Across the world, digital payments are now synonymous with mobile payments, with the rate of adoption directly linked to access to smartphones and telecoms networks.
The furious growth in digital payments in developing countries, especially in Asia, demonstrates the impact of the coronavirus (Covid-19) pandemic in advancing online retail sales, as well as the role that governments and regulators play in facilitating the spread of new payments systems.
A new piece of research by the Economist Intelligence Unit shows how the digital-payment revolution is transforming business in different parts of the world.
Governments have a crucial role to play in formulating policies that guarantee equitable access to these systems while encouraging innovation.
However, regulators’ responsibilities will increase further with the spread of digital currencies and super apps, which will allow for more cross-selling while also exacerbating the risks to data security, privacy and sustainable credit terms.
Both payments services providers and conventional financial services companies need to be ready for regulatory shifts as they seek to take advantage of new opportunities.
Pandemic gives regulators a unique opportunity
Covid-19 forced economies across the world to modernise their payments systems in order to support commerce and allow a return to economic growth.
India offers a prime example of this shift. Although the country’s population remains largely rural and, therefore, still reliant on cash transactions, the pandemic has lifted digital payments, in terms of both volume and value, to heights far beyond the expectations of the policymakers who facilitated their adoption.
India’s UPI illustrates how an enabling policy framework and supportive regulation can create the infrastructure needed for swift adoption.
Government institutions, particularly the central bank, encouraged the use of tools such as QR codes for merchants and radio-frequency identification (RFID) tags for toll gates.
This paved the way for India’s drive towards real-time payments. The prevalence of low-value payments in the Indian economy has led to the highest real-time payments volumes of this type in the world.
Similar trends are visible in other developing countries, however.
In the Philippines, the government is making a concerted effort to achieve a cash-free society by 2025 and aims to make half of its financial transactions digital by 2023.
The rewards of this are numerous, most notably in terms of wider financial inclusion.
Key implications:
- Governments in countries with a low level of digitalisation and unsatisfactory financial inclusion must recognise that an enabling policy framework and public investment are keys to the successful widespread adoption of digital-payment systems.
- Payment-platform providers must create additional capacity to prepare for greater demand for digital-payment services, as well as opportunities to migrate customers to financial services that yield higher margins. They must also prepare for the rising costs and complexities of compliance with regulatory requirements.
- Firms and service providers in adjacent areas must rapidly transform their businesses to benefit from these developments. Their strategies should include improving the interoperability of their digital platforms and deploying application programming interfaces (APIs) to allow the use of embedded-payment systems.
- Regulators must adopt a proactive, multi-level approach to technological changes when formulating new standards, as well as closely monitoring any financial risks within payments systems
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