Episode 17: Trends shaping payments in 2021

Transcript of the recording

Cyrielle Chiron:
Evolving technology and payments innovation continues to transform the way Canadian consumers and businesses make payments. In pursuit of more convenient, faster and secure payments experiences, Canadians continue to adopt new and evolving digital payments methods and channels. The migration to digital payments, a trend that we have observed for a number of years now has been accelerated by the COVID-19 pandemic. More than ever we are seeing that Canadians' payments preferences can be impacted by available payment options. For example, contactless payments. While these are trends that we're seeing in Canada, it's important that we continue to understand and explore the payment trends shaping other jurisdictions. What are the similarities and differences when we look at the payments landscape on a global scale?

I'm Cyrielle Chiron, Chief Strategy Officer at Payments Canada and host of The PayPod which explores the trends and topics influencing payments in Canada and around the world. Joining me today to discuss the trends shaping the global payments landscape in 2021 is Kate Frankish, Director of Strategy at Pay.UK. For more than 20 years, Kate has worked in the financial industry in a number of diverse roles. Kate has a strong focus on innovation driven by consumer demand and global market movements. She now leads the strategy team at Pay.UK with the purpose of driving innovation in the payments ecosystem and enabling a vibrant UK economy. Welcome Kate and thank you for joining me today on The PayPod.

Kate Frankish: 
Thank you, Cyrielle. I'm delighted to be your guest today to talk about the ever-changing world of payments, which is a critical enabler of all of our lives, allowing people to be paid, to pay for bills, mortgages, food. It really allows the world to run smoothly, most of the time anyway.

Cyrielle Chiron: 
Let's get right into it. There's a lot of things that we have to talk about because there's a lot of things that have been going on in the payments industry. I think every day you can see innovation popping up and a lot of countries like us in Canada and the UK are modernizing their payment systems to make sure we keep up with these trends. Talking about trends, I saw that Pay.UK recently released on their website, a Strategic Trends white paper that explores the key trends shaping the future of retail payments. It would be very good if you could tell us a bit about it, what are the key highlights of that report? Let's see if actually we see the same in Canada or not.

Kate Frankish: 
Yeah, certainly. Before I get into the report study, I'm just going to give a bit of background for the listeners on what Pay.UK is. We're a payment systems operators, similar to Payments Canada. Our focus is to deliver robust and resilient retail payment products to the users of our services. That's really key. The key thing that we need to look at and we've discussed a few times Cyrielle is, you can't stand still and running our platforms well is not enough. We, like all of the global payment providers, understand that we have to look forward, we have to understand trends and threats and opportunities and to make evidence-based decisions on what we focus our time and effort on.

Cyrielle Chiron: 
I like the evidence-based decisions.

Kate Frankish: 
Yeah, it's really hard to argue with data, isn't it? If you've got the evidence that sits beside why you're doing something, it allows you to move forward, which we're using in earnest now in the UK. One of our key strategic focuses is delivering value for money. We always consistently challenge ourselves to focus on the things which really drive value. If I talk about now, why we did the white paper and the work that sat behind that and why it's important. This was done at the end of 2019, actually. We've been looking at trends for quite some time. We started this work and we want it to look globally because actually, we've talked about this, a number of times what's happening in your own jurisdiction is happening in other jurisdictions as well. When you look at the big focus areas around payments, around making payments flow quicker and taking out any consumer detriments, around making sure fraud is minimized, it's the same type of themes that are happening globally.

We wanted to stretch our thinking and look out to 2030. Now everything in the report is not going to come true. I'm sure you know, we're not future gazers, but we used information and trends to extrapolate out what might be true in the future. We focused on three key areas in the report. The first one is all around what we call atomization. This is smaller, more frequent payments that are driven by things like subscription services, such as Netflix and which I'm sure we've all leaned on really heavily during all of the lockdowns that COVID has driven across the globe. And also the gig economy. People are getting paid smaller amounts more frequently than traditionally. Atomization is important because it means there will be higher volumes of payment and we need to make sure we're set up to manage those higher volumes and potential spikes.

The next topic is internalization. This is where we see big tech companies, such as Amazon, which is all around. They could cut out the need for a payment rails at all within their services. At the moment, most people when they purchase on Amazon have a card saved and they use card payment rails to make the payment. Amazon has many different elements to its business model. They could actually manage the payments in a closed loop environment and cut out card schemes or the retail payment scheme. It's important again, we understand that to manage that potential threat, but also to understand what that would mean from a volume's perspective on our platforms. Then the last one is virtualization, and this is one that's really growing pace. This is all around virtual currencies of all different types. You've got stable coins, you've got Central Bank, Digital Currencies, and there's private virtual currencies such as Diem, which Facebook is looking to launch later this year.

