This article is the third and final instalment in our series of articles on the future of payments, written in collaboration with Galitt, a Sopra Steria company dedicated to making payments easy, efficient and secure in everyday life.
The payments sector is at a crossroads. In recent years, the landscape has shifted. Thanks to new technologies and innovative practices, it’s no longer dominated by traditional payment systems – such as cash, credit cards and bank transfers – and is instead an ever-evolving market, focused on convenience, globalization, technological innovation and security.
New players are entering the market at an astounding rate, with fintech and Big Tech companies – such as Apple, Google, Amazon and Facebook – vying for market dominance.
In this article, we take a look at nine factors that will affect the future of payments, and the impact that they will have on end-customers’ day-to-day lives.
People are increasingly reliant on data on a day-to-day basis. Not just in the payments sector or indeed even the financial services industry, but in almost every facet of their lives, from listening to music to online shopping.
In fact, more data has been produced over the past five years than in the previous 30. And by 2025, it’s estimated that global data creation will have reached around 181 zettabytes, over double that of 2021.
Of course, data-driven approaches are not new to the payments sector, with marketing, advertising and SEO optimization encouraging consumers to visit e-commerce sites across the web. But this is just the start of something far bigger.
The next decade will see the arrival of 5G and 6G, as well an acceleration in connectivity across devices and across the globe. This will dramatically change the way people interact with one another.
The quantum of data that will be generated, as a result, will be colossal. And this presents huge opportunities for the payments sector. All payments players will have the option to harness this data to better understand their clients’ wants and needs, and create better, more personalized products and services.
That said, with new opportunity comes new challenges, too. More data will mean more issues around cybersecurity, privacy and consumer rights, which payments players will have to come to overcome, and fast.
2. Digital IDs
When making payments, it’s not unusual for consumers to be asked for identification. Whether it’s buying alcohol, renting a car or checking into a hotel – passports, driving licenses and utility bills may be required.
In the future, consumers will have digital IDs – validated digital attributes and credentials created specifically for the digital world.
Traditional IDs may include a unique identity number, social security number, vaccination code, name, place, date of birth, citizenship, biometrics and much more. Digital IDs, on the other hand, would only include a “Yes” or “No” answer by a certified provider to a question identifying the user.
Each of these certified providers store the digital ID components on a safe, distributed system that protects users from data breaches and fraud. No one single entity has the totality of a user’s ID information. It is the combination of a series of answers that guarantees authentication.
Digital IDs will involve innovative technologies and deeper collaboration between governments and the private sector.
In turn, new regulations and standards will be introduced in order to deal with the transformation and foster compatibility and interoperability.
Furthermore, the system will require certification measures to increase resilience, allowing consumers to connect to devices they can trust as secure. This move will involve better digital authentication, biometric identification and strong password and username protection.
Players in the payment sector will need to be ready for digital IDs, incorporating them into their existing products and services in a way that’s user friendly and safe. Otherwise, they could lose business to Big Tech and fintech competitors.
3. Emerging markets
The pandemic has certainly accelerated technological innovations in the payments industry and highlighted their importance. But it has not completely succeeded in challenging the emerging markets. Western financial companies, for instance, are facing increased competition from innovative startups in Asia – one of the most attractive growth regions.
Some of these startups are jumping ahead of traditional financial institutions in the fight for market dominance, offering payment products and services in line with the latest technologies and consumer demands.
Such markets are highly receptive to technological innovation, as populations used to archaic payments systems are highly eager to adopt new technologies better adapted to their daily economic needs. By way of example, the number of debit and credit cardholders is forecast to rise by 5.8 percent in the Philippines and by 5.5 percent in Indonesia between 2020 and 2024, according to Omdia. This clearly shows the shift away from cash in countries with previously underdeveloped payment infrastructures.
The payments industry has historically focused on the US, but this is changing as more attention is being paid to Asian markets, especially China, which is accelerating its jump to mobile payments. The swift development of this market in China has encouraged the rapid advance of Chinese payments players such as WeChat Pay, increasing global competition.
The entire payments ecosystem has been impacted radically in recent years with the advent of Super-apps. This monetized system has been designed for consumer convenience, providing a unified experience for financial tools. These apps offer secure, contactless payment systems through mobile phones. Apple Pay (US) and Alipay (China) are the two biggest examples that are transforming consumers’ day-to-day transactional activities.
Super-apps exist as an all-in-one marketplace of services and offerings, using in-house technology and third-party integrations, resulting in an ultra-convenient experience for merchants and consumers alike.
Super-apps are efficient in plenty of ways. Leveraging date, they provide faster and less risky product launches, lower product ownership and development, as well as integrated financial functions. Furthermore, they offer users a centralized virtual platform where they can access financial tools adapted to their needs via data analytics.
PayPal recently launched its own Super-app, offering a combination of financial tools, including direct deposit, bill pay, a digital wallet, peer-to-peer payments, shopping tools and crypto capabilities.
