Fueled by the COVID-19 pandemic, 2021 was a year of transformation for the payments industry, and digital payments in particular. The real time nature of payments has been a boon for businesses and individuals. This was strongly illustrated during COVID, which brought about the distribution of disaster payments in Australia for example, increases in contactless payment limits, and the sharp decline in the use of cash globally.
Image: Australian Government
Driven by consumer demand, trends in payments started to evolve dramatically. Now they're an enabling function, embedded and invisible, and providing an immersive, seamless, and frictionless customer experience.
In this blog we'll highlight trends in payments in 2022, and what's in store for the payments industry in the immediate future:
We'll examine the most innovative new technology trends changing the face of digital payments.
We'll take a look at permanent changes in customer behavior and the way consumer payments are heading in the future.
We'll discuss the emergence of next-gen payment services, and the increased focus on nimble payment solutions for B2B and SMB segments.
And we'll look at ways in which financial institutions need to adapt if they're to pave the way for tomorrow's payment landscape.
How the payment world is changing
The payment industry is undergoing a massive facelift, driven primarily by industry consolidation and the growing consumer demand for embedded payment experiences.
Consumers have demanded, and are now embracing next-generation, non-cash payments, including Buy Now Pay Later (BNPL), digital wallets, real time payments and mobile payments. Many card issuers now support the use of their cards in digital wallet applications provided by Apple, Samsung and Google, for example.
With their digital identity, including payment details now commonly stored on a mobile phone, consumers have more flexibility and choice in the way they shop.
Retailers across the world have seen the shift from in-store purchases to digital retail and digital payments over the last few years, and the volume of BNPL transactions will continue to rise.
More about BNPL
Customer payment preferences have shifted from credit to debit, which has altered shopping habits away from bulk credit card payments. This “a lower-cost financing option” is the most commonly cited reason for the enthusiastic adoption of BNPL. Previously, installment payments were a standalone payment plan offered in-store at the point of sale.
Today, zero-interest fees and flexible repayment plans are attracting new customers as an attractive payment option. This has led to more BNPL providers and BNPL services emerging, primarily on the strength of their next-generation platforms and well-suited credit underwriting model that are designed to serve customers of various credit levels.
Within the payments industry, providers have established a relationship with consumers, and
it's expected that they’ll delve deeper into financial services and broaden their services, offering loans, brokerage accounts or crypto. Providers like Affirm, Afterpay and Klarna have already introduced new products like debit and rewards programs.
This financing approach with it attractive terms and conditions, is also expected to win over businesses.
During the pandemic, the payment industry supported the shift to contactless payments by temporarily increasing the no-PIN limit on contactless card transactions to further reduce the need to touch payment terminals.
There's no denying that the payment instrument mix has moved to digital, and with cloud technology now a core part of every business's IT infrastructure, traditional payment providers are scrambling for competitive differentiation.
Image: Grandview Research
Introducing Payments 4.X: A new payment era
The impact of the pandemic propelled the payments industry into the Payment 4.X era, a concept introduced by Capgemini in their World Payments Report 2021, where experience is the defining feature.
The idea is that transactions become embedded, invisible and an enabling function in a collaborative environment to support and enhance consumer experience in an omni-channel world.
Time is running out for banks and traditional payments services as non-banks venture into newer territories to seize competitive advantage, and threaten banks' market share.
“Digitally enthusiastic consumers – vocal about convenient, lifestyle-embedded payments – helped spark Payments 4.X. So did escalating B2B2C requirements for instant confirmation, smooth reconciliations and seamless cross-border transactions,” Anirban Bose, Financial Services Strategic Business Unit CEO & Group Executive Board Member, Capgemini
Trends in payments
Below, we'll explore some of the key trends in the payment world affecting eCommerce and the global economy today.
Trend 1: Accelerated growth through next-gen payment methods
Traditional payments providers are well aware that the conventional payments instrument mix, such as cash, checks, direct debits and credit transfers are rapidly transforming and moving towards digital payments.
The traditional payment method adopted by consumers for the past decade who had little choice, was credit or debit cards, but this payment method is stagnating, and the use of cash is diminishing. Online purchases have meant that legacy systems are being replaced by new payment methods, and more advanced and convenient payment infrastructures. Consumers are calling the shots as to their preferred payment method.
The digital wallet is replacing the physical one, due to an accelerated customer adoption of online shopping, online payments, and digital transactions. The number of mobile wallets is predicted to reach 4.8 billion by 2025 (up from 2.8 billion in 2020), which accounts for almost 60% of the world's population. And with COVID fueling an increase in contactless credit and debit card payments, touch-free, fast and convenient ways to pay are now the norm.