They are the key areas that we focused on in our paper. The questions that we were trying to ask ourselves to make sure we really understood, what does it mean for us? I think we've always got to turn over lots of data and information. What does it mean for us? Then do we have to do anything different? Do we have to pivot our strategy and how do we make sure we continually monitor the global payments market and consumer trends? Because, one of the things that's really key to us is remaining relevant. If consumers don't use our payments, then we won't remain relevant. That's a really key driver for us.

Cyrielle Chiron: 
Yeah, I agree. Virtualization, internalization and atomization. Very hard words for me to say, but those are very, very, very good words. I'm glad you're mentioning these because we are looking at the same and we are saying maybe in other words, but we are definitely seeing the same. Those trends are definitely global. I like the fact you say, we need to look at that to make sure we are staying relevant and we are not sitting still because that's the truth. Things are going very, very fast. With last year, things even went faster than we expected. In Canada every year, we look at how consumers make payments. I'm just going to put a plug here. This report, we have it, it's called the Canadian Payments and Trends report. We put it always every year on our website.

We look at how people make payments and it's moving, definitely. There's some trends that we've been seeing that are shifting, but it's shifting in a couple of years, there's no major changes, radical changes that we see from year to year. We definitely saw some trends that for a while, that has been happening, like the clash of papers, like cash, or obviously on the other side, the growth of digital payments. This is what you talked about with visualization, internalization in atomization, everything digital is definitely growing. We've been seeing that last year, those trends really picked up in some way with COVID. People are not comfortable touching cash anymore. I think you did that report before COVID or during COVID. I'd like to see if you thought about the impact of COVID and if you think that COVID accelerating the trends that you just talked about, the internalization, virtualization and atomization. Do you think it accelerated? Do you think they are here to stay?

Kate Frankish: 
Yeah, I certainly think many of the digital trends we'd started, Silica have accelerated and it's that habit forming activity, trying to change the large portion of consumers' payment activity is really hard because if you're the man on the street, you just want your payments to work, don't you? You want it to be safe and you want it to be fast and you don't want any hassle. It's when it doesn't work that it causes a problem for people in general, but we've started to see the use of loads of different things that we thought wasn't going to be taken up so widely by consumers. My husband for example, was really anti contactless cards until lockdown. I hate to admit that because I'm in the payments industry and I love anything that's new and shiny and contactless, is really easy to use, but he now swears by it and doesn't ever want to actually have to put his card in the machine and then put in his pin.

There's moves all over the world to increase contactless card limits, but you have pros and cons obviously. We saw people starting to get used to using things like QR codes, because you were certainly in the UK, we were using them for track and chase capability. When we opened up in the summer a little bit, more restaurants and bars were open with social distancing, you would use a QR code to get your menu or order a drink. These are technologies that we thought were dead, but we're starting a resurgence. I do think once consumers get used to using something it's fine and it becomes habit. I would definitely, if I was a betting person, think that a number of these trends have accelerated and will stick.

Cyrielle Chiron: 
Yeah, I agree. It's the same in Canada. We still have the same QR code which were, I would not say inexistent but very, very rare. Then it started to really pick up over the summer and like you, with the restaurants to get the menus or to get access to information. It's funny how things are really similar. We have a difference in terms of behavior between the UK and Canada sometimes, but those things we are seeing it's the same. I liked the fact that you talked about before, virtualization and digital currencies. There's another hot topic in payments right now, which is, Central Bank Digital Currency. We also call it CBDC. The trends that have been growing globally are really accelerating the development of central banks looking at CBDC.

The decline of cash is not the only reason, but it's one of the reasons that we've been seeing. Last year, I spoke with Rod Garratt from the University of California in Santa Barbara and Francisco Rivadeneyra from the Bank of Canada about the benefits and the uncertainties of CBDC. That was really the start. Since then, a lot of development have been done globally with regards to CBDC. Some countries are more advanced than others. China, I think already launched it already and some other countries in the Caribbean as well.

