Looking ahead to how the future of payments will evolve
As we assess the evolution of PayTech, we can observe some notable shifts and takeaways:
- Connected commerce is driving the digital economy. New payments propositions are helping connect merchants and consumers directly, in the most efficient way, leading to faster, cheaper and safer payments methods.
- “Value beyond payment” has been top of mind for many payment players as they look beyond transactions and focus on the holistic customer experience. By providing relevant services before and after payments, they’re evolving into “one-stop shops.”
- Open banking will be a real game changer as many more players will embrace “pay by bank,” as well as new payment methods like variable recurring payments (VRPs).
- The adoption of real-time payments rails (RTR) unlocks tremendous innovation across the overlay services, enabling all PSPs to serve customers better through account-to-account (A2A), which is further reinforced and accelerated by open banking.
- Embedded payments are expected to scale and become more invisible as non-financial services providers integrate payments into customer journeys – driven by the rise of e-commerce, platforms and marketplaces.
- The emergence of innovative payments facilitators (PayFacs) is fundamentally changing the way businesses, acquiring banks and card networks work together.
- New PayTech ecosystems are developing that can securely store, manage and leverage consumer and merchant data generated through payment transactions – representing radical data monetization opportunities and unique customer offerings.
- Crypto and digital currencies will offer not only new payment methods, but a new infrastructure enabling instant settlement through distributed ledger technology (DLT), programmability, smart contracts and tokenization.
Fundamentally, payments are becoming more instant, frictionless and embedded within customer journeys – hence invisible.
The seven forces driving the future of payments
Open banking: a turning point for the financial ecosystem
Open banking has created a new bank payment method and a framework for payments innovation. Although it does not provide a new set of payment rails, open banking creates a new mechanism for payment initiation, in effect, open payments. Application programming interfaces (APIs) can be used to easily trigger single payments, but also give greater flexibility, such as creating a mandate for VRPs.
The APIs that exist alongside open banking have also unshackled the potential of A2A payments by removing the barriers created by fragmented banking rails, forming an effective “pay by bank” option. This makes it easier to access payments clearing systems and embed an A2A payment at the point of purchase. As a result, customers and merchants have far more options.
The open banking movement is building momentum globally, radically changing the way banks approach business models, customer engagement and service delivery. With digital experiences becoming increasingly important, open banking offers opportunities for organizations to serve customers in more innovative and intuitive ways.
Real-time payments: unlocking the power of RTP with value-added services
RTPs use modern payment rails to move money from end-to-end in real-time. While RTP infrastructure has essentially changed the payments landscape, the true value of RTP is only realized when surrounded by value-added services. For example, in Australia, the first value-added service launched from the New Payment Platform (NPP) is Osko by BPAY. It allows consumers to use an alias – like an email or mobile number – in place of an account number to initiate payments on the NPP. Such services have proven to be effective at helping RTP networks scale and deliver on their value propositions.
The adoption of real-time rails unlocks tremendous innovation across overlay services, enabling all PSPs to serve customers better through A2A, which is further reinforced and accelerated by open banking.
Financial institutions, PSPs, PayTechs and FinTechs would benefit from providing these “overlays,” to not only increase their bottom lines via new sources of high margin revenue, but also to increase transactional volumes on the rail itself. It’s a win-win for all parties in the ecosystem.
The future of cross-border payments is faster, cheaper and more efficient
Wholesale cross-border payments tend to be slow, generate high transaction charges, and are considerably less transparent than domestic payments. However, with regulators laying the groundwork for these payments to be modernized, PayTechs are moving at pace to transform the cross-border payments business model (both wholesale and retail) and customer experience.
Notably, all payments providers are starting to recognize the potential of digital assets, cryptocurrencies and DLT technology to help improve and transform clearing and settlement processes.
The G20 endorsed a roadmap, developed by the Financial Stability Board (FSB), in coordination with the Committee on Payments and Market Infrastructure (CPMI) and other relevant organizations, to enhance cross-border payments. It lays out a comