ARYZE spoke with Tony Craddock, Director General of the Emerging Payments Association, where he talked us through some of the biggest payments developments taking place due to COVID-19 and how involved parties can play a role in moving money forward.
Before the industry changed drastically due to COVID-19, the development of payments was on a steady journey, Craddock believes, which resulted in access to more convenient, less expensive, and more immediate ways of paying and receiving money. Payments was taken from being a slow and rather dull back quarter of financial services, to now being at the absolute forefront of things. Craddock explains three underlying elements allowing development to take place within the payments industry:
The journey of innovation in payments depends on three drivers: changes in technology, the needs of consumers, and the nature of regulation. Unless you have these three working hand in hand; it doesn’t work. And it has to work as it’s the movement of the most valuable commodity of the world: money.
With COVID-19 shaking up the entire financial industry, the development of payments increased very rapidly. Craddock mentions changing consumer needs as the main driver behind this fast evolution. Customers demand asked for more digital and convenient ways of paying and receiving money. He illustrates how this March (2020) alone, around ten percent of the British population downloaded their banking app for the first time.
This means that there is some kind of trust in the underlying technology infrastructure to cater for and satisfy the really rapid change in consumer need. It is very exciting to see this taking place.
With these interesting times giving speed to the digitalization of money, regulators have been challenged to foster a secure environment supportive of innovation and change. This is easier said than done as regulations change extremely slow, are complex and it is easy to get things wrong. The EPA director argues that if you don’t get the detail of the regulation right, it can have unexpected results; it either allows transactions to take place that shouldn’t, or it causes transactions to not take place that, in fact, should.
With COVID-19 causing a shock to the system, regulators have had to find a balance between being loose and tight in order to stabilize the industry.
Without beneficial regulatory frameworks, the end-consumer will be heavily negatively impacted, which can not happen, Craddock says. He believes that regulators have taken the right steps to keep up with rapid changes in customer demand caused by corona.
Industry competitors: Synergy as an asset
Also traditional banks and fintechs have had to deal with major changes happening due to the world-wide crisis. Some providers have flourished while others have barely made it through. Going forward, Craddock is convinced that collaboration between both parties is what will drive long-term change. Having an industry like payments where parties are so highly interlinked, one cannot move forward without the other. Craddock explains:
In the payment industry, there is no clear buyside. There is no obvious group of people buying from another group of people. Everyone buys and sells to and from each other. They compete today, tomorrow they may partner, the next day they might buy or sell.
This is because there are many companies involved in a payments transaction. A traditional credit card for example has eight to eleven companies involved in a transaction processing. As a result, you cannot afford to make anybody an enemy.
Therefore, we must collaborate, Craddock finds, fintechs have the technology and potentially access to the markets that banks need, on the other hand, banks have the assets, the brand, and the trust. Although there is a lot of effort invested in order to successfully work together, collaboration between fintechs and large banks still often fails to be successful. The hardship arises from subtle things such as organizational culture. Differences in how decisions are made and what motivates people within companies can cause difficulty in working together. Craddock illustrates:
If you are motivated by the ambition to generate revenue that will allow you to demonstrate to the stock market or investors that your company is growing fast – allowing you to raise more investment money for the year 1, 2, and 3 – that is very different than being motivated to get a retirement pension in 5 years.
One will be high-risk and one will be low-risk, and it is very hard to get those two aligned. These are the unspoken inhibitors of collaboration in our industry.
Central banks & decentralization
Looking at how the payments industry will evolve after corona, Craddock mentions Central Banks as the area where he expects major changes to happen. With Central Bank Digital Currencies acting promising, it is all about how movement of money will benefit from these types of innovation. The industry expert is very excited about the future of digital assets and currencies, and refers to David Birch’s book called ‘the currency cold war’, which outlines these developments. Craddock adds:
ARYZE has a lot of strengths in this area that’s going to be central to the future of how our payments industry evolves. There are big conversations happening amongst thought leaders like ARYZE, who help shape people’s thinking. It is not obvious where it is going to end up yet, but there is definitely real fundamental change in the use of distributed ledgers to allow central banks and central non-banks to issue digital assets for particular purposes.
Digital currencies have a great potential to take away the slow settlement process of money, Craddock believes. However, there are challenges involved. CBDC’s clearly form a thread to the traditional competition of Central Banks as they could impact the bank’s ability to issue currencies. What happened during the COVID-19 crisis, where the Federal Reserves issued 2 trillion dollars into the US market, and the British Central Banks issued 200 billion, would not be possible with independent digital assets. It is the democratization of money that will shape our future and change the control mechanisms in play.
It is clear that money won’t stay the way as we currently know it. Although its outcome still remains unsure, digitalization (potentially leading to decentralization) shows as a key trend which has accelerated during the last few months. These interesting times have us witness how money is facing limitations, yet also has reached more of its potential than ever before.
The Emerging Payments Association makes sure the right parties are involved to innovate the industry. Companies, banks, regulators, thought leaders, and experts are brought together through the EPA network and events in order to move payments forward. If you’d like to learn more about EPA, please visit their website or connect with Tony Craddock on LinkedIn. To learn more about ARYZE’s vision on payments, visit our website. For other articles, check out our blog.