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Payments Trends Transforming the Industry in 2023 and beyond

IR Team

Written by IR Team

info@ir.com

The COVID-19 pandemic radically reshaped the payments landscape forever, driving digital acceleration and changing the financial services industry. Emerging payment trends are the drivers for the way both consumers and retailers interact and navigate their financial lives.

The real time nature of payments has been a boon for businesses and individuals. COVID brought about the distribution of disaster payments in Australia for example, worldwide increases in contactless payment limits, and the sharp decline in the use of cash globally.

As well as the pandemic, it's consumer demand that continues to drive digital payments trends. Digital wallets are ubiquitous today, and not just with younger generation consumers. Apple Pay, Google Pay, Alipay, PayPal and many other electronic wallet applications have become the top consumer preferences to enable users to store money, make mobile payments, transfer money, and pay for goods and services online.

Now, digital payments are an enabling function, embedded and invisible, and providing an immersive, seamless, and frictionless customer experience, allowing consumers to complete transactions effortlessly.

In this blog we'll highlight the payment trends transforming the industry in 2023 and what's in store for the payments industry in the immediate future, including: 

  • The most innovative new technology trends changing the face of digital payments.

  • The permanent changes in customer behavior and the way consumer payments are heading in the future.

  • The emergence of next-gen payment services, and the increased focus on nimble payment apps and solutions for B2B and SMB segments.

  • The 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

For quite a few years now, the financial technology (fintech) industry has been a major disrupter in the traditional payment industry, causing traditional banking institutions to rethink their banking infrastructure and payment technology.

With the rise of e-commerce and mobile payment apps, customers expect a consistent digital payments experience across all their devices and platforms. This includes frictionless payment methods, real time payments, digital wallets, open banking, mobile banking and cryptocurrencies.

The rise of Alternative Payments

The demand for Alternative Payment Methods (APMs) is growing, and payment methods such as open banking have become commonplace.

For merchants who operate globally, or need to cater to regional markets, this can increase complexity, as it invariably means relying on multiple Payment Service Providers (PSPs). As a result, merchants are increasingly turning to solutions that unify multiple PSPs and APMs via a single Application Programming Interface (API). This offers additional flexibility to merchants, allowing them to integrate new digital payment methods as demand emerges and consumer preferences change.

Payment as a Service

Consumers

Consumers are now embracing next-generation, non-cash payments, including Buy Now Pay Later (BNPL), the digital wallet, real time payments and mobile electronic payments. An increasing number of card issuers now support the use of their in-app payments through digital wallet options provided by Apple, Samsung, Amazon and Google, and others.

With their digital identity and customer data, including payment details now commonly stored on a mobile device, consumers have convenience, flexibility and choices in their payment system, and in the way they shop and pay for goods and services.

Retailers

Payment trends over the last few years are showing that retailers across the world are experiencing a significant shift from in-store purchases to digital retail and digital payments, and the volume of Buy Now Pay Later continuing to rise.

2023 BNPL Statistics

More about BNPL

Customer payment preferences have shifted from credit to debit, which has altered shopping habits away from bulk credit card payments. This “ 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.

65% of merchants plan to add buy now, pay later as a payment method in 2022

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.

Payments industry

Within the payments industry, providers have been focusing on building and improving customer relationships, 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 brings with it attractive terms and conditions, that is expected to win over businesses.

Contactless Payments

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. This boosted the adoption of digital wallets and in app payments, making the payment process even more fast and flexible.

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.

US contactless payment market size

Image: Grandview Research

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.

Omnichannel retailing

Image: Plytix

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 who had little choice for the past decade, was credit or debit cards, but this payment method is stagnating, and the use of cash is diminishing in favor of mobile and digital wallets.

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.

Growth of next-gen payment methods

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. Blockchain Technology

A fast emerging payment trend is Blockchain technology. Common cryptocurrencies, including Bitcoin and Ethereum, are leading the way with blockchain-based payments, with many merchants now accepting them as a form of payment.

The downside with cryptocurrencies at this relatively early stage is that volatility and regulatory uncertainty have limited their acceptance as a mainstream payment method.

Traditional and new payments mix

Trend 3: 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 4. Real-time payments

Real-time payments (RTP) is one of the fastest-growing sectors in the global payments landscape today. Since 2021, its market size value has increased by approximately $3 billion with the upward trend expected to continue.

To facilitate the growth of RTP, there has been an increase in cloud-hosted Payments-as-a-Sevice (PaaS) solutions, and it's predicted that by 2025, 8 out of 10 financial institutions will use outsourced cloud and platform infrastructure.

The agility, flexibility, efficiency, lower upfront costs and scalability of PaaS cloud solutions are providing banks with the springboard they need to respond to the demand for real-time and cross border payments faster in 2023 and beyond.

Trend 5. Biometric authentication

According to a study by KBV Research, the global contactless biometrics technology market size will reach $18.6 billion by 2026. This represents 19.1% compound annual growth during the forecast period.

Contactless Biometrics Technology Market Size

Biometrics use an individual's face, fingerprint, iris or voice markers to provide a viable alternative to authenticating payments at a point of sale (POS), instead of validating payments with a PIN or signature.

Digital ID infrastructure

Trend 6: The growth of Central Bank Digital Currencies (CBDCs)

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.

CBDCs

Trend 7: 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 more streamlined APIs and the monetization of data as top considerations, as banks are being forced to invest in new data-led services. Less capital expenditure increases flexibility and the ability to offer new functions, payment schemes and clearing access, and 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.

PaaS and data-based API business models

Trend 8: 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, extend geographical reach, and save costs.

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.

Consolidation of payment services

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.

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.

Business payment changes amidst COVID-19

Image: Stampli

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.

Importance of business data

Image: McKinsey

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.

“The information about a payment is as important as the payment itself,” Gareth Lodge, Celent

Payments industry changes

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.

Watch our real time payments webinar for more information

Real Time Payments: A Global Perspective

 

Topics: Payments Payment processing Real-time monitoring eBooks, Guides & Reports Transact Transaction analytics Real time

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