From IoT to peer-to-peer offerings, the PPRO Group - specialists in cross-border electronic payments - have predicted key online payment trends for the year ahead. With digitisation in the world of payments progressing by leaps and bounds, the following seven developments are expected to make waves in 2018.

1. Internet of Payments

According to Gartner, the number of devices connected to the Internet of Things (IoT) is set to increase from 6.4 billion in 2016 to 20.8 billion in 2020. Consumers are increasingly expecting their IoT devices to enable more than just carrying out tasks automatically; they also expect them to facilitate payments. For example, consumers with connected fridges can expect to see depleated items restocked and automatically paid for. Visa is also working with Honda to develop technology that can detect when a car’s petrol is low and enables users to pay for a refill using an app that is connected to the in-car display.

2. Context-Based Payments

Anyone heading to the checkout, whether with a real or virtual shopping basket, often takes a moment to decide whether their purchase is really worth it. Integrating payment into the context of the shopping experience and transaction can help remove this barrier to sale. It renders the POS almost invisible, while the payment process runs automatically in the background of a shopping app being used.

Wireless payments – a concept already being implemented more frequently online – will also be used in brick and mortar stores. Customers will, in the future, no longer need to reach for their cash or a credit card; instead, they can pay wirelessly in passing – whether from their smartphone via Bluetooth, using the RFID chip in their debit card, or automatically by facial or voice recognition. This will make the transaction seamless, and leave little time for consumers to rethink their purchase.

3. Peer-to-Peer Payments

In 2018 payment processes will be increasingly integrated into peer-to-peer (P2P) systems. In India, for example, WhatsApp users can already use P2P payments to send money to friends during online chats. Apple is also implementing this feature with Apple Pay Cash. The new voice input technologies, such as Alexa, Siri and Cortana, mean that P2P payments and banking transactions can also be carried out using voice commands.

4. Real-Time Payments

The push pay model makes real-time payments possible. Thanks to the SEPA Instant Credit Transfer (SCT Inst) scheme, the requisite European infrastructure has been in place since 21^st November 2017. In Germany, it is already supported by the UniCredit Bank, the Deutsche Kredit Bank, and many savings banks. But it will probably be some time before the majority of banks are using the new system – perhaps not until participation becomes mandatory.

In 2018, however, additional German participants are expected to join the scheme as market pressure increases. It will be interesting to see the extent to which SCT Inst will open up new payment methods and how much retailers, in particular, will take advantage of the speed and reliability of real-time transfers to convert their processes to genuine real-time transactions.

5. Partnership between Banks and Fintechs

The technical specifications (Regulatory Technical Standards, RTS) defined by the European Commission for the new Payment Service Directive, PSD2, represent a major compromise between the interests of the established banking industry and the European FinTechs.

From the FinTech point of view, it would have been better to offer them the same as banks, and a free choice of using APIs or access via online banking. This would have resulted in good APIs being used while poor ones were ignored, creating a kind of self-regulation. At least, however, the new version is less of a threat to the European FinTech sector than the original version issued by the EBA at the end of February 2017. This is expected to result in a solid foundation which will foster increased competition and security in payment processes, which will provide both retailers and consumers with more choice and information monitoring.

6. Decentralisation through Blockchain Technologies

The technological basis for Bitcoin and other cryptocurrencies will facilitate the creation of more innovative financial solutions in 2018. Institutions will use blockchain technology to establish direct connections, thus eliminating the need for intermediary or correspondence banks.

Nasdaq has already created a platform which allows private companies to issue and trade shares via blockchain. Here, the complete trading process – from execution to clearing to settlement – takes place almost in real-time, while the technology allows traceability. Blockchain can also be used by regulators as a completely transparent and accessible recording system, thus making auditing and financial reporting considerably more efficient. The number of uses for blockchain is constantly increasing and, although the technology has not yet actually achieved breakthrough status, like many radical technological shifts, it needs time to establish itself.

7. Commercialisation of MNO Wallets

More than two billion people globally currently do not have access to financial services. In many countries with low financial inclusion, peer-to peer-payments through mobile wallets or mobile network operator wallets (MNO wallets) are the norm. With growing popularity of e-commerce in these countries comes the commercialisation of such wallets for B2C payment methods. There is a clear shift from P2P payments to B2C payments seen in many Asian, African and Latin American countries.

