The global COVID-19 crisis is unlike anything in modern history a major disruptive force that has prompted an immediate response to safeguard lives. As this health crisis has continued to spread, companies around the world have worked to continue operations by establishing remote-working conditions for their employees to keep business moving. Banks and financial-services companies have had the added burden of protecting not only their employees, but also their customers while maintaining the stability of payment systems.
While it is expected that the crisis will have a profound economic disruption and short-term drop in activity for economies that have been locked down, the payments industry’s outlook has also reflected that uncertainty. However, having a stable infrastructure in the payment’s industry will be essential for supporting functional economies as the global economy reboots as we move to a “new normal.”
In this article, we will discuss what the payment industry can do now to adapt by making changes in their payment ecosystems in finding a new normal.
What Will Happen in the Short Term?
According to McKinsey & Company the economic impact of COVID-19 is expected to follow that of the 2008 financial crisis. Revenue growth in global payments is expected to turn negative as activity continues to decline. In the worst case scenario, it is possible that transaction volumes could drop by 12 percent. This could bring the following underlying realities throughout the various segments in the payments industry, including:
- Reduction in the number of cross-border consumer-to-business transactions related mainly by the disruption of travel and tourism, especially in highly vulnerable markets
- Reduction in the number of cross-border business-to-business transactions because of supply chain and container freight disruptions
- Reduction in volume of retail payments and merchant-services businesses where it is expected point-of-sale volumes may drop as much as 40 percent in the short term
- With the instability and volatility of the market, an increase in payments related to securities transactions
- Reduction in the number of payment transactions related to the gig economy and fintech wallets
- Increase in contactless payments because less of a health risk than POS payments
Rebooting the Global Economy / Supporting Your Customers
As individual countries emerge from their lock-downs, the payments industry needs to be ready. Economies will be up and running again as all attempt to limit the long-term financial impact of the COVID-19 crisis. The payments industry must be able to help businesses resume payment activities as they progress into full activity.
Payment operators will need to support their customers, and this requires making changes that will support the reshaped economy. Such support should focus on helping customers maintain liquidity and accelerating the restart of their businesses, and could include:
- Creating e-commerce platforms for small-merchant clients to allow them to restart in a commerce environment that is more remote
- Deploying merchant networks that simplify local and regional trade mechanisms
- Temporarily waiving transaction fees to provide relive to vulnerable businesses
Adjusting Your Portfolio to the New Normal
The new normal will require payment companies to offer new solutions to meet their customer needs, such as:
- Providing support for government and aid organizations in reaching small businesses and citizens to distribute government relief payments
- Assisting companies with establishing an online presence to assist in their restart
- Adding functionalities like identity and health to mobile wallets
- Adding features to ATM networks that would usually involve face-to-face contact, like opening bank accounts
- Simplifying the B2B supply chain to assist smaller suppliers to join larger network supply-chain platforms
Adapting Your Operating Models and Habits
As the economy reboots, it is likely that social distancing measures and risk awareness will be around for quite a while. Many companies will want to consider making long-term adjustments to their operating models. For example, not that many have learned to work effectively without physical interaction while working remotely, more digital solutions will be needed like document signing and notarization. The adoption of future-of-work models will require more use of digital tools.
Finding the Next Normal
It is apparent that once the COVID-19 crisis is over, there will be a new normal because there will be no going back to previous norms. As the economy redevelops, so needs the payments ecosystem. Here are some fundamental changes that the payment industry should expect moving forward as economies are relaunched:
- Cash and checks are considered no longer safe.
- All merchants and consumers will need to have access to new technologies and digital tools for digital payments
- Digital currencies will need to be stabilized as they have proved to not deliver as a universal payments solution
- Omnichannel payments solutions will be needed to support the growth of online commerce
- Contactless payments that are card and wallet-based will be encouraged as most payments are expected to become touchless
- More options will need to be included in digital-wallet solutions that are beyond payments, such as alerts that tell the user to wait to go shopping because the store is too crowded
- Fraud prevention is even more a priority as there will be more data for cybercriminals to try to get their hands on
- Bank-payments operating models will need to be transformed to readjust to the expected new normal, including cloud-based infrastructure, onshoring versus outsourcing, and payments-as-a-service business models
Getting the “Next Normal” Up and Running
It is time to look ahead to what will be needed to assist in the restart of the economy as we prepare for the new normal. In doing so, the payments industry can become more resilient, efficient and customer-focused moving forward. Or as Boston Consultancy Group phrased it in their Global Risk 2020 assessment: "It's time for banks to self-disrupt".
The described steps towards a next normal comes with the demand for coping with this broad variety of services (from data-center-based to the cloud) and for excelling the related security requirements.
The answer in business terms is to provide a better and all-embracing crypto architecture, without blowing up the overall cost-burden - in view of the challenging competitive situation.
An important step is to upgrade and consolidate to newer, more secure HSM and crypto infrastructures that are able to handle more banking services concurrently in a more flexible way all while increasing the overall security level in a compliant way.
We at Utimaco suggest to consider the following six technical features when upgrading the current infrastructure:
- Move to partitioned and / or cloud based HSMs
- Delegate banking applications partially to the cloud and manage crypto from a separate, secure location
- Turn the overall crypto architecture less complex and more straightforward and get rid of disturbing parallel structures
- Merge payment and general purpose HSMs
- Make the crypto architecture flexible and crypto-agile
Current legacy architecture does not need to be thrown overboard immediately, but can be phased out gradually. A good crypto infrastructure shall be able to handle
- The old legacy systems as well,
- The transition process in an agile way with limited effort.
The article “Integration, Automation and Open API in Banking Infrastructure to Accelerate Service Innovation - How Crypto paves the way” sheds light on the required steps of upgrading the crypto-architecture while keeping total cost of ownership down.
The article “7 Steps to Reduce Total Cost of Ownership Around HSMs to Gain Force in a disrupting finance market” (in publication) provides a closer look at the six technical features addressed above. And our series on TCO dives into each aspect separately, providing the technical information needed by CISOs and IT change managers in financial institutions, to conduct a successful upgrade towards a future-oriented, flexible and value generating service platform.
- Based on: How payments can adjust to the coronavirus pandemic—and help the world adapt (March 2020), by Philip Bruno, Reet Chaudhuri, Olivier Denecker, Tobias Lundberg, and Marc Niederkorn at McKinsey
- Global Risk 2020: It’s Time for Banks to Self-Disrupt (April 2020), by Gerold Grasshoff , Matteo Coppola , Thomas Pfuhler , Stefan Bochtler , Norbert Gittfried , Pascal Vogt, and Carsten Wiegand
- Read more about total cost of ownership and crypto security (2019 - today)