In this increasingly digitalized world, it is a given that the payment ecosystem is moving through a revolution that will radically transform it. But there are still some questions that arise when thinking specifically about how it will be transformed, and how people will pay and make transactions in the future.
As it is more and more evident, the transition to a cashless world is a path that is already underway. But underneath this shift, there are more profound changes that need to be perceived as well: it is the whole infrastructure of payments that is being reshaped.
On one side, it’s the front- and back-end parts of the ecosystem that are changing, giving space to services such as instant payments, plastic cards and digital wallets. On the other hand, the payment mix is also a symptom of this structural change with the emergence of “buy now, pay later” offerings, cryptocurrencies and central bank digital currencies.
Today, companies of all types, issuers, payment processors and merchant acquirers are investing in transforming their own payments systems, or in launching their own financial services. This is how the ecosystem is broadening: we have not only the traditional participants such as banks operating in this market, now the institutions that are fostering innovation and that are pushing this industry forward are new fintech providers and non-traditional players. This shift is also playing a huge role in the development of digital economies, though it still needs to guarantee that the payments ecosystem functions as a stable backbone for economies.
Upcoming trends in 2022
There are some trends and technologies in particular that are leading the way for this transformation. Mobile payments, the eWallet and loyalty apps is one of these trends. Its emergence is due in large part to the exponential adoption of smartphones, as mobile banking puts control in the consumer’s hands. Digital wallets or eWallets allow consumers to load and store payment methods and access funding sources on their mobile devices. Real time payments are also enabled by these technologies, having merchants adopting them because of its efficiency in sending and receiving money in a matter of seconds. Smartphones are not the only technology supporting this trend, it’s also the P2P apps, digital currencies, real-time settlement systems, social pay and biometrics.
Cross-border transactions are also evolving as e-Commerce provides the means to its effectiveness. According to a study published by Accenture, the total cross-border payment flow is growing globally at around 5% (CAGR) a year, and it is expected to reach US$156 trillion by 2022. Consumers expect nowadays to have access to easy and simple payment solutions as a standard, and cross-border commerce is no exception to this. This trend is especially beneficial to small businesses because international transactions offer them opportunities for enormous growth. In the future, and because they are becoming more and more accessible, cross-border transactions will become smaller in value but much higher in volume.
The use of blockchain technology is also accelerating these changes. Its distributed and real-time verification of transactions creates secure environments for the systems that enable them. It is not only employed for the prevention of fraud and for regulatory issues, but it also accelerates asset transfers, payments and even investments. This is the reason why blockchain is being slowly adopted by financial institutions, and there are even blockchain-based startups that are emerging.
Another technology that is paving its way in the payments industry is Artificial Intelligence and Deep Learning. The democratization of data and the neural networks makes AI critical for card issuers and payment providers that need to monitor fraud, to increase approval rates and to reduce the number of declined transactions. Open-source technologies makes it easier for companies to apply deep learning, and in combination with other tools such as personalization, the possibilities are expanding: the offer of targeted products at attractive prices, deep data monetization for advertisers, on-demand and real-time analytics for merchants, and much more.
The increased use of Internet of Things is also seriously undermining the use of physical cards and account numbers. The increase in connectivity, in device penetration and embedded payments places the payment cards industry in a vulnerable position. The biometrics-based payments, digital IDs, and the tokenization can make the physical cards seem irrelevant when so much information can be shared between devices. In combination with blockchain technologies it can even create decentralized credit-card processing platforms.
And in relation to this, biometrics is going to be central and is already central to the eradication of frauds in the payments industry. They are already being used on mobile devices to authenticate payments, and it will also replace the need for PIN numbers and passwords. In the future, payments will become more and more invisible and much more part of everyday life, and the use of biometrics is going to play a fundamental role in this new scenario, making transactions easier to make than they are today.
