even in the case of India, while cash is still being used – UPI has shown significant penetration (and continues to grow exponentially).
Question: The growth of e-payments has accelerated due to COVID-19, but also from massive subsidies from venture capital in covering the cost of using digital payments. What will happen when these subsidies go away and 2-3% of the merchants' revenue goes to payment providers?
Response: Jeremy Tan – When “subsidies” go away, a sustainable model will be established. As long as regulators continue to promote heathy competition among players, the payment processing fee will reflect the cost of processing, lending, marketing, etc. The sense is, it will be lower than 2-3%.
Response: Joel Yarbrough - The subsidies are an inducement for merchants and consumers who don’t see the advantages of paying electronically. Going forward, real time electronic payments will be cheap, fast, clean, and provide benefits like rewards and access to credit that cash alone doesn’t match. The concept of a 2-3% MDR relates to credit card fees, Debit is already cheaper in many markets, and real time payment systems are usually fixed fee, while many wallets are much cheaper than cards as well.
Question: With the trend of going digital, the concern for most businesses is still the cost of transactions. Do you foresee transaction fees dropping across the different cashless acceptance modes?
Response: Jeremy Tan – Fee pricing is a function of market forces. Increased competition due to the various disruption in the payment industry should lower the costs of transactions.
Response: Joel Yarbrough - Yes. Most push-based e-payment systems, like real time bank payments and wallets, will move towards either fixed fee models or very low MDR models, not the higher MDR that comes with the buyer and seller risk underwriting that’s part of cards.
Response: Milind Sanghavi - In our experience costs are relative to the value that is provided (in exchange). In terms of the larger picture, transaction costs should be expected to drop due to combination of lower direct costs, regulation and newer cheaper payment options i.e., real time rails. The revenue pyramid for payments should also migrate towards value added services that solve other merchant/consumer pain points.
Question: Is MDR a barrier?
Response: Joel Yarbrough - Historically, yes, because merchants and consumers didn’t see the advantages. Now that it’s clear that e-payments are cheap, fast, and clean, MDR will become less of a barrier.
Response: Milind Sanghavi - Yes but a lot of those concerns can be resolved with merchants migrating towards real time payments i.e., PayNow, UPI and PromptPay.
Question: How are you dealing with risks that digital payments pose to security? E-commerce has accelerated but it has also increased vulnerabilities in the system. Is there an industry-wide initiative that players are pushing for to maintain certain standards across the various channels?
Response: Jeremy Tan – There are various international schemes and domestic schemes that govern and establish minimum standards for all stakeholders.
Response: Joel Yarbrough - Mobile payments are actually much more secure on your own personal device than desktop-browser ecommerce or card-based transactions at a machine. In terms of industry-wide guidance, most payments providers are still PCI-DSS compliant, since cards are part of their model, and SOC-2 and other certifications exist as well.
Response: Reuben Lai – Going digital inevitably increases the risk of fraud. But Grab has controls that have been in place since pre-pandemic to counter each risk event correspondingly. We have a 360 view of our user base across the region that allows us to comprehensively risk-assess across all business verticals. Our goal is to build customer and merchant trust, and ensure our risk infrastructure continues to remain stringent and resilient.
For e.g. with fraudsters exploiting covid fears via targeted phishing attempts and scams, we have ramped up our communications and education via our app. But we know we can’t do this alone, so we will work with governments to ensure widespread awareness - targeting even the slow-to-adopt segments (e.g. elderly).
Question: Cost of using digital currency is one of the main concerns for merchants in Myanmar. What type of approach should we use to tackle that?
Response: Joel Yarbrough - Opening up real-time payment rails to banks, wallets, and other issuers like consumer loan providers and insurance companies will bring a lot of volume into the market that will help drive down costs. India has basically zeroed out the cost of real-time payments and local debit, and most other countries could as well, particularly since cash printing, cleaning, and handling is itself expensive.
Response: Milind Sanghavi - Build a strong real time payment network with multi modal payment capability that can be scaled across
Question: Do you see an overdose of payment providers, wallets? How do you differentiate yourself in this jungle?
Response: Joel Yarbrough - Issuers need to really know their own users, be attached to some use case that’s differentiated and somewhat defensible, and offer real value added services like lending, loyalty, or access to exclusive service benefits.
Response: Milind Sanghavi - We continue to focus on serving our strong regional consumer and merchant base with stable, secure and scalable solutions that address pain points across the digital landscape. As a natural extension to this, we continue to find and execute unique long term partnership opportunities.
Question: Do the panellists see a move/trend to use non-traditional currency (i.e. digital payment tokens like stablecoins) for retailers or even any major commerce platforms? What are the challenges to innovation using DPTs for e-payments?
Response: Jeremy Tan – We do see interest certainly, but this is not main stream yet. Or rather, as a percentage of total payments, is it not really significant yet. Do watch the China e-Coin by PBOC that may progress by the way.
