How digital platforms are shaking up the way we pay
Banks will need to lift their game with improved user experience
In February, a national faster payments system was launched in Australia. Called the New Payments Platform (NPP), it represents a switch from analog to digital. It promises instant payment between bank accounts, instead of waiting up to three days for the money to appear in your account.
NPP is cutting-edge and provides the infrastructure for a coming digital banking revolution. Yet Australia is playing catch up with some other countries, such as the UK, which has had a similar Faster Payments system for 10 years.
China is also a pacesetter in digital payments, according to Eric Lim, a senior lecturer in the school of information systems and technology management at UNSW Business School. Lim points to the Chinese equivalent of Facebook – the ubiquitous WeChat messaging and social media app – which allows users to pay money to each other in China, Hong Kong and South Africa.
Australia's NPP was devised by the Reserve Bank of Australia in collaboration with the major banks, which have managed to ultimately keep a hold on the payments system. WeChat Pay shows there are alternatives when a dominant technology used by everybody can distribute mobile payment services.
"There's no dominant app like WeChat in Australia," says Lim. "If someone wanted to challenge the Big Four banks they would have to get that sort of penetration first and [then] offer payment services on top of that."
Banks need not be involved for payments to take place, notes Lim's research colleague, Chee-Wee Tan, a professor at Copenhagen Business School.
"What you need for payments is communication and verification. Facebook provides communication. Facebook and Google have payment licences but they have not utilised them. It is an option they are thinking about," Tan says.
'With NPP, small payment providers only have access to the system ultimately through the banks'ERIC LIM
The contrast between how digital payment platforms compete is the subject of Disentangling Digital Platform Competition: The Case of UK Mobile Payment Platforms, a research paper by Lim, Tan, Erol Kazan and Jan Damsgaard from Copenhagen Business School, and Carsten Sorensen from the London School of Economics.
In Australia, the NPP is a utility and so far has only a single commercial overlay – BPay's Osko – which can deliver person-to-person payments on the NPP.
But in the UK, there are several commercial overlay services similar to Osko which compete with each other – and can offer insights into the way new payment options are developing.
The researchers have compared Pingit (from Barclays Bank); Droplet (a payment start-up); Paym (an industry consortium of most UK banking institutions); Zapp (from Vocalink, a payment technology provider); Blockchain.info (a start-up); and Circle (a blockchain start-up).
The UK payment platform most like the NPP's Osko is Paym, which competes by mobilising third parties to engage in co-innovation. In contrast, Pingit is monopolistic, accepting information to its app but is opposed to integrating Pingit into other apps.
Yet there is little competition between the two platforms' value delivery architecture because they both use the UK banking institutions' Faster Payments scheme, which solidifies the present market positions of these banks.
This is also the case in Australia. With NPP, small payment providers only have access to the system ultimately through the banks, notes Lim.
"[Whereas] blockchain allows the possibility of payments taking place without using this existing infrastructure and paying a fee," he adds.
'We are setting up a bank for the digital age starting off with new technology, not playing catch up'VAN LE
Like Pingit, the Droplet and Circle platforms rely on internal development and use different established payment infrastructures (BACS payment services, Visa, MasterCard and so on).
Circle is a hybrid – an American bitcoin start-up that also offers mobile payment service in the form of bitcoin brokerage and free wallets targeted towards end users.
Circle does not endorse an open developer program that could be using it. This is unlike Blockchain.info which has the ambition to transform bitcoin into an accepted payment currency. Blockchain.info offers unobstructed access to the bitcoin network.
Zapp, like Paym, is also inclusive, capturing value with third parties, but neither have access to the bitcoin network.
Platform owners (such as, Apple) and platform developers collaborate to develop popular apps (such as Uber, Netflix). The authors say platformisation has revolutionised the financial service industry by altering the manner through which such value is created and delivered.
"Emerging technologies in the likes of blockchain and cryptocurrency have displaced conventional modes of transactions (for example, centralised payment networks controlled by market incumbents such as banks) by introducing alternative value creation and delivery architectures that function as open, decentralised peer-to-peer (P2P) platforms," they say.
"This in turn compels market incumbents (banks) to redesign their financial service offerings to harness the benefits of platformisation and remain competitive within networked economies."
The paper says the existing banks can have it both ways, as is evident from the case of Circle. Concurrently, the banks can use platforms to innovate to deliver value for users and so sustain their established payment infrastructures. At the same time such digital platforms can innovate in ways that could replace their payment delivery infrastructures with new ones (bitcoin, blockchain).
"Successful architectural innovation has the potential of delivering significant competitive advantage over market incumbents as it destroys the basis of their competitiveness," note the authors.
Banks will have to be agile in the face of the digital revolution and the looming arrival of open banking in Australia, which the federal government is committed to implementing in line with the development of a national Consumer Data Right.
Compare the market
What Uber has done to taxis and Airbnb to hospitality, open banking could do for the finance industry. So says Xinja, a new digital bank starting up in Sydney.
"We are setting up a bank for the digital age starting off with new technology, not playing catch up," says its co-founder and strategist, Van Le.
Imagine a bank that is also a platform, providing a 'compare the market' service, laying out the cost of a loan or the interest on an investment offered by a range of external lenders and borrowers.
For instance, if you want to send $10,000 to your daughter overseas, the digital banking platform may offer a service such as The Currency Shop does. It compares nine money transfer outfits – and shows the Commonwealth and Westpac banks charge $920 more than the cheapest.
Such a banking platform could ask you for permission to review all your past financial transactions (which your traditional bank would have to hand over) and promises to use their robots to come up with the deals tailored for you.
The best bank account may come from another bank. The credit card from a non-bank. Outsourcing your mortgage, car loan, super fund, stockbroker and so on, but consolidating it on one platform.
The UK bank of the year, Starling Bank, has some of these features. Their overdraft facility includes a rate comparison with other banks. Borrowing $5000 for 90 days costs about $175 (another bank, Lloyds, charges $655). It invites app developers to join its open platform to reach new customers.
And there is off-the-shelf technology called open application programmable interface (API) that can 'mine' everyone's big data. This year, with open banking, banks will be forced to share their historical data about customers' transactions, if customers so direct.
Bank-to-be Xinja can't wait. "Customers will be interacting with user interfaces designed by third parties rather than the banks themselves, which in turn means banks will up their game in terms of the quality of user experience they provide and banking is going to be a whole lot more competitive," Xinja says.