(Source: PPRO Group)

Traditional banks are lagging behind when it comes to technology and we are increasingly seeing non-financial services companies, like Facebook and Orange moving in into the territory of traditional banks. Below Daniel Kjellén, Co-Founder and CEO of Swedish fintech unicorn Tink, looks at how Facebook is currently adding P2P payments to their services.

You would have to have your head in the sand not to notice that huge change is afoot across the banking and personal finance sectors. Earlier this month, Facebook announced that it was making its first foray into finance in the UK, with the launch of a new service which will allow users to transfer cash with just a message.

Facebook is not the only tech giant moving in on the territory of traditional banks, with Apple also set to launch its own virtual cash payments system and telecoms behemoth Orange recently announcing the launch of its online banking platform. This is just the tip of the iceberg. Fintech firms like Mint, Moneybox and Tink are taking this concept beyond payments, creating a sophisticated consumer led money management ecosystem.

So why is this happening? The launch of Facebook’s P2P payments service is evidence of the wave of technological and legislative driven disruption sweeping toward the retail banking market that change the shape of the sector beyond recognition. Consumers in 2017 are platform agnostic and don’t care whether they manage their money through their bank or their phone company or social media account.

Across the world, we are witnessing a move to the model of ‘open banking’ which will blow open the retail banking sector and create competition in the form of tech firms, who are already making a play for the territory traditionally held by banks. This hasn’t happened in a vacuum, it is just one symptom of the enormous transformation the industry is undergoing.

The fintech invasion

The current wave of tech companies offering in-app personal finance capabilities is just the beginning. The success of fintechs such as Monzo and Transferwise has demonstrated beyond doubt that today’s consumers are looking beyond their bank to manage their finances.

Until recently, banks have enjoyed a monopoly over their customers’ data and have operated in a market which by design, discourages competition and transparency. The result has been a mismatch between people and products, with consumers having to settle for high cost, low quality financial services. It’s not surprising that nimble tech companies are moving in on the space previously occupied by the banks. So long as their investments in fintech yield results, these ambitious and visionary companies will continue to pioneer new solutions that transform our relationship with money.

Banks who don’t innovate and create customer led products, will risk losing their customers who, through tech solutions will automatically be filtered towards a smorgoesboard of banking products which suit their needs. Third party platforms will become the main interface for money management, regardless of who the consumer actually banks with.

A nudge in the right direction

Facebook’s mobile payments feature will be supported by M Suggestions, a virtual assistant which monitors Messenger chats and nudges consumers to use the payments feature whenever the subject of sending money comes up in conversation, aiming for a seamless integration between social interaction and finance. The smart technology which underpins Facebook’s virtual assistant is a glimpse of the future of personal money management.

Today’s apps are nudging consumers in their day-to-day choices, encouraging them to save a little every month, offering tailored advice based on their economic habits, pointing them towards better deals and products, helping them to prepare for life’s big financial commitments - all with the aim of improving users’ financial happiness.

Money on autopilot

Facebook’s payments service aims to remove friction from the transaction - friction in this case being the need to leave Messenger. We are witnessing increasing numbers of tech companies offering these in app capabilities, the ultimate aim of which is to allow users to do everything in one place.

PSD2, which comes into force in January, will open the floodgates for third parties to build financial services apps which aggregate, enabling consumers to do everything in-app from paying their bills to comparing how much they are paying for access to financial products like credit and mortgages.

Technology is ushering in a new era where money management is frictionless and simple. Many people today have a difficult or distant relationship with their finances. There is often a mismatch between people’s needs and the product they are offered by their bank. This means money management can often feel like a chore rather than a choice.

In-app personal finance services such as those offered by Facebook, Tink and Apple, will offer consumers the ability to effortlessly manage their personal finances while going about their daily business. People’s relationship with their money will become a lifestyle choice, with financial decisions being akin to the choices they make about their health or their hobbies. Eventually, money will be on autopilot.

A bank by any other name

Today it is rare to find an individual who is loyal to their bank. With the ties between consumers and their bank becoming increasingly weak, smartphones will become the interface between people and their money. The entity sitting behind this engagement will become little more than an afterthought.

Tech companies who have built a strong consumer facing brand - underpinned by best in class technology - are waking up to the opportunity and are planting their roots in the fertile ground left wide open by the traditional banks. As the line between banks, fintech, social media and telecoms becomes blurred, the banking market as we know it will soon be unrecognisable. The banks who will survive and thrive are those who embrace the disruption and invest in the power to innovate through technology.

