Cash has always been the ultimate way of hiding your tracks but now the banking industry needs to start paying more attention to so-called ‘hidden payments’ that are not conducted using traditional channels, as these activities are growing at an increasing rate.
This is among the key findings of Capgemini and Royal Bank of Scotland’s (RBS) latest World Payments Report, which revealed that these transactions – defined as those not statistically reported under usual payment methods such as credit/debit cards, cheques, direct debits and money transfers – accounted for between 24.5 and 40.9 billion transactions last year.
Because by their very nature these activities are difficult to track, exact figures are hard to come by, but the report estimates that hidden payments could have made up as much as ten per cent of non-cash transactions in 2014 – and may reach as high as 20 per cent this year.
Why the move to hidden payments?
Capgemini and RBS identified several key factors that are helping the drive towards hidden payments. Leading the way is the demand from consumers for more convenient ways of making transactions, as well as gaps in existing payments options and a lack of access to traditional solutions – particularly in the developing world.
It also noted that banks have found it challenging to develop new propositions to meet these demands – partly because of their reliance on legacy systems and partly because they are more constrained by regulations. Non-bank payment providers are typically governed by consumer protection rules that are less stringent than banks’ financial regulations, so are often able to bring innovative offerings to market faster and more easily.
The most common solutions
The report highlighted several main categories of hidden payments that are being seen around the world. These include ‘closed loop’ cards and mobile apps – such as Starbucks’ mobile app – which are often used by retailers to encourage customer loyalty, but are increasingly being used for a variety of payments such as transport tickets and micropayments.
Non-bank digital wallets and mobile financial solutions are also growing in popularity, particularly in developing countries. For instance, Kenya had 13.9 million M-Pesa users as of March 2015, with mobile money volumes triple those of traditional non-cash payments in the country.
The final key driver of hidden payments is virtual currencies, with Bitcoin the most famous of these. With major companies such as Dell and Expedia now accepting Bitcoin payments, virtual currencies’ share of the non-cash market is set to grow as more merchants and consumers embrace the technology.
The industry’s response
However, these hidden payments are not without their risks. While the fact they are less regulated means it is easier for new, innovative ideas to take hold, it does raise concerns regarding data privacy and security. Meanwhile, some hidden payments will also present challenges to regulators as they can encourage tax evasion or money laundering.
“As customers demand faster and more convenient payments services, the hidden payments market is gaining momentum, as for some transactions it better fulfils requirements than traditional methods,” the World Payments Report stated.
Despite the challenges that traditional payment service providers face in those market, any future plans must take into account this trend.
“These providers can use hidden payments as an opportunity to align their operating model with customer demands and add new revenue sources to their portfolios,” RBS and Capgemini said.