Payments

Drivers

All industries are being shaped by the global Megatends of Globalisation, changing Demographics, Sustainability and Technology innovation.  Shaped by these trends, the pandemic, and now worsening economic conditions, the sector is being transformed by five major drivers:

 Customer Experience

The growing influence of BigTechs, such as Google, Amazon, Facebook and Apple and others has raised the bar for customer service and seamless experience. The growth of e-commerce and digital banking has created a demand for digital payments that is spilling over into the physical world and business-to-business transactions.

Use of digital payments transcends age, with 73% of users having used a digital wallet, only Baby boomers and seniors segment are just below 50% [1].

Mobile is the preferred device. Three times as many consumers now prefer to access their bank accounts using smartphones rather than computers, with security playing a pivotal role in this shift. While most consumers now view smartphones and computers as equally secure, many see biometric authentication measures, which smartphones tend to provide, as the most secure way to authenticate a transaction [2].

Players are now battling to be the financial front door to consumers (banking as a service) and value added provider to businesses.

Trust & Compliance

Regulation will continue to play a core part of driving the payments market. There is considerable momentum around Open Banking globally. Digital payments and digital/crypto currency are also evolving fast. The fragmentation of the market with the entry of BigTech and FinTech will stretch and challenge regulators.  The national political focus on financial services is likely to lead to fragmentation as developed economies seek their own place in the financial markets landscape. The EU is already seeking more autonomy from the US dominated payments companies and China’s financial markets will become more important. Managing the decline of cash will be a key concern.

The financial crisis in 2008 caused regulators to review compliance with a focus on the usage and security of customer data (e.g. GDPR) and anti-money laundering (AML). Regulatory fines are growing, with fines for AML and data privacy having totalled $5.4 billion in 2021 [1]. The UK regulator imposed fines of £214 million in 2022 [2], and Wells Fargo received a $3.7 billion fine for "widespread mismanagement" from US regulators [3].

Banks have seen a 35% increase in fraud attempts through digital channels during the crisis [4]. 25% of Europeans exposed to any fraud suffered financial damage, causing a total loss of around €24bn in 2 years [5]. Whilst 83% of consumers trust their banks’ security measures, half believe their financial institutions should provide additional protection [6].

Innovation

COVID-19 has accelerated the shift to digital payments away from cash and digital currencies (CBDC) are being developed. Cash payments in the euro area have dropped from 72% to 59% [1].  Mobile payments are expected to almost double to $4.6 trillion by 2025 [2]. Innovations such as Apple Pay, Wechat Pay, Bitcoin and M-Pesa have further transformed payments. Traditional payments firms need to innovate fast otherwise they may be disintermediated.

Blockchain, digital currency and mobile payments are just some of the technologies which are disrupting payments. The challenge is how do the players harness these technologies and how does regulation keep up. 

Efficiency

The payments market is complex with many steps in the value chain, leading to cost. Payments are seen as expensive to merchants and businesses. Consumers value ease, convenience and speed. Disruptors will seek to reduce friction whilst maintaining trust and compliance.

Resilience of payments networks is critical especially during moments of crisis like COVID-19. 

Profitability

Payments represents a strong fee income market for banks. 

The tradition payments market is at risk of disruption by innovative payment service providers capturing market share through digital wallets and digital currencies, for example WeChat Pay who cut out the middlemen in the value chain. It is estimated that changes in consumer payments preferences to digital wallets will put up to $31.4 billion of revenue at risk for US banks between 2023 and 2026 [1].