Last but not least, the “buy now, pay later”(BNPL) trend is one of the fastest-growing payment methods. More and more consumers are choosing BNPL as a way to control their finances, and companies that offer this service promise bigger purchases and higher conversion rates. Until these shoppers encounter BNPL offers, they are ready to keep using cards, making merchant placement deals crucial for getting new customers. In the future, BNPL brands will use their solid customer loyalty to expand their offer to other areas of financial services.
Regulation and politics: payments shift to center-stage
Given all these transformations, the regulations and politics of each country is going to slowly adapt to this new reality. The emergence of new payment methods and digital currencies pushes the traditional players into a world where finance is decentralized. And as the pressure heightens, they will have to give into this new scenario and learn how they can be part of this new economy.
One of the most alarming elements for sovereign states and central banks are digital currencies, because the exponential use of them means that they lose sight of the financial flows that take place in their own economies. Until it is regulated, governments and central banks lose their ability to apply monetary policies and pursue economic goals.
One way in which we will see countries regulate this situation is in the creation of state-controlled digital currencies. China is already doing so, and El Salvador has adopted bitcoin as a national currency. Each country will not only have their own digital currencies, but these will also compete between nations. Nevertheless, with so many players emerging in the payments industry, no country will be able to control all of them. Instead, a multinational approach to regulation will prevail, one that is able to police payment processes and not individual providers of this service.
How the economics of payments will transform
Another significant alteration the payments industry will face is where its value lies. If in the old version of this industry that we are leaving behind the transactions were the central piece, now the transactional data will be the key asset that will create growth and new revenue streams. Data will have the greatest value because it will unlock a huge variety of new opportunities for payments businesses.
To name just a few, data and the insights it offers have the potential to combat fraud and to help in sophisticated financial planning for consumers. Still, new issues will also arise: as innovation develops at an exponential rate, the amount of new businesses of all sizes that enter the market can not only impact financial stability, but the lack of regulation can also expose them to risks related to data privacy.
Towards an inclusive industry
The upcoming payments industry will provide tools that foster inclusion in the financial system. For example, biometrically-enabled digital IDs such as facial recognition and fingerprints will facilitate authentication and thus open the doors to billions of people to participate in the digital economy.
Especially in developing countries, financial inclusion is driven mostly by the penetration of mobile devices and by the access to affordable payment mechanisms. Trust in these systems has yet to be gained for a full adoption, but this is where supervisors and regulators on data privacy and traceability will play a central role.
The technology of tomorrow
The payments infrastructure of tomorrow is going to integrate broad customer journeys in the sense that it will encompass end-to-end movements of money, including those services and platforms that enable this commerce process. It will also stand upon a foundation of distributed ledger technologies, which have the potential to be a primary means through which payments will be processed and delivered. Technologies such as cloud computing and API tools will create cross-borders and high-speed networks where payments flow in real-time, and where instantaneous transactions will be a standard commodity.
An model built on partnership
Also, collaboration between traditional banks and startups that are innovating in this industry will be a two-way convenient arrangement. Both actors need each other to survive for different reasons. In a highly regulated financial services market where risk is an ever-present factor, new entrants in this industry will need to work alongside banking partners. But the increased emphasis in technology puts pressure on established players to partner with innovative companies and startups if they want to stay relevant in an ecosystem that is rapidly changing. For this industry to fully transform, both actors need to see collaboration as an opportunity rather than as a competition.
All of these new technologies and trends present exciting opportunities, and forward-thinking actors in this industry are already planning the next wave of innovation. The disruption and innovation is already ongoing, and though in early stages, some of the technologies mentioned could fuel significant change.
But, for this innovation to be successful, it is critical that it is grounded on a solid tech foundation. Not only should companies address some questions such as if the existing platform architecture enables extensions of payment services or if they can disengage legacy workflows, but also if they can replace them with newer ones that are powered by blockchain, deep learning and IoT. Nevertheless, the inevitable course of events points to decentralized financial systems where the efficiency and safety of transactions is guaranteed by partnerships between state institutions, traditional players and startups that inject innovation into the ecosystem.