The new frontier in payments

A new world of payments is rapidly unfolding; instant, digital and most importantly, driven by data.

With one in four of all UK payment transactions processed by NatWest, the bank sits at the heart of both business and personal customer transactions. “For many, payments are viewed as the natural end of a process; but the payments revolution created a seismic shift, moving payments to the epicentre of the digital transformation, impacting the economy, society and the lives of individuals,” says Simon Eacott, Managing Director,  Head of Payments NatWest. “Payments is the most exciting and rapidly evolving part of the finance world; the prime interface between us and our customers enabling us to provide the smart, simple, and secure payments they need, and which is a crucial element of our differentiation.” 

As cash payments continue to decline, alternative payments methods continue their meteoric rise in popularity, accelerated by the pandemic. Change is also being driven by industry regulation. The renewal of the UK’s central payments infrastructure as well as the Payment Services Directive Two (PSD2), and Open Banking, aim to increase competition and innovation, whilst also improving safety and resilience. “Identifying the opportunities and creating the benefits, while implementing the regulatory requirements is central to the NatWest strategy,” says Eacott.

Focus on customer need, not payment need

Since the Faster Payments Service first emerged in the UK over a decade ago, it has been on an upward trajectory, revolutionising payments. However, it's what is built on the back of the payment and embedded into the customer journey, the things people do on a day-to-day basis, such as buying a coffee through their app, with a focus on customer need, rather than payment need, that matters. 

Embedded finance, the integration of financial services traditionally obtained from a bank within the products or services of a non-financial organisation, has the flexibility and universality to be applied to any company or industry with a transactional element. Examples include online stores offering short-term loans in the form of buy now pay later (BNPL), and digital wallets on smartphones that enable instant contactless payments. Digital innovation has created opportunities to build more capability into the payment stream, creating a frictionless journey for the customer and fresh revenue streams for businesses. Eacott adds: “Our focus is on unlocking the power of payments to create value for every customer.”

With this level of integration in the world of payments and banking, APIs are driving a digital economy that drives efficiencies and lowers costs. But this is just the beginning, as Dan Globerson, Head of Bank of APIs, NatWest, explains. He says: “The use of API technology to connect systems opens up capability for non-financial services companies to offer financial services; banking as a service (BaaS) enabling them to lend, for example, through their channels via our technology. Companies now can provide a payment service, a lending service, or a credit service from a bank, but through their customer user interface. 

“We embed the whole payment, the whole banking experience, within a different company’s offering. And by embedding a contract as part of that payment between both parties it introduces trust. We use payments as an agent of change; a catalyst to increase value, drive innovation, foster inclusion, and build confidence in the future of money.” 

For businesses, embedded finance opens up new channels and creates huge opportunities for growth, for example, by helping them get more products to market, drive sales, meet growing consumer expectations, and attract and retain customers.

Data-driven global payments in real-time

Digital innovation is also transforming cross-border payments, with advances in instant or real-time payments allowing people to receive funds from overseas much faster, aided by schemes and mechanisms for cross-border connectivity and interoperability. Advanced payment technology provides access to richer payments data, the key to identifying new growth opportunities and becoming a real-world vehicle to drive positive change, not only within cross border payments but also cross-border partnerships.

Digital currencies also have a role in the future of payments. Three notable categories include central bank digital currencies (CBDC), being explored globally as an alternative way of exchanging and settling transactions in central bank money. Stablecoins are not central bank money but are linked to or backed by some asset and payment can be made on the back of it, while cryptocurrencies, such as bitcoin, are more speculative in nature, with values being subject to volatility. Nevertheless, bitcoin is increasingly being accepted as a payment method in its own right, although far from universally.

Frictionless and secure

Customers want great user experience and frictionless payments, but they also seek peace of mind, especially at a time when online payment scams, in particular authorised push payments, where individuals and businesses are unwittingly duped into sending money to criminals, are rising. 

“The importance of trust in the payments arena cannot be underestimated,” says Jessica Richards, Head of Market Development, Payments, NatWest. “Our goal is to implement the right technologies to protect our customers from fraud, while delivering a fast and efficient payment journey. It’s vital that we collaborate with the industry and regulators to maintain focus on this critical issue.”

