As the world continues through a global payments revolution, Australia has been at the forefront of embracing new technologies.
That puts Australian fintech in a strong position to assist in making digital solutions more accessible for consumers in the US, which is on the brink of an innovation explosion.
The US is a key player in the global financial system. Yet it appears to be lagging behind the global frontier when it comes to adopting modern payment solutions.
Cash and cheques make up a larger part of B2B payment volume in the US and Canada than anywhere else, according to Endava’s 2022 Global Payments Report. This is especially true for small businesses, which rely on these methods for over 30 per cent of supplier payments and also for larger enterprises, where it accounts for around a fifth of their payments.
On the consumer side, Americans use digital wallets and real-time payments less than the rest of the world, and this can be partly attributed to a lack of access.
While many countries have completed operational real-time payment systems that move funds between accounts instantly, it’s still in its infancy in the US and limits how much money can be sent and by whom. The Clearing House’s RTP Network, launched in 2017, is accessible to federally insured US depository institutions and the credit transfer limit is $1 million.
While the US Federal Reserve does have a Real Time Gross Settlement (RTGS) system, the Fedwire Funds Service carries less than 1 million transactions a day, is not available 24 hours, and is mainly used by financial institutions and large companies.
Its fees are higher than other payment methods, such as Automated Clearing House (ACH), creating a trade-off between cost and immediacy. Private sector alternatives are limited, and while some banks have deployed real-time solutions, these come with transaction limits and low adoption rates.
Expensive payments impact equality
Barriers to low-cost, convenient and timely payments in the US include legacy infrastructure, market fragmentation and lack of competition, and research has found that low-income households tend to bear the burden.
The US enjoys low banking concentration compared to other advanced economies, but this feature has created a fragmented and expensive payment system. According to Finder, transfers between major US banks incur fees ranging up to US$35 for outgoing domestic wires and up to US$50 for outgoing international wires.
High bank fees have contributed to a high proportion of American adults forgoing bank accounts. According to the Fed, 5 per cent of adults don’t have a bank account, compared to less than 1 per cent in Australia.
The US is ripe for growth
Rising interest amongst younger generations for modern payment products and services in the US will remain a clear area of opportunity for years to come.
The recent Global Repayments Report from FIS predicts that mobile wallets will grow by 9.1 per cent in the US before 2024, presenting the highest rate of growth globally.
In 2022, digital wallets will take the lead over credit cards in the US as the most common means of payment, equating to around one-third of transactions, marking the need for further development and investment.
FedNow is a game changer
It’s possible that 2023 will be the biggest year for fintech in the US yet. Instant payments are finally poised to take off, with the Fed planning to launch its new FedNow system by midyear.
FedNow is aimed at enabling financial institutions of every size and in every community across the U.S. to provide safe and efficient instant payment services in real-time, around the clock, every day of the year.
Through financial institutions participating in the FedNow Service, businesses and individuals will, at last, be able to send and receive instant payments conveniently, and recipients will have full access to funds immediately, giving them greater flexibility to manage their money and make time-sensitive payments.
It means that banks will have the potential to stay up to date with the latest fintech offerings, and smaller banks and credit unions will have a fighting chance in the payments space.
Also, the White House’s plans to encourage government agencies to use instant payments for their own transactions have the potential further to foster industry growth and collaboration in the fintech space.
Opportunity for Australian fintech
Australia has moved to the forefront of payments innovation in recent years with the construction of the world-leading New Payments Platform (NPP). Fintechs in Australia has driven innovation in areas such as online payments, point-of-sale acceptance technology, cross-border retail payments, and buy now, pay later services.
Australia also leads the US in digital wallet takeup, with more than 80 per cent of Australians saying they have used digital wallets in the past 12 months, compared to only 71 per cent in the US, according to a survey from Marqeta.
Australian fintech is well placed to take this expertise offshore. The sector has significantly matured in the past 12 months, with the majority of fintech now post-revenue, according to the latest EY FinTech Australia Census report.
The report found that 40 per cent of Australian fintech are already generating revenue from overseas, and 43 per cent earn almost half of their revenue from overseas sales.
The US lags behind Australia when it comes to debit card usage. Debit cards lead point-of-sale payments in Australia with a 41 per cent share. By comparison, the US card market is dominated by credit cards, with debit cards only making up 30 per cent of the point of sales volumes, according to the FIS Global Payments Report.
We see a significant opportunity to provide US mid-sized banks and fintech with the tools and services best to meet the changing expectations of a more digital world. We want to make it simpler and more affordable for people in the US to access card services and payment solutions, like digital wallets, that many take for granted, and expanding these offerings outside of the major banks is the first step in doing so.
Currently there are record levels of finance flowing into Australia’s fintech sector. With payments making up the biggest sub-sector, representing nearly a fifth of fintechs, investment is expected to continue in this space.
As the world continues riding the wave of this payments revolution, Australian fintech has the capacity to be among those players leading the charge and highlighting areas of opportunity and innovation for markets such as the US.
Change Financial recently added debit cards to the US offering under an exclusive five-year partnership with Mastercard. Visit Change Financial here.
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