The Future of Electronic PaymentsSocial Networks, Globalization Are Changing the Landscape
Cindy Merritt, assistant director of the Retail Payments Risk Forum, the research arm of the Federal Reserve Bank of Atlanta, says emerging technologies are bridging banks to social networks and setting the stage for cross-continent payments rails. Those bridges also are opening doors for connections between merchants and telcos, and are bringing unbanked consumers closer to more traditional financial services.
"Payments are quickly migrating from paper to electronic format," Merritt says, which is setting the stage for new financial products and services that cater to the unbanked. The problem for banks and credit unions, she says, is that electronic payments also create opportunities for non-traditional financial-service providers, and that means more competition.
That so-called electronification of payments and the entrance of new payments providers have made payments in the U.S. more efficient, but they also have introduced new risks, Merritt says -- risks that have become a focus for the Retail Payments Risk Forum.
In November, the Retail Payments Risk Forum hosted the Emerging Retail Payments Risk Issues Conference, which highlighted the evolution of prepaid cards, globalization and the impact social networks will have on peer-to-peer payments.
A Global Example?Looking to mobile payments offered in developing markets such as Africa has proven beneficial, Merritt says, since these regions reveal trends the U.S. might see as mobile services become more the mainstay in the U.S. over the next 12 months. "In the United States, we have so many payments options, including check, so we don't have the same motivation to move to mobile," as do countries where payments up until recently remained cash- or barter-based. But interest in mobile payments is growing in the U.S., even if the reasons differ from other countries.
"We're seeing a lot more activity on the part of telecoms, which are starting to provide services on a prepaid basis via the mobile channel," Merritt says. "They are allowing consumers to make payments and have those payments appear on their phone bills. We're also seeing the potential for cross-border payments through the carriers."
Those types of services are filling the financial void suffered by the country's underserved and unbanked market, which the Federal Deposit Insurance Corp. estimates to comprise about 18 percent of the population. And Merritt says the unbanked market is growing -- fed by the economic recession and younger U.S. consumers who are just beginning to establish financial relationships. "Younger consumers don't necessarily see the need for a traditional banking relationship, and they are also big users of social networks, where new payments are beginning to emerge for digital goods," she says. "More mobile users are using their mobile devices to access social networks, so we're seeing the confluence of all of these technologies and channels."
That confluence, Merritt says, is expected to fuel growth in mobile remittances -- a trend already underway. Traditional money-transfer companies like Western Union and MoneyGram have already begun forging remittance partnerships with mobile carriers, she says.
Competition for the BanksConvergence and innovation are occurring simultaneously, says Don Rhodes, senior director of risk management policy for the American Bankers Association. Financial institutions can't ignore the trends.
"Cross-border payments are increasingly becoming an issue for all banks," Rhodes says. Emerging technologies, some of which fall outside existing regulatory structures and mandates, are posing competitive challenges, especially for mid-sized and smaller institutions. Peer-to-peer payments, for instance, which up to this point banks have avoided, will have to become part of their traditional offerings. "As this emerging market grows, banks will have to take serious looks at all of these services," Rhodes says.