Trend 2: The focus on Digital Identity Infrastructure
Consumers are demanding added security and protection from payment fraud and identity theft in this new digitally connected payment world, but throughout the payment industry, the payment authentication process is fragmented and inconsistent.
In the Payment 4.X era, financial institutions and industry players will be looking at overhauling their process of authenticating digital IDs to ensure friction-less experiences for customers.
Globally, governments are launching national identity initiatives, mandating the creation of solutions for digital IDs. For example, the Australian government along with New Zealand and Canada have already implemented, or in the process of putting these initiatives into effect.
Trend 3: The growth of Central Bank Digital Currencies (CBDCs)
While other 2022 trends are at play, Central Bank Digital Currency is emerging globally and is looking like opening a new chapter in the current payment landscape. Central banks are exploring digital currencies and digital assets as a potential solution to major issues like low financial inclusion, money laundering and unregulated cryptocurrencies.
According to a Bank of International Settlements (BIS) survey in 2021, as many as 86% of the world's central banks are now considering developing digital fiat currency in various use cases.
For example, The People's Bank of China debuted the digital yuan for the 2022 Winter Olympics. The Wall Street Journal posted a video during the Beijing Olympics Games showing one of its reporters participating in the Central Bank Digital Currencies pilot.
Trend 4: PaaS and data-based API business models continue to rise
With traditional revenue models becoming alarmingly less profitable, generating new revenue streams from financial and non-financial partnerships means that every bank and financial institution will need to build a strategy to leverage data-based APIs and open banking.
The Payment 4.X era calls for API maturity, and the monetization of data as top considerations. With many corporate clients looking to justify their bank relationships, banks are being forced to invest in new data-led services.
Less capital expenditure adds flexibility and the means to offer new functions, payment schemes and clearing access as well as the ability to launch new products faster.
For example, Klarna, a Swedish FinTech offering payment plans (popular with younger Consumers), social shopping and finance, recently partnered with Simon, the largest shopping center operator in the U.S. , giving Simon shoppers access to Klarna's unique in-store payment solutions.
Trend 5: Consolidation is driving payment services and financial institutions to expand
Over the past 10 years, the payment industry has undergone massive waves of mergers Mergers and Acquisitions (M & As).
Payment firms are realizing the need for consolidation to increase their scale of operations, expand portfolios and extend geographical reach, and save costs by merging with a technology player of large FI.
For example, Ireland-based financial service company Stripe acquired Bouncer, a fraud-fighting authentication firm in May 2021, to enhance Stripe's fraud prevention tool.
As financial services continue to evolve, finding new ways to satisfy consumer demand, and big tech companies are playing an increasing role in changing the face of e Commerce.
Some of the differences in the average merchant fees across schemes could also be explained by compositional differences in transaction types. For example, Visa and Mastercard's foreign-issued debit or credit cards have significantly higher interchange fees than domestic transactions.
The challenges for Business to Business digital payments
The cost and complexity that comes with overhauling the infrastructure used to process transactions are partly to blame for slower innovation in the B2B payments sector. These types of transactions are typically high in volume but low in value.
However, with the significant improvements in digital adoption across the payment ecosystem, global trade is increasing, with cross border business transactions expected to top USD 35 trillion in 2022, payment automation is a priority.
Despite this, in some regions such as the United States, paper and offline-based transaction methods are still the norm for B2B transactions.
The digitization of payments isn't just contained to retail, though, with real time mobile P2P transactions, digital remittances, and digital business payments continuing to blossom as change spreads through the ecosystem.
The importance of business data in the payments industry
Payments data is important because it identifies trends and patterns and creates actionable insights which can shape future business decisions. It allows businesses to operate in real time and can uncover actionable insights that can increase revenue and improve ROI.
A major obstacle for FIs and other banks has always been the difficulty of accessing the right data in real time, due to disparity, lack of transparency, and speed.
The massive adoption of ISO 20022 gives organizations the ability to access and analyze the date, not only in a message, but the ability to look across all the messages in a single data set and create analytical value from it.
Real-time payment analytics are vital to measure, view growth and make decisions all the way through the payment chain, and across each different platform. This is even more important now with the impending global ISO 20022 migration.
Third-party monitoring solutions
IR Transact is a third-party solution that's non-intrusive, and integrates seamlessly into the existing enterprise environment, bringing real-time visibility to the entire payment ecosystem. It collects data from all silos across the payments system, filters, correlates and analyzes this information and brings it into a single application.
Keeping on top of emerging technologies, regulatory changes, cyber threats, and the introduction of new international payment standards is challenging. With ISO 20022 migration imminent, turning information into intelligence will assure the safe, efficient operation of payments systems worldwide.