Now definitely, a lot of more activities have been done in this space. The Bank of Canada has been releasing a lot of speeches and information, explaining the journey, but like the Bank of Canada, I know the Bank of England as well as being very active in this space. The data consultation paper a few months ago, if I'm not mistaken, they still haven't released the results of that consultation. I would be really interested to hear your views on CBDC and especially at Pay.UK being a payment operator like Payments Canada. I know when we think about CBDCs, we can also speak about digital currencies overhaul, but maybe let's talk about CBDCs first and let's see if there is something that you are focusing on, monitoring, thinking about.

Kate Frankish: 
Okay. As you say, the Bank of England is our central bank in the UK. They have been looking at CBDCs on and off since 2014, actually. I think it's a really complex, I suppose, framework to look at and understand the benefits, the impacts on the economy, the impacts on the banking industry. There's significant impacts depending on how you actually apply and develop and then run a Central Bank Digital Currency. As you say, it was actually back in March 2020, they published their discussion paper and consultation. We worked with Bank of England and gave a response from a payment system operator perspective. I think we continue to work with Bank of England. I think they are still undecided on how to take things forward, but they do intend to continue to consult widely on the benefits, the risks and the practicalities.

One thing we've talked with them quite a bit about, if we were to decide or if Bank of England were to decide to develop a CBDC, this would be a three to five year program of work. It's not something that could happen really, really quickly. One of the areas we are interested in is, we are developing what we call our New Payments Architecture platform. This is a new retail payments, immediate payment scheme. We want to understand from the Bank of England, whether or not there's a place within our requirements on that particular platform, to be able to actually pass the value of Central Bank Digital Currency across the rails and not just great British pounds for example, which is what we pass value on today. Again, that's very much dependent on how the model is set up, but as an organization who manages the exchange of value rate across the UK for retail payments, it wouldn't seem absurd for us to be involved in passing different types of value. That's certainly an ongoing conversation that we are having with Bank of England.

Cyrielle Chiron: 
Yeah, that's interesting. That's great to hear. You said March 2020. Gosh, days are blurring, it's a year old and I feel it was just a few months ago, but that's interesting to see. This is exactly the same way we are. We are working with the Bank of Canada, working together for the benefits of the whole ecosystem. I agree, it really will depend on how CBDC is designed and distributed in order to see how it can interoperate with the payment system. You spoke before also about other digital currencies and stable coins. In Canada, the usage is still very low. There are some activities as well, but still, not really mainstream. There's a lot of news and a lot of things going on, but I would be interested to see in the UK, if the usage is growing or not, and if there is anything that's happening around digital currencies, because your platform you are building, I believe you take this into account, right?

Kate Frankish: 
Yeah. It's not one of our fully decided requirements yet. It's something we're looking at. Again, on that point of relevance, as consumer usage changes in the payment space, we need to make sure we can facilitate that change in usage. In the UK, again, there are lots of new ideas popping up and you only need one real killer use case to get a new payment type to take off. I do feel when you've got a big tech giant, like Facebook coming in to do something with a virtual currency, I think that's where you might see a tight turn in usage and trust because consumers do use social media and do tend to trust using those platforms.

At the moment, we're seeing a bit of growth. I think more people are speculating on virtual currencies because they fluctuate in value so much as well. It's a bit like gambling. At the moment some of them are stable coins. As the name suggests, it's a basket of currency linked funds. It takes away a lot of that volatility, but for some of the others like Bitcoin and Diem et cetera, there's a lot of talk in more spikes of usage, but nothing significant as yet.

Cyrielle Chiron: 
Yeah. We just need Elon Musk to tweet about Bitcoin. I'd like us to explore another topic still in the topic of technology. I'd like us to speak about AI a little bit because that's another trend that is growing. As more people get comfortable using technology and integrating technology into their lives, do you think Artificial Intelligence will play a bigger role in payments? Here, I do not want us to think only about the way we pay, but also the way payment operators or FIs manage money.

Kate Frankish: 
Yeah, definitely. Who would have thought a number of years ago that one we would shop so enthusiastically on Amazon, then we would be comfortable with leaving our card details in Amazon and they have one of the best fraud systems in the world as well. Now we're quite comfortable shouting our Alexa to order us something when we've run out of cereal, whatever it is and Alexa can take that and pay if you've got your card stored with Amazon. I think AI, it's a convenience plea. Time is probably the most critical thing for people. People have less time. If use cases for AI that really helps take away monotonous jobs that add time to people's day. One of the things that Open Banking in the UK is developing is a standard for sweeping.