A good example is Confirmation of Payee (CoP), a new name-checking service for UK-based payments, which strengthens payment security by allowing people to verify who they are sending payments to in real-time. “During the pandemic, NatWest was able to use this service to help government get payments out to people who needed them most,” adds Richards.

Protection from fraud, as well as financial crime, which has been in the global spotlight recently, can only be addressed through collective and collaborative effort, and at both the industry level and individual bank level, a huge amount of investment and innovation is being channelled into it. The challenge, says Globerson, is finding the balance between frictionless and secure. “While customer experience needs to be seamless, creating that balance between frictionless customer experience and appropriate checks and balances along the way is the key to fighting financial crime,” he says.

Looking to the future

What does the payments revolution mean for traditional ways of making payments, including Direct Debits (DD) and cash? With the advent of Open Banking, alternatives to DD are already making inroads. Request to Pay is a new initiative that gives customers greater control over when and how they pay, while Variable Recurring Payments (VRP), allow customers to safely connect authorised payment initiation service providers (PISPs) to their bank account to make regular payments on their behalf.

Eacott says: “We know there are challenges with some of these changes, and as a responsible finance provider our role is to ensure that all individuals and businesses have effective access to payments and that we don’t leave anyone behind. The industry still needs to provide access to cash for those who want and need it.”

In an increasingly complex networked payments ecosystem, where cost and infrastructure barriers to market entry are lower and competition is rising, Eacott emphasises the benefits of collaboration within the industry. He says: “Whilst competition is important to drive innovation, banks and other financial services organisations must work together to accelerate the evolution in payments in a purposeful way and ensure success for the long term.”

NatWest specialists predict the five key trends in payments

1. The true value of payments data

The opportunity for better, richer payments data is the single most important point of value to banks and others along the payment chain. By unlocking the true value of payment activity data, banks can develop more personalised products in a more secure environment. And in the fight against financial crime and fraud, predictive analytics becomes a powerful tool for staying ahead of potential threats, reducing risks, and ensuring compliance.

2. Tradition being eclipsed by digital

Cash payments have been in decline for several years. In 2021 the proportion of UK payments made using cash fell to 15%. Direct Debit, a long-established method of paying regular bills appears to be plateauing. While the volume of Direct Debit payments grew in 2021, with 4.6 billion payments made, it was at a slower rate. (Source UK Finance report 2022). With global smartphone ownership predicted to continue to grow over the next five years, any significant return to traditional ways of making payments is unlikely.  

3. Digital developments drive the payments revolution

The Payments-as-a-Service (PaaS) and Banking-as-a-Service (BaaS) model is gaining traction due to cost-effectiveness and is a fast-moving trend for banks and financial institutions looking to accelerate digital innovation, stay relevant, and avoid losing new and existing customers. Embedded finance is one of the most exciting digital developments in the evolution of payments. With consumers demanding fast and frictionless ways to make payments from a variety of devices, from wallets to wearables, embedded payment options can open up new revenue channels for non-financial organisations.

4. A catalyst for overseas trade for the startup economy

In the payments and movement of money space, it's no longer just large corporations that can get involved with instant payments. Faster payments, not just in the UK but across international borders, can be integrated at near zero cost by startups and small businesses, allowing them to not only drive down the cost of transactions between them and their suppliers, workers, and customers but also take advantage of newer digital tools, embedded lending, embedded payroll and embedded accounts payable.

5. Purposeful payments

Sustainability is at the top of all agendas, including finance. Digital transactions have the potential to drive real choice, providing sustainable payment alternatives and support the transition to a net zero economy. By 2030, of the projects that NatWest helps fund, it aims to at least halve the impact on the climate. Financial inclusion is also a hugely important topic, particularly against the current backdrop of rising inflation and the cost of living. A big part of the payments evolution is about widening the function of payments to broader sections of society. Richards summarises, “It’s about making sure that our entire customer base have access to the payment capability that works for them,”.

This article was first published as part of the Raconteur Future of Payments Report distributed in The Sunday Times on 2nd October 2022. 

Download the full report here (PDF , 2.9MB).

For more information, please speak to your usual NatWest representative.

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