The way people pay and buy things is being transformed by digital technologies. Nowadays, cryptocurrencies, mobile wallets and embedded finance are changing how we make payments dramatically. As a result, the traditional payment systems and financial institutions that have led the market for years are threatened with extinction.
Innovation is happening very quickly for new digital businesses, but their old systems are not able to keep up. More and more, the payments needs of new companies are not being met by current providers. Traditional payments face the danger of being replaced if modernization is not done quickly in the digital economy.
The Old Guard of Payments Can’t Keep Pace
Established payment systems like credit/debit cards, bank transfers, and checks trace their origins back 50+ years. They were designed in an analog era, focused solely on basic payment transfer between two parties.
But the needs of 21st century digital commerce bear little resemblance to the 20th century. As software continues eating the world, payments have become integrated into sophisticated business models. Terms like mobile apps, global e-commerce, and embedded finance would have been foreign concepts to the creators of legacy payments.
Online gaming and wagering are the areas where you can see this transformation, as a betting payment gateway needs to offer speed, follow regulations, prevent fraud and offer a smooth user experience in real time. Because of this, industries need payment solutions that can address the many challenges of modern digital systems—something older systems were not made for.
The result is a widening capabilities gap between digital businesses and analog payment systems:
Speed. Real-time digital commerce needs real-time payments. But 48 hour bank transfers or 30 day check settlements are still common. This causes cash flow issues for digital businesses who sell products/services instantly over apps and web, but have to wait days or weeks to receive actual money.
Global Reach. Cross-border e-commerce requires payment systems with global interoperability. But most traditional systems were built for domestic usage, with little connectivity between countries. This leaves digital merchants struggling to pay and receive internationally.
Data Integration. Smart business software relies on payment systems that provide detailed metadata on transactions. Legacy payments were made for simple value transfers, so they lack crucial contextual data that digital businesses depend on.
Developer Experience. Modern platforms are now created through code, but traditional payments severely lack developer-friendly APIs. This makes integrating payments into digital environments like mobile/web apps needlessly complex at best, and impossible at worst.
The Specialized Needs of Highly-Regulated Digital Verticals
Apart from general e-commerce, other rapidly growing digital fields with distinct payment requirements are not covered by existing systems. Online gambling, trading and digital media companies need a payments system that is both reliable, open and up-to-date with tough regulations.
Online casinos and sports betting sites are becoming more popular among younger people. According to research, over half of millennials have wagered money online. To allow for smooth and secure gambling on millions of wagers, these websites depend on instant payment processing and permanent results. If this were the case, people might use the delays in processing payments to carry out fraud.
Gambling and pornography are usually cut off from major payment services such as Stripe. That’s why these digital merchants depend on payments partners who can adapt to their special business models.
In addition, cryptocurrency exchanges are emerging digital platforms that require users to easily switch between fiat and cryptocurrencies. With crypto being used more widely, hybrid payment solutions are needed by exchanges to link traditional finance with the world of decentralized finance.
Regulatory Compliance Drives Need For Customized Payments
Each of these digital verticals must also comply with evolving regulations that require fine-tuned payment capabilities.
Take, for example, most countries have strict anti-money laundering (AML) and know your customer (KYC) rules for any payments related to gambling. This requires the integration with identity verification services into the payment system infrastructure.
More jurisdictions now insist that gambling sites meet responsible gaming obligations, including providing customer spending limits and self-exclusion options. Real-time enforcement is payments’ core and can’t be an afterthought.
In addition, cryptocurrency businesses must navigate ever changing and complex regulations across various jurisdictions in regard to licensing, taxation, consumer protection and so forth. Compliance must be adaptable and adapt to payments.
Finally, increased regulations around data privacy and security make transparency into payment systems even more important for these digital merchants. If legacy providers can’t provide visibility or assurance at the infrastructure level, compliance risk grows exponentially.
Legacy Providers Too Inflexible With Strict Verticals
Unfortunately, traditional payment systems lack the agility or customization needed for these highly regulated digital sectors. Built originally for analog storefronts and not real-time software, retrofitting legacy infrastructure is extremely difficult.
The result is poorly integrated payments that drive up ops costs for merchants. Or worse yet, lost business from outright refusal to work with niche verticals at all.
Here are 4 common failure points of traditional payments when working with strictly-regulated digital businesses:
Real-Time Settlement Finality
Gambling and other merchant verticals need money transfers to be finished in seconds to protect against fraud. Still, using card networks means it takes days to settle and hold money, which makes fraud more likely.
Dedicated Compliance Support
Maintaining licensing and meeting evolving regulatory reporting requirements is extremely complex for regulated digital merchants. But legacy payments treat compliance as an afterthought instead of providing specialized legal/regulatory support.
Inflexible Fraud Management
High-risk verticals require adaptive fraud systems that take signals like transaction history or velocity into account. Rigid legacy providers rely on blanket blocks instead of custom rules. This leads to faulty fraud flags and lost revenue.
Poor Identity Verification Integration
Because of strict ID and customer regulations, payment systems must use high-quality ID verification and biometrics. Still, old systems weren’t designed to move data in real time between services.
In these examples, you can see that the present payment infrastructure does not have the adaptability, speed, or compliance support required by gambling sites. Unless legacy systems upgrade to meet unique needs, they will continue bleeding market share with regulated merchants to specialized next-gen payments companies willing to customize.
Traditional Players Are Waking Up – But Is It Too Little, Too Late?
Thankfully, there are signs that leaders of establishment payment systems recognize the existential threats bearing down on them.
However, most of these changes are still playing catch-up. And while incumbents inch towards modernization at a snail’s pace, hungry fintech innovators are rapidly eating their lunch.
For example, Stripe processes hundreds of billions in payment volume by catering specifically to online businesses’ needs. Blockchain-based systems like Circle enable instant global payouts using USD-backed digital coins. Checkout.com provides a developer-first payments API to let merchants easily build customized checkout experiences.
These next-gen payments companies will continue aggressively expanding market share with digital businesses, while legacy players attempt to stop the bleeding.
The Window For Meaningful Modernization Is Closing
The question of the day for traditional payment systems: can they modernize quickly enough to reclaim the next generation of digital companies?
Still, power with incumbents – large merchant networks, regulatory expertise, trusted brands. However, these benefits are fast disappearing. As software revolutionizes more industries, each year brings more digital natives who adopt cutting-edge payment alternatives, and it becomes more acute how legacy providers fall short.
If we reach an inflection point, where legacy payment usage among digital businesses is no longer worth modernizing, it may be soon. Why invest in meaningful resources into outdated systems when the other digital merchants that are still using them can easily move to something better?
The time for legacy payments to upgrade themselves to become 21st century contenders is quickly running out. They have to take real action today, not promise empty things for tomorrow.