Response: Joel Yarbrough - Most online retailers that tried accepting Bitcoin and ETH have pulled back. There weren’t enough day to day spenders who were legitimate to make offering the service worthwhile, in a world that most crypto investors were HODL
Response: Milind Sanghavi - While this may be a longer term trend, some immediate steps need to be taken to ensure their long term stability and success.
Question: What is the impact of New Normal in Digital Payment?
Response: Jeremy Tan – We expect a further move towards cashless, contactless digital payments.
Response: Joel Yarbrough – Booming.
Question: With so many companies developing their own e-wallets, do you see a convergence to a few major players? If no, what convenience or confusion do you see the consumers will get if there are so many wallets?
Response: Jeremy Tan – There are thousands of different types of credit cards offering different rewards, benefits and value proposition to consumers. It feels less confusing, because there exists Visa, MasterCard, etc that establishes interoperability and the common rules for everyone. Similarly, we expect the e-wallets to go that same way, if we want to maintain a healthy competitive payment ecosystem.
Response: Joel Yarbrough - I don’t think we see any evidence of convergence or meaningful consolidation. In markets without common standards of interoperability, there is some confusion and fatigue, but as interoperability increases, customers have a lot of choices. It’s not like the existence of Visa and MC acceptance rails meant that individual banks weren’t needed to address different user segments.
Response: Milind Sanghavi - As we’re witnessing in many other markets only the wallet providers that are stable and address customer needs will win in the long term. A convergence/consolidation seems likely.
Question: What is stopping Request to Pay from coming to the fore here in Singapore? Any expectations to have this for PayNow?
Response: Milind Sanghavi - My idea was more along the lines of a multi-bank Request functionality on a PayNow rail. The infrastructure for this has certainly been laid out by the MAS and ABS with the expansion of Corporate Paynow and its merchant based addressing system. As there is increased merchant adoption this will become the next logical step in seamless payments. As it stands today, a few banks (i.e., OCBC) already offers a version of this for our merchants.
Question: Will MDR go lower in Singapore going forward?
Response: Joel Yarbrough - It remains to be seen, but Australia, Malaysia, India, Europe, and even the US have regulated debit, electronic payments, or both.
Question: Governments will eventually want to track all movement and flow of money inward/outward so that illegal activities like money laundering, terrorism financing and business dealings with sanctioned countries are stopped. Do you foresee cash being made illegal by any countries at some point in future?
Response: Joel Yarbrough – Cash will not be illegal, but may not be accepted for certain types of transactions, especially when it is more inconvenient with less flexible large denominations (see China or the US as examples).
Question: The use of cash is like the culture of wearing masks. Japan and Taiwan has the culture of wearing masks so with the COVID-19 crisis, they have an upper hand. Do you think we should develop a cashless culture to prepare ourselves for a financial crisis?
Response: Joel Yarbrough - I think it’s happening now.
Response: Reuben Lai – Habits take time to form. We see the current consumer and business habits of going cashless as a self-reinforcing long term trend that may be here to stay as the fear of infection via physical cash/cards remains top of mind and more importantly, the habit of using e-payments becomes ingrained in peoples’ day-to-day lives particularly amongst previous hard to convert consumers.
Question: Would concurrent transactions be intrusive?
Response: Jeremy Tan – It is not envisioned to be intrusive; consumers will most certainly not be compelled to use the various value services. There will be of course sharing of data across the network, but as with open platforms/standards, we expect great transparency on what type of data is being shared and control to consumers.
Response: Joel Yarbrough - If you mean slow, then no. Google Wallet is “concurrent” and does payment and rewards redemption at the same time, so is GrabPay, which can spend funds on PayLater and give you rewards at the same time.
Question: E-wallets are being used in Malaysia to disburse government aid to citizens only. The problem lies with people who have no forms of ID. They stay in the city but are unable to open a bank account because of their stateless status. For them, cash is the only way for them to make and receive payments. How can e-wallets work for such? Perhaps, by virtue, they could somehow access e-wallets using a phone number to create an account? This is worth exploring to truly ensure nobody is left behind.
Response: Joel Yarbrough - Yes, you are correct. “Lifeline” or basic accounts usually require only a very low level of user KYC (like a phone number), and then higher levels of KYC to unlock higher balances or other features like sending money. At the same time, modernizing ID programs so that every resident can have a government-issued ID is important.
Question: Some traditional stalls and hawkers are still using cash with the reason being that for every amount they collected, they can report less to the authority. More recorded transactions would mean that they will have to pay more tax. With high trade income recorded digitally, I doubt that these people will come on-board unless there are ways that their transactions can be encrypted and not shared.