Here Finance Monthly benefits from an exclusive opinion piece authored by Chirag Shah, CEO of Nucleus Commercial Finance, who gives us his thoughts on the P2P market, financing and banks.

The P2P market is attractive to consumers and investors because its mentality and practices are distinct from those of conventional retail banks. However, the desire to present an alternative should never become a wilful disregard for standards.

That banks are too strict with borrowers ought to be beyond dispute. Pick a small business owner at random, and chances are, they’ll have a story about being turned down for loans on spurious or non-existent grounds. We’re now at the point where banks are being compelled by law to refer rejected applicants to alternative financiers.

But if there is danger in stringency, there is also danger in extreme leniency. When P2P lenders start emphasising flexibility at the expense of due diligence, they are flirting with trouble – and if they don’t impose the proper constraints on themselves, their regulators certainly will.

Checks and balances

Worryingly, there is some evidence that lenders are failing to properly check their borrowers. Writing in 2013, the FT’s Patrick Jenkins wrote that peer-to-peer lending was ‘inherently unsafe’, and intimated that the industry’s low default rates were illusory; they “look flattering because they only go back a few years.” I don’t agree with his first conclusion, but his second is becoming tough to refute.

RateSetter, for example, reported a default rate of 2.81% on loans originating in 2014: a number that’s both above expectations (2.07%) and potentially capable of eliminating the company’s provision funds. Late last year, they parted company with the head of Professional Business Finance and disbanded the team. They’re not an anomaly, either – LendingClub was recently forced to tighten its requirements for funding after several borrower defaults.

It’s worth keeping Jenkins’ point firmly in mind here: the industry is older than it was in 2013, but it’s still very young. These default rates may get worse as more time goes by and we get a fuller picture of the sector’s health. There’s a reason that P2P organisations the world over tend to advertise the amount they’ve lent openly – and keep all data about the amount they’ve recovered to themselves. How many borrowers have missed a payment on the loans? Their due diligence processes make it borderline impossible to verify the integrity of their loans.

For example, Prosper – one of the biggest US P2P lenders – checked income and employment status for only 59% of loans between 2009 and 2015. When you consider that a sixth of those loans it did investigate got cancelled, this approach seems negligent at best. Anecdotal stories of businesses getting finance from multiple P2P lenders only complicate the situation further. Shouldn’t one of these providers consider this practice a red flag?

The future of P2P finance

Two possible conclusions emerge. The first and most uncharitable is that P2P lenders, in their desperation to supply large volumes of finance, simply don’t care about trifling concerns such as due diligence. The second is that – without the firm hand of the law to guide them – their internal processes simply aren’t set up to perform the proper checks and detect bad borrowers.

The latter scenario is far more likely, but rule makers won’t appreciate the distinction. Bailey, the head of the Financial Conduct Authority (FCA) – which has probed the industry twice in two years – has stated his belief that P2P might lead to “the next big regulatory or financial services scandal.”

Not knowing the difference between flexible lending and irresponsible lending has already been calamitous for alternative financiers such as Wonga: FCA-imposed affordability checks have left the company reporting record losses.

P2P shouldn’t expect mercy. If the sector is seen routinely lending to high-risk businesses, if it’s perceived to be faltering – if there’s the faintest whiff of poor practice – heavy regulation will follow. And should the industry become heavily regulated, it’ll become much harder for P2P companies to provide the flexibility that’s supposed to be their chief selling point.

Reforming from within

In the fallout from the LendingClub fiasco, some P2P lenders have warmed to the prospect of further regulation. I wouldn’t necessarily go that far, but the industry could certainly benefit from some stricter policing.

And better it comes from within than outside. Bodies like the FCA exist to find and close loopholes. If they sense that even one lender – and, as Wonga demonstrated, it only takes one – is taking advantage of the rules, they’ll simply change the rules. There’s a perception in some quarters that P2P is getting away with something. It’s wrong, but certain lenders don’t help the well-meaning majority.

If you’re one of them, the best thing you can do is perform the proper checks. This doesn’t mean you can’t be flexible. It doesn’t mean you need to reject applicants out of hand. It certainly doesn’t mean you need to use any kind of lengthy checklist. It simply means you shouldn’t lend money to businesses that might not be able to repay you.

Failing to undertake basic due diligence isn’t ‘disruptive’, but reckless. Communicate with other providers. Collaborate on best practices. Help them improve when they fall short, and commend their example when they succeed. The industry’s survival depends on it.