From settling up with friends after a group holiday to buying groceries online, digital payments and open banking are changing how payments are made.
Innovations in fintech – or financial technology - have the potential to make financial services more secure, convenient, and affordable.
Now that COVID-19 has accelerated the shift to digital payments, authorities overseeing financial services and digital technologies must come together to set up proactive, strategic, inclusive policy frameworks for rapidly evolving services.
Beyond banks
Payments used to be bundled into the services provided by banks. Today, standalone payment products are offered by newcomer fintech providers and not just banks, noted Dorothee Delort, Senior Financial Infrastructure Specialist at the World Bank Group, during a Financial Inclusion Global Initiative (FIGI) panel session.
"Thanks to innovations like mobile wallets, super apps combined with fast payment, APIs (application programming interfaces) and other technologies, consumers find it more convenient and less costly to make and receive digital payments while enjoying a smoother user experience," she said.
Prepaid accounts and mobile wallets have also changed how payment services are linked. "E-money was revolutionary and led to the creation of a new payment instrument, the e-money transaction, which could better meet the needs of certain customer segments."
Even more importantly, e-money opened the market of payment services to non-banks and different business models, Delort added.
Fast payments have emerged as a boon for merchants, allowing immediate settlement for products sold via e-commerce and social networks, without the need to integrate expensive payment gateways.
Another innovation, QR (quick response) code technology, "leverages the mobile phone both as a payment-initiation device and a transaction-accepting device," said Delort, adding the qualification that shortcomings in interoperability are impeding the scalability of most QR schemes.
For QR schemes to scale, it is important that digital financial service providers lay a foundation for interoperability.
Challenges for central banks
Payments can also be a source of data, which banks and fintechs alike can use to differentiate themselves against competitors and provide related products and services.
But they are not the only ones – leading global tech firms have entered the payments sector, too. While their arrival increases competition and expands the ecosystem, said Delort, she also noted the importance of considering risks of renewed concentration of market power and the emergence an oligopoly.
Shifts like these also pose challenging questions to central banks as the main overseer, regulator, supervisor, and catalyst for changes in payment systems, she added. For example, careful consideration is needed about digital currencies and their potential impact on the financial sector.
Central banks are stepping up by modifying their oversight and supervision procedures to accommodate fast payments.
Amid heightened innovation and competition, banks are also building cyber-resilience and working to ensure consumer and data protection.
Delort highlighted the need for increased coordination and maintaining proportionate, risk-based regulatory frameworks that foster innovation. "Industry-level infrastructure is also critical for innovation and continued efficiency gains," she said.
Access to open banking
Open banking enables third parties to use open APIs to develop financial applications and services around financial institutions, with third parties including companies like payment initiators and account information service providers. Data aggregators have also recently emerged as so-called "fourth-party service providers" noted Fredes Montes, Senior Financial Specialist, World Bank Group.
Open APIs have become the common method to support open banking, but they can be costly to deploy and may lack the flexibility to meet some institutions' needs.
Banks aiming to support open banking, Montes said, need to develop an API infrastructure, but this takes time and resources. Fintech – although less subject to regulatory burdens – can pose a compliance risk. Setting up consumer consent mechanisms is another tricky area to navigate.
Access to open banking must be organized, structured, and secure with clear overall governance guidelines, she said, adding that regulations and standards can help harmonize data collected from different entities.
Yet this raises new questions about oversight and coordination, establishing clear rights to access for third-party providers, and accreditation for fourth-party providers, Montes noted. "How are authorities going to manage all these data flows in terms of sharing, storage and security?"
Montes highlighted data privacy as another crucial factor. Multiple authorizations could increase concerns about hidden bias and the potential risk of exclusion for underserved groups and individuals.
To learn more about new privacy considerations emerging in digital financial services, read the FIGI report Big data, machine learning, consumer protection and privacy here.