Response: Joel Yarbrough - In our research, very few merchants use tax avoidance as an excuse to not use wallets. They know they’ll pay taxes anyway. They are *much* more concerned about whether a new payment method will help them earn more revenue.
Question: Do you think people would want a cheap payment service instead of paying 3% for value-added services? Many people may not want or may be unable to use these value added services. In this crisis, isn’t the 3% a penalisation for a simple transaction?
Response: Jeremy Tan – There are domestic digital, e-payment schemes, etc in Singapore and regionally, which are very much below 3%.
Response: Joel Yarbrough - As we discussed, the 3% is an anachronism for real time “push” payments, and isn’t true for PayNow QR or many other real time methods.
Response: Milind Sanghavi - As we discussed payments should not be one size fits all. Successful payment players meet the needs of the larger swath of merchants by customizing their offering i.e., add-on VAS fees as required, fixed monthly fees in lieu of MDRs, etc.
Question: What is the best way for banks to work together in Singapore? Do you see a future in the PayNow pull
Response: Joel Yarbrough - Yes, PayNow “Pull” or “Request to Pay” will presumably happen, but the banks that are the larger card issuers need to see a way to replace their existing revenue streams, or significantly grow the pie, to fully come on board.
Response: Milind Sanghavi - Banks continue to work together to drive various initiatives like PayNow. Pull will be most likely be in the roadmap.
Question: Do you see digital payments including cryptocurrency (e.g. e-Yuan) accepted in Asia soon?
Response: Joel Yarbrough - Any state-issued digital currency will see adoption as soon as they are transactable across borders.
Question: Will loyalty and value-added services mature for real time payments, such as an equivalent to credit cards
Response: Jeremy Tan – We expect so, but with more open payment structures/infrastructure, the loyalty and value-added services might not necessarily be always provided by the bank/FI.
Response: Joel Yarbrough - Yes, for sure, provided by issuers that use the RTP rails, but have their own value proposition.
Response: Milind Sanghavi - The underlying difference in cost structures will probably lead to different setup(s) of VAS/ Rewards that will most likely be different to credit cards (probably similar to debit).
Question: Chargebacks seems to be a hot topic in payments. Is there a solution that can help the merchants to risk assess a client who is a repeat offender?
Response: Joel Yarbrough - There are good third party platforms like Sift, ThreatMetrix, and Kount as well as blacklists and other industry-owned solutions.
Question: Will the rise in digital payments lead to an increase in illicit transactions due to the anonymity it provides
Response: Jeremy Tan – We believe anything digital can eventually be traced.
Response: Joel Yarbrough - Illicit payments have always been around, but digital payments support a lot of great ways to minimize fraud, AML / CFT and other risks.
Question: We have a fragmented e-payment ecosystem. Do you think Central Bank Digital Currency (CBDC) will spur better interoperability across payment providers and become a de facto retail payment method?
Response: Joel Yarbrough - I think CBDC simply designed is just fiat money being pushed into the banking system (which is 80% digital anyway) and then spent across real time payment rails. I’m not sure the “fancier” definitions of CBDC are really necessary.
Question: I understand that Cost of Funds (COF) has a huge impact on the profitability of Payments. What initiatives have been done to reduce COF to expedite digital payments?
Response: Joel Yarbrough - RTP is pretty cheap. Enabling PayNow “Pull” would be a great add on.
Question: What are the cross-border instant solutions that are really promising?
Response: Jeremy Tan – We would say probably all of the speaker organisations provide promising cross border, instant/close to instant solutions.
Response: Joel Yarbrough - Interoperability between PayNow, PromptPay and UPI; NETS and MY Debit, and networks like Rapyd making many, many local payment methods effectively international with a single integration.
Question: Do you think open banking payment gateway will be more popular in the future? One integration, thousands of connection visa APIs.
Response: Jeremy Tan – Yes, we are a strong believer of Open Banking.
Response: Joel Yarbrough - I think there are serious value proposition and economic questions that need to be addressed, in addition to security, abuse, data privacy and more. It’s hard to see open banking as-is as fair to the incumbent banks that created the infrastructure and bear most of the cost.
Question: With forced digitisation of remittance flows across segments, what about anti-money laundering (AML), fraud and other risks arising - are regulatory requirements level between banks and non-banks?
Response: Jo Yeo (MAS) - Financial institutions regulated by MAS, including banks and payment services licensees, need to comply with all applicable laws to their business. For banks these include AML/CFT requirements issued under the MAS Act; likewise for payment services licensees where the payment service that they provide carry ML/TF risk, they have to comply to AML/CFT requirements issued under the MAS Act as well.
Question: What is the role of MAS in this new environment?
Response: Jo Yeo (MAS) - MAS continues to uphold its objectives as a financial services regulator and financial services development agency. To cater to needs in this new environment, MAS has pushed out new initiatives and measures including the ones set out in the media releases below: