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Digital payments continue to climb, fueled by demand for digital solutions and FinTech

Digital payment transactions are continuing to grow, with a new report indicating volumes to reach 10% growth for the first time.

According to the World Payment Report 2016, 426.3 billion transactions took place in 2015, up from the record-setting 8.9% growth in 2014 (387.3 billion transactions).

According to the report, the growth in digital payment transactions is largely being driven by strong economic growth in key developing countries, improved security measures such as EMV and biometrics, and government initiatives designed to encourage electronic payments in developing markets, as the cost of cash continues to rise.

However, this growth comes as banks face increasing demand for seamless, secure digital transaction services, particularly from corporate customers, spurring transaction banks to accelerate investment and collaboration amongst banks and/or with FinTechs (financial technology firms) to reduce time to market in delivering differentiating digital transaction experiences.

The report revealed developing markets grew at the fastest rate but mature markets still account for majority share.

Growth in digital payments occurred across all regions, with developing markets experiencing the highest rates of 16.7% and mature markets growing at 6%, although mature markets still account for 70.9% of total global volumes, the report shows.

For the first time, China surpassed the U.K. and South Korea in digital transaction volumes, taking fourth position among the top ten markets globally, behind the U.S., Eurozone and Brazil.

According to the report, this continued growth in digital payments globally presents opportunities for banks to provide such services to customers while corporates also benefit from a more efficient financial supply chain.

Cards remain the fastest growing digital payments instrument since 2010, while check usage continues to decline. Immediate payments have the potential to drive growth in digital transactions as an alternative to cash and checks, but efforts are needed to educate stakeholders, provide more value-added services, and upgrade infrastructure at merchants and corporates.

The report says banks need to ‘think digital’ in order to retain and capture transaction banking market share.

The core theme for WPR 2016 is the challenges and opportunities that exist in transaction banking.

“While treasurers’ fundamental expectations have not changed over recent years - control, visibility on cash, risk management - corporates increasingly expect banks to digitalise support processes such as account management, data analytics, compliance tracking, and fraud detection and prevention,” explains Jean-Francois Denis, deputy global head of Cash Management, BNP Paribas.

“This calls for banks to accelerate their shift towards digitisation and foster a more collaborative approach.”

Adding to this context is the fact that transaction banking revenue is under pressure from a multitude of internal and external challenges such as lower fee income, lower interest income, pressure on foreign exchange service fees and the emergence of FinTechs. Denis says.

“FinTechs are known for providing enhanced customer experiences through advanced technology to shape and drive customer expectations.”

A number of banks already have started to adopt a ‘digital-first’ mindset. According to the WPR, 79% of bank executives now view FinTechs as partners. Banks could have additional opportunities to further drive innovation in transaction banking by opening up their internal systems through open application programming interfaces (APIs) and leveraging the requirements of the Payment Services Directive II (PSD II).

According to the report, regulatory environments continue to put pressure on banks.

Multiple existing and new regulatory initiatives have added complexity for some banks when complying with the regulatory landscape, it says.

The report finds two key themes emerging in regulatory compliance around payments: the increased use of technology and a facilitation approach being adopted by some regulators to enable businesses to accelerate their time to innovate within a ‘safe’ environment, such as the U.K. Financial Conduct Authority’s Project Innovate, which introduced the concept of a Regulatory Sandbox and the Singularity Innovation Hub in the Netherlands.