In 2012 there were 333.4 billion non cash transactions and this number is expected to rise rapidly in the coming years with the average transaction size reducing drastically. Two other trends waiting in the wings are mobile payments and global transactions. M-payments are expected to grow by 60.8% and global transactions are expected to rise driven by electronic shopping, global sourcing, companies purchasing inventory from other countries, international money transfer, and so on.
Can traditional payment models support the needs of future transactions? The problem with traditional payment rails is the value transfer between the payer and payee may involve several institutions especially in cases where sending and recipient banks do not hold reciprocal accounts so
Startups like Transferwise, Currency Fair and WeSwap.com have come about an innovative way to transfer money across borders that saves considerable amounts in transaction fee. Furthermore, since transfer of money is done at mid-market currency rate customers will not lose money in unfair rates quoted by banks or exchange services. Processes deployed by these companies are very simple. They match you with someone sending in the other direction and the converted money is sent to the account you specified in most cases within a day, a pace that is not matched by traditional banks today.
In order to compete with these non-bank financial institutions, banks can start providing products and services around these payment rails to capture the customer base of these institutions. Also since crypto currencies cannot be regulated by a central authority and mobile money also has its regulatory challenges in cross border transactions, banks can collaborate with traditional payment network providers and develop innovative payment protocols and systems with the characteristics outlined below to gain a competitive edge:
Fast: Faster systems that undertakes broad variety of business and personal payments and transfer funds instantaneously and not takes hours or days. The underlying payment infrastructure should either support real-time payments or should be an emerging infrastructure such as telecom or distributed networks.
Secure: Payment system that is robust and keeps pace with the rapidly evolving and expanding threat environment.
International: Global transactions are increasingly on the rise so the system should help in timely and effective cross border payments.
Cost-effective: Only a payment system with low transaction cost would be accepted for frequent low value transactions which is the need of the customer going forward.
Unbanked: The payment system should be have the widest possible reach and should satisfy the financial needs of the population with no bank accounts.
Tushar Chitra is the Senior Director for Product Marketing at Oracle Financial Services. He can be reached at Tushar.chitra AT oracle.com.