The COVID-19 crisis has changed how people make their day-to-day transactions. Yet in a dynamic system reliant on secure applications and services, experts are working to balance the safety of electronic payments with the need to include all kinds of users, representing every socio-economic group.
In many developing countries, large segments of society have until now remained largely excluded from the benefits of bank accounts and other financial services. Electronic payments - and attractive opportunities to make use of them - are a key part of the puzzle when it comes to the inclusion of small merchants and consumers in the formal financial system.
Electronic payment intermediaries - such as payment facilitators, bill aggregators and payment gateways - process payments across a wider range of channels than has ever been available before. Think mobile phones and e-commerce websites as the main payment channel for today's small-scale business or customer.
Growth opportunity
Merchants' uptake paves the way for growing numbers of consumers to make payments electronically. According to a 2020 World Bank report, payments made by individuals to micro, small and medium-sized retailers are estimated to amount to USD 18.8 trillion worldwide, but only 37 per cent are made electronically. For most countries, this represents an untapped opportunity.
In Mexico, accepting electronic payments overwhelmingly improved the lives and livelihoods of micro and small business owners, according to a study commissioned by Visa. Out of 750 owners surveyed during the COVID-19 pandemic, about three quarters reported increased monthly revenue and customer spending, said Amina Tirana, Visa's Head of Social Impact, Policy & Measurement, at the Financial Inclusion Global Initiative (FIGI) Symposium. "Among businesses that reported growth, average monthly revenue increased by 22 per cent since accepting digital payments."
For those businesses, payment-facilitator intermediaries provided solutions customized to their needs and, for three quarters of them, this was the very first time they had accepted electronic payments. As secure payment platforms keep getting more abundant and easier to use, businesses are increasingly likely to recommend electronic payments to their peers, added Tirana. More than a third of the businesses surveyed saw electronic payments as imperative to their resilience and recovery after COVID-19.
Mobile access
Access to cheap mobile phones has nudged more merchants towards electronic payments, even drawing in unbanked small-scale vendors.
With over 1.2 billion registered accounts and 300 million monthly active accounts globally, mobile money providers contributed significantly to the COVID-19 response in many markets, according to the State of the Industry Report on Mobile Money 2021, from the GSM Association, an industry association representing the interests of mobile network operators. The value of merchant payments over mobile money grew by 43 per cent last year, compared to 28 per cent the year before.
"The payment-as-a-platform business model for mobile money providers has resulted in a new acceptance ecosystem in the mobile space, relying on a range of intermediaries to ensure frictionless processing across multiple platforms," said Ashley Olson Onyango, Head of Financial Inclusion and AgriTech on the GSM Association's Mobile for Development team.
The industry must continually assess the risks posed by electronic payments. These tend to be operational, such as "technology failure or delays, which may give rise to settlement delays and transaction backloads," Onyango noted.
Cybersecurity and fraud prevention are vital to instil widespread trust. Additional due diligence is required to comply with regulations designed to counteract money laundering and terrorism financing. But at the same time, ease of access for customers and merchants is highly important, as is an assurance of secure transaction accounts and right of recourse when things go wrong.
"Merchants want immediate access to their funds, and consumers want immediate refunds during disputes," said Syed Sohail Javaad, Director of the Payment Systems Department at the State Bank of Pakistan.
Regulatory questions
Pakistan's forthcoming electronic payment system, Raast, offers person-to-merchant transactions. With the system due for roll-out next year, the central bank is considering how to license and register electronic payment intermediaries. "The timing is very important," Javaad said. "Do we start registering them or licensing them at the initial stage, or do we wait and let their business grow and reach a certain threshold?"
Regulators are working with the payments industry to find an appropriate balance between regulatory controls and opportunities for electronic payment intermediaries to enter the market and innovate. A sustainable approach would encourage investment and innovation, while also accommodating continual redesigns to meet the evolving needs of merchants and customers, said Tirana.
User convenience also calls for interoperability among intermediaries - "but with only the necessary amount of information," she added in reference to the importance of security and privacy.
Ahmed Faragallah, Senior Financial Sector Specialist at the World Bank Group, outlined three main approaches central banks are taking to the regulation of intermediaries. First, regulations can be directly issued to intermediaries. Second, where payment schemes are licensing intermediaries that satisfy certain requirements, regulators can assess the adequacy of these requirements and call for alterations as appropriate.
"The third approach is where the regulator applies regulations on the acquirer and then deals with the intermediaries as an outsourced service of the acquirer," he said.
Outsourcing institutions are liable for the actions of providers of outsourced services, noted Faragallah. As such, in the third scenario, the acquirer - banks as well as non-bank actors - conducts thorough due diligence on intermediaries. Javaad suggested the possibility of a hybrid approach, which could incorporate different regulatory components based on each country's needs.
Read the Electronic Payment Acceptance Incentives report developed by FIGI's working group on the topic led by the World Bank.
