New payment methods and technologies abound. As FIs seek to engage consumers across channels and devices, they will need to shift the focus toward digital transformation. Only then can true payments innovation occur.
Payments technology was rapidly evolving even before COVID-19, though it may have been accelerated as consumers turned to E-commerce and digital channels as a safe alternative to in-store payments.
While people are adapting to contactless and mobile payments, forward-looking consumers are considering even newer payment methods like paying through a connected car. According to Mercator Advisory Group, more than half (57%) of consumers said they would be willing to make payments via a connected car. While alternative payment methods were once thought to be fancied only by the likes of Gen Z and other early adopters, the truth is that consumers have become increasingly comfortable with emerging payment methods.
As consumers grow interested in alternative payment methods and continue to rely on digital payments, financial institutions (FIs) and businesses must prepare internal systems to ensure that processes, products, and solutions can keep up with consumer demand.
How APIs are Leading the Innovation Charge
APIs have been around for some time, though they are finding a new role within payments innovation. As the lines between digital and physical payments blur, one thing that is crystal clear is that customers expect secure, fast, and convenient payment services. To deliver this, organizations should embrace an API-led approach to product development. The result can be a flourishing ecosystem that can help FIs gain a competitive advantage while offering a personalized payments experience.
“Open banking” has picked up steam across the pond, but FIs in the U.S. should take a page from that book. To remain competitive in a landscape packed with competitors, substitutes, and new entrants, FIs must accept that partnering with other industry players is table stakes to survival. Enabling partners to tap into an FI’s APIs to build unique solutions and further add value to the FI’s customers is the way of the future. To leverage these capabilities, FIs should look at the various API models through which they can improve operations, such as:
- Internal integration – This is using APIs to integrate applications to legacy systems and to each other. It is the original API model, though it poses challenges as integrations are largely case-by-case, making it difficult to change or retire suppliers and capabilities.
- Supplier integration – This integration connects organizations directly with suppliers to avoid some of the hardships that come with internal integration.
- Basic open banking – In the advent of open banking regulations in the EU, APIs are beginning to evolve to collect the necessary information that would satisfy regulatory requirements.
- Corporate client integration – Enterprise clients are able to weave bank connections into supply chain payments and integrate the bank into payroll functions.
- Solution sourcing – Companies create payment sandboxes that are meant for various organizations, students, and groups to “play” in, facilitating competitions to produce innovative solutions that can be introduced to the marketplace.
- New capabilities phased in – The API platform grows, enabling FIs to provide new services and products to customers (some that are managed by third-party collaborators) and create new revenue streams for FIs.
API-led connectivity will upend current business models to create more customer-centric products and services that drive value for customers and collaborators. APIs are a major component of the digital transformations occurring throughout the financial services ecosystem.
Artificial Intelligence (AI) Has a Hand in Innovation
Artificial intelligence (AI) and machine learning are also in the spotlight as more applications for the technology become apparent in the financial services space. These technologies are already being tapped today to aid humans with things like know-your-customer (KYC) in onboarding for merchants, contract review for legal departments, branch automation, and fraud prevention.
As AI grows more intelligent and better able to mimic human interaction, it will find a place in other roles, including customer-facing services. The main consideration for AI will be security. Biometrics, voice authentication, and other authentication methods that may involve AI and machine learning still require some fine-tuning before conversational commerce will be truly available in the mainstream.
As payments innovation rapidly unfolds, the key driver continues to be customer needs and preferences. The biggest obstacles to innovation include questions around security, fraud prevention, and adding value. While consumers are becoming increasingly comfortable with and are starting to trust emerging payment methods, FIs must ensure that trust is well-placed.
New payment methods also come with bad actors seeking to exploit new and not-yet-known vulnerabilities. Perhaps the biggest point that FIs must pay attention to is finding areas where they can really add value to the consumer’s life. Changing payment behavior is an uphill battle, especially when consumers are well-practiced in paying with cards. Adding unique value is the only way to shift consumer behavior and to spur the adoption of new payment methods.