We are living through a time of significant upheaval and change in the world of finance and payments. The term fintech (short for financial technology) is now widespread and as Google Trends shows, has exploded in usage over the past five years.
Digital payments are now being used more than ever in the US and across the world. Where cash once was king, purchases made using physical coins and banknotes today account for fewer than 19% of sales. What’s more, by 2030, cashless uptake across the globe is predicted to increase by 200% according to research by PWC.
With so much changing at such a rapid pace and with different markets and territories around the world adopting different financial technologies at different rates, it is incredibly challenging to predict what the future holds.
However, by monitoring trends and assessing the landscape region by region, we can get an idea of the bigger picture in terms of how digital payments will evolve further in the years ahead.
- We’ll cut right to the chase: the future of payments is digital.
- Some trends to keep an eye on include Central Banks Digital Currencies (CBDCs), digital payments, cross-border banking, and crypto.
- Open payment platforms will also play a critical role in the future. With much of the world’s banking being conducted exclusively online, access to open data has become crucial in allowing third party developers to build platforms that allow seamless communication between businesses, consumers and payment processing providers.
What is the Future of the Payments Industry?
When you consider where we are now compared to 5-10 years ago, it’s clear that change within the fintech world is rapid. In the US, it’s common to see people making payments with their smartphones just by tapping a merchant terminal.
In other countries, there are alternative common digital payment methods such as sending text messages to specific payment account numbers or using QR codes for instant account debits. Meanwhile, the humble check has been on the decline since 2000 and is unlikely to ever return to popular usage.
Perhaps as a predictor of what’s to come, the UK market sees checks accounting for less than 1% of all retail bank payments while cash is only worth 6% of the market. In some parts of northern Europe, checks have become extinct altogether.
All this to say that the future of payments is digital.
Consumer convenience is perhaps the biggest driver of change in the financial world but often what’s convenient for the consumer is also beneficial to merchants and to financial institutions. Processing of physical cash is costly and time consuming whereas most digital payments require very little human input once appropriate infrastructure is in place.
Additionally, there are advantages to security, compatibility, regulatory compliance and speed that come with most modern developments in the payments sector. We’ll explore these in more depth below.
Payment Industry Trends to Keep an Eye on
What are the main payment trends and disruptive predictions for the financial sector? We’ve rounded up the ones we believe will be most significant to the global payments ecosystem in the months and years ahead.
Blockchain and cryptocurrencies
By now most of us have heard of cryptocurrencies and the blockchain, even if not everyone fully understands them. In short, cryptocurrency is decentralized digital currency not controlled by any governments or institutions. The blockchain, meanwhile, is the underlying technology that underpins cryptocurrencies. It is effectively a giant record-keeping network that can securely validate the transfer of cryptocurrencies.
Why are cryptocurrencies so important in the payments industry right now? In an increasingly globalized world, the appeal of a decentralized system is ever more apparent. Blockchain as a technology and cryptocurrency as a concept have only been around since 2008 but there’s no ignoring the continuing trend, especially as today there are over 12,000 cryptocurrencies in existence, with new coins entering the market every week.
To date, cryptocurrencies have tended to be seen as investment opportunities, as acceptance of crypto for regular transactions remains quite limited. Certainly, you’re unlikely to find many high street stores offering customers the opportunity to pay using their chosen cryptocurrency. But it’s still possible that the most popular cryptocurrencies could become more commonly accepted for day to day purchases.
Like with any payment method, the more people that hold it and have a preference for using it, the more merchants will be eager to accept it.
While Stax does not currently offer acceptance of cryptocurrencies, it is always important for businesses to pay close attention to new ways in which customers are looking to make payments and take note of future payment trends in order to stay ahead of their competitors. This is especially relevant as they look at expanding the breadth of accepted payment methods.
As Stax Chief Payment Officer Menda Sims put it, “Businesses that get in there first with the right kinds of fintech firms and banks will be the ones that thrive long term. Many organizations are still looking for the right use cases and reasons to get behind crypto as a payment method, and I predict that we’ll see more of those use cases come to light this year.“
With physical cash usage and acceptance on the wane, it is more important than ever to promote financial inclusion, ensuring businesses and individuals alike have access to all basic financial needs. Between 2011 and 2021 global financial account ownership for individuals increased from 51% to 76% which is a phenomenal rate of growth, but still leaves 24% of people across the planet with no access to banking services with which to send and receive money. In developing countries this figure rises to 29%.