This would allow consumers to set a set of limits with their bank, and that could be done over AI. It could be done lots of different ways, but it means that the customer gives the control away and says, "Actually, if my balance gets to X, please sweep a hundred pounds in from another bank," for example, that they've got a savings account with. There's all of these potential use cases starting to pop up that make consumers' lives easier and can use going forward AI to actually be the bank manager or the financial organizer for a consumer. I think definitely that's something that will start to take off.

Cyrielle Chiron: 
For you as a payments operator, are you looking at AI, because this is something me with the research team like AI and machine learning. We are really interested in exploring further to really try to detect fraud as well. As the payment system becomes faster, or instant just using that technology to help us actually identify anomalies. You're the same, right?

Kate Frankish: 
Yeah. Our current platform provider VocaLink, we work with them really closely and are developing a number of different fraud type solutions that use machine learning and pattern identification and you're right Cyrielle, because the more real-time a payment comes, the less time you have to do any forms of checks and stop the money from going out the door. It's really important that you've got the upfront capability to detect anomalies and get that balance right between the false positives and actual fraud itself.

Cyrielle Chiron: 
Exactly. Well, at least if it detects you can action after, but at least help us detect. I forgot who I was talking to a while back, people were skeptical about this technology and I was thinking, "Do you really imagine somebody instantly checking everything that's happening?" We definitely need help in order to flag things, if there is anything bad that’s happening. I know you talked a little bit about open banking and I’m glad you talked about it because we can't talk about payment trends in the UK without discussing open banking. That would be really unfair from my side.

I'd like to know if there are new things happening in open banking in the UK, where is it at? What is new or what are any learnings? You just mentioned new use cases that were coming up, but is there anything that maybe with some time that has passed since it's launch that you'd like to share with us that we could know because in Canada, we are having some chats. Again, there's some activities around open banking. We are not at the same level, but anything that you could share, that would be great.

Kate Frankish: 
Yeah, certainly. Before I joined Pay.UK, I was in a large bank developing open banking API's et cetera. I can see it from both sides of the coin. Open banking is really starting to take off, certainly in the account information element of open banking in the UK where a consumer can... People in the past may have maybe banked with one bank and had all of their products in one bank, because it's easy to manage. You use one app or one online banking solution. What open banking does is allow consumers to pick the best breed of product. You might have a savings account with one bank or a financial services' provider, a current account with another, and you can pick the best of breed, but you can also bring them all into one app as well, to be able to manage your money centrally.

It has been driven by regulations. The big nine banks in the UK had to develop and allow access to the data of their consumers as long as their customers allowed that access to new companies who are building these solutions to help people manage their money. On the payments side, that's not taken off as quickly, but there is a growing use of payment initiation coming through open banking and where that helps drive new innovation is if I use an example, Amex, who obviously are a card provider and don't have a debit card book. They've got nothing to lose to use open banking, which doesn't use a card rail. It uses the faster payment rails that we run. Amex launched their pay by bank transfer proposition in 2019. What they can do is they've partnered with a number of merchants.

On the merchants' website, there's a button that says pay by bank transfer. What Amex does therefore is take the customer through to their own bank. They do a strong customer authentication journey. They authenticate themselves. It goes through that, they approve the payment and the payment goes to the merchant from their account. Now, Amex have not had to integrate with every single bank to make that happen. They've only had to integrate with merchants, whereas normally you'd have to integrate on both sites and that's what open banking really helps drive uptick.

It's a different way of paying and certainly in the UK, when we've looked up to what our consumers want, they want choice of payment. They don't always want to use cards. Although the protection that comes from the card schemes is obviously important for larger value payments. That's one aspect. There's quite a lot of work going on in open banking. They have a roadmap of activities to deliver this year, including some potential new types of propositions. There's also a review of the governance and the company that looks after open banking at the moment in the UK. Lots going on, lots of change.

Cyrielle Chiron: 
Definitely. Talking about change, we mentioned earlier that both our countries are in the process of modernizing their payment systems. Us, we are building real time payments but you, you already had faster payments and you're in the process of organizing it. Can you tell us a little bit of what you're doing in the UK?

Kate Frankish: 
Yeah, certainly. As you say, we have faster payments already. We've got something we call BACS, which is a 3D payment cycle and that's more used for salary payments and to draw funds for bill payments as well. What we're looking to move to is a single real time push payment rail. The core outcomes that we want to deliver is that it's easy to access. It's easy for others to innovate on. It delivers benefits to the people who use our rails and their customers.