When it comes to Super-apps, the West is considerably behind the curve, with China and Japan leading the rollout worldwide. It has to be said, however, that the Western regulatory environment and market conditions make repeating the success of Super-apps in Asia less likely.
5. Regulatory responses
With fintech solutions on the rise across the payments ecosystem, traditional regulatory framework focused on financial institutions is evolving. To better understand the risks in the fintech space, regulators, supervisors and firms are paying more attention to the development of fintech solutions with regards to consumers and investors, financial services firms and financial stability.
Regulatory supervision will include:
- Technology risk
- Cybersecurity and operational resilience
- Data privacy
- Consumer protection
- Firm governance and risk governance
- Amendments to anti-money laundering requirements.
The considerable divergence of standards across different jurisdictions has become a challenge for fintech companies, with some considering pursuing bank charters to avoid disruption. Indeed, in order to leverage their experience around regulation and licensing requirements, some fintechs have partnered up with banks, who are in turn attracted by fintechs’ agility and deeper understanding of tech-savvy consumers.
6. Financial inclusion
Over 2 billion people remain unbanked worldwide, with millions more not using their bank accounts on a regular basis. This is not just a developing market issue, nor an issue solely for the developing world. Offering a full range of financial services to developing countries at an affordable and competitive cost is key to the future success of both fintech companies and banking institutions.
Financial inclusion means individuals and businesses being given easy access to the plethora of financial services necessary for them to succeed in an increasingly connected, digital world. A responsible, sustainable payments system is at the heart of any egalitarian financial system.
Having the option to make daily payments in a secure digital environment, access to credit for investment in small-scale activities, and cash and insurance services are all vital if the world’s poorest populations are to be included in the globalization of digital financial services.
Fintechs and banking institutions both have a role to play in facilitating a fairer financial future for everyone.
7. Blockchain and cryptocurrencies
The ongoing debate surrounding the blockchain seems unending, but the advantages of the system with regards to traceability and compliance are undeniable. The volatility of cryptocurrencies, however, does hinder their ability to be used as currency and function operationally for consumers, hence the debates around stable coins and CBDC.
That said, several countries have already begun issuing their own digital currencies, including Nigeria, China, Ecuador, Singapore and Senegal, with other countries in Europe and Asia actively exploring centralized e-currencies.
The blockchain system also has several advantages in terms of real-time transactions in the digital ecosystem. Blockchain creates trust between different entities where trust is either nonexistent or unproven, it has a de-centralized structure, improved security and privacy, it can reduce costs, increase speed, visibility and traceability, immutability and protect the individual control of data.
All these advantages will facilitate maximum transparency, reduce money-laundering and mitigate fraud. Good news for the payments sector as a whole.
In spite of these benefits, there are drawbacks regarding access and technological infrastructure, not to mention concerns regarding financial inclusion and global regulation. Players in the payments sector will need to have a firm grasp of the disadvantages as well as the advantages when it comes to blockchain and planning for the future.
The fragility of the fragmented global payment landscape has been deeply affected by increased international economic tensions and rivalry between nations. One of the main challenges in this context is digital, i.e. how states can wield maximum computing power, control citizens’ date and secure connectivity and cybersecurity.
Protecting sovereignty clearly remains incredibly important for nation states, so that the future of countries is not in the hands of financial institutions, subsidiaries of huge groups protected by foreign laws.
The profound changes to financial ecosystems engendered by digitization have had equally profound effects on states’ financial sovereignty. According to Denis Beau, First Deputy Director of the bank of France, “the future of Europe’s sovereignty over its payments system will be all the more secure if it can rely in particular on the ability of its private and industrial players, fintechs and financial intermediaries to adapt and innovate continuously in order to reap the benefits for themselves and their customers of an open, competitive and highly integrated payments market at European and international level.”
The rise in regional payment schemes has been an answer to the issue of sovereignty. UnionPay in China, RuPay in India, MIR in Russia and now EPI in Europe are all providing consumers with payment platforms that specifically address personal and regional needs. With more banks and regulators supporting regional schemes, long-time global players and tech giants alike face increasingly challenge-worthy competition.
9. Social payments
With consumers’ social lives being increasingly linked to their social media use, financial services and payment providers have been tapping into social media interactions to facilitate payments. This trend was popularized by PayPal but has also been embraced by other companies such as Venmo, Snapcash, Google Wallet, Apple Pay and Twitter Buy. Mobile money sharing app Lydia has also exploded as a neat, convenient way to send money to friends and family instantaneously.
Social payments are changing the way we buy. P2P apps are convenient, safe to use and fast. The pandemic encouraged more and more people to embrace such apps, as well as instigating a rise in “Buy now, pay later” platforms, such as Affirm. This payment option is generally more secure, as no confidential information is requested.
These trends have led more people to trust Big Tech with their finances, who have already begun partnering with banks to launch digital bank accounts. Expect them to dive further into the fray and offer loans or cryptocurrency services.
Customer-to-Business (C2B) payments through social apps are still lagging behind somewhat, with some experts asserting that businesses have missed an opportunity to drive up revenues when launching social platforms.
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