All national and regional economies and the financial institutions within them have a duty to improve financial inclusion for the betterment of society as a whole. It is a key indicator of global development, so expect to see more providers diversifying their reach in order to help meet internationally agreed targets for inclusion.
While many countries take steps to move towards a cashless society, it’s increasingly important to ensure people aren’t left behind in this desire for progressive change. Payment experiences need to go beyond the issuing of an everyday Visa or Mastercard and should instead be framed around how best to embrace somebody “off-grid”.
Central Banks Digital Currencies (CBDCs)
Developed as a reaction to the decentralized blockchain system, CBDCs are (usually) government-issued digital currencies, commonly tied to a nation’s existing fiat currency.
They can also be implemented by centralized banks not governed by one individual nation, such as the Eastern Caribbean Central Bank, as well as theoretically being available for offer by private sector entities.
With a CBDC, the centralization of the currency’s management negates the need for blockchain technology, with the managing institution storing records in a regular database instead. Much like with cryptocurrencies, CBDCs carry a lot of advantages over traditional fiat currency such as carrying reduced risk, minimizing third party input and transaction fees along with simplifying transactional record keeping.
And unlike cryptocurrencies, CBDCs are well suited to the combating of illegal financial activity. The centralized record keeping of all CBDC transactions all but eliminates the possibilities of tax evasion and money laundering, among other financial crimes.
While CBDCs are still in their infancy, digital wallets are well established and only show signs of continuing to grow in popularity and usage. In fact a report by FIS has suggested that mobile wallets will become the single most popular method of online payment by 2024 and will overtake usage of physical cards in the US within three years.
Most of us will be familiar with the likes of Apple Pay and Google Pay, the two most popular digital wallets in use in the US, but worldwide there are hundreds of alternatives dominating in their home markets. China’s Alipay and WeChat Pay account for over 90% of all domestic mobile payments whilst MTN MoMo and Orange Money provide mobile digital wallet services to users across much of Africa.
Buy Now Pay Later (BNPL)
Recent years have seen a shift in how consumers access credit with buy now pay later (BNPL) providers rocketing in popularity over more traditional credit cards and personal loans. The advantages to the consumer are obvious—being able to spread the cost of purchases with minimal (if any) interest helps with cash flow and reduces the risk of falling into unmanageable debt. Meanwhile, merchants can enjoy increased sales as more customers have access to otherwise prohibitively expensive goods.
This trend towards BNPL services has definitely been accelerated by the pandemic and subsequent global financial instability and Menda suggests this will only continue:
“While the pandemic served as a catalyst for the BNPL boom, inflation only helped the payment option hold its position at the top. As inflation rates rise, people–particularly millennials and Gen Z who are experiencing the highest inflation rates of their adult lives–are becoming more budget-conscious in their everyday spending. A $100 sweater becomes much more affordable when you can pay for it in four installments of $25.“
International borders have always presented challenges within the financial services sector. Traditional banks and state-controlled currencies make international transfers of money cumbersome and inefficient. This has contributed to the boom in payment processing providers not tied to traditional banking systems.
ISO 20022, a data exchange standard for financial institutions, is helping to simplify the transmission of financial data between countries and regions. As adoption becomes more widespread, this standardization for cross-border, cross-currency payments should see significant improvements in speed and ease of making payments from country to country.
All banking institutions and modern fintechs alike recognize the need to address fraudulent activity head on. The seismic shift in how we make purchases since the pandemic has only increased the lengths to which fraudsters will go in order to disrupt legitimate transactions. With new modes of payment come increased risks to consumers and financial institutions alike as criminals take advantage of widespread uncertainty with more and more inventive scams.
This means that as the payments market evolves, so too must fraud-prevention measures, whether implemented by controlling institutions or third parties dedicated to the safety of consumer finances. As such, we expect to see more advancements in payment security going forward.
With much of the world’s banking being conducted exclusively online, access to open data has become crucial in allowing third party developers to build platforms that allow seamless communication between businesses, consumers and payment processing providers.
APIs provided by fintech providers that can be securely used by online merchants in apps and websites simplify the management of sending, authorizing and clearing payments. The open banking protocol also helps improve overall customer experience when directly or indirectly interacting with the big tech payments players.
Ready for the Future of Payments?
Predicting the future of payments is tricky, but we hope this article helps explain a lot of what’s evolving within the financial landscape.
And if you need help keeping up with these changes, Stax has got you covered. As a leading provider of payment solutions to SMBs and enterprise customers, we are proud to be at the forefront of emerging technologies within the financial sector.