One of the key aspects of our design is we are not going to deliver lots of bells and whistles. We're going to deliver a fast throughput core [inaudible 00:26:31] and settlement layer. We are going to provide APIs for market providers to add additional functionality on top of the payment itself. With the new payments architecture, it's going to take a number of years to complete. We have to migrate people from our current platforms onto this new platform as well. Migration is always the hardest part of any modernization, but we've developed a few new products on the way. I don't know if that would be of interest to you so [inaudible 00:27:02] to talk a little bit about requests to pay and confirmation of pay.

Cyrielle Chiron: 
Definitely. I love talking. Go ahead.

Kate Frankish: 
Okay. Last year we delivered two new what we call account overlays and an account overlay means we've delivered a set of standards and rules to allow interoperability, but the product delivery itself does not have to plug into our system. That doesn't have anything to do with our system. People can use different technology providers to allow the service to run. Request to pay, first of all, this allows billers, your utility billers, et cetera to send their customers a payment request, some mess is fundamental, it's not a payment. I asked customers. It tells them how much [inaudible 00:27:48] they also say it's 40 pounds for their electricity bill this month. The customer then has a choice of whether they accept this and choose then the customer can choose whichever payment methods they want to make the payment, or they can choose to pay some of it if they're finding that they're financially struggling and they can't make that payment this month, or they can decline it and speak to the biller alternatively.

Request to pay is designed to give customers and particularly vulnerable customers more control over their finances because in the UK at the moment, bills... To get the best tariff and rate on things like utilities, you have to sign up for something called a direct debit. The consumer doesn't always see when that's going to come off their account, how much it's going to be. The control is much more with the biller than the customer. That's really the point of request to pay, is giving control back into the hands of the customer. That's really starting to take off. In fact, Mastercard announced this morning that they are going to be one of the requests to pay providers. There's a number of others in the pipeline at the moment.

Cyrielle Chiron: 
Yeah. I saw that this morning too. I wanted to see if you had any views on that. Well, thank you. That's a good [inaudible 00:29:04]. You're very busy like us.

Kate Frankish: 
Yeah. I've been in financial services for a long time and I don't think I've ever worked as hard as I have in [crosstalk 00:29:12] year.

Cyrielle Chiron: 
Payments, it's where everything happens, I keep saying. Things are going so, so fast. It's definitely, as you were saying at the beginning, we cannot stand still because it's just lots going on. I'd like to have your final words. The final question we'll be, we talk about all those trends and the future. You talk about 2030. I'm like you. I like to really see a long horizons, not everything is going to happen, but we really need to look up and far in order to be able to at least organize ourselves to plan for the future. Last questions would be like, what's next? What do you think is going to happen? What are you excited for when you think about the future of payments? You cannot say that deliver your modern institutions [inaudible 00:30:03].

Kate Frankish: 
No, but that would be exciting. I'm sure you feel the same.

Cyrielle Chiron: 
Yes. I feel the same.

Kate Frankish: 
No, actually do you know what? I can't believe I'm saying this because as I say, it's kind of old tech, but I think the resurgence of QR codes is quite exciting. I think that there's a space for a payment standard to be written so that QR codes can be used more easily for small businesses so that you don't need point of sale change to be able to accept to a payment that's not a card payment. I think that's definitely something that we're certainly going to look at whether or not there's a market for us to design and deliver a payment standard for QR code. It's one to watch, definitely.

Cyrielle Chiron: 
Yeah. I'm keeping the same, but accounts to accounts payments at point of sale, this is the thing that I am really looking forward to as well. Well, that's it. That's everything we have. Thank you so much for conversation. I think that was great. You gave us a lot of your wisdom, so I really appreciate it.

Kate Frankish: 
Yeah. Thanks Cyrielle. Great to chat.

Cyrielle Chiron: 
Looking to the future, it's clear that the payments landscape in Canada and around the world will continue to evolve dramatically due to new technologies, consumer demands and shifting competitive dynamics. It remains critical that we looked not only at Canadian trends, but also at what is going on globally. This will give us a holistic view of what the future of payments will hold and help us plan to keep Canada globally competitive in the digital payments ecosystem. Kate, once again, thank you for joining me today and sharing your wisdom. I have a question to the audience actually. What do you think would be the next biggest trend in payments? Well, we would love to hear you. Join the payments conversation online, using #modernpayments. Also, stay informed by registering for annual conference, The Payments Canada SUMMIT at thesummit.ca. I'm Cyrielle Chiron. Thanks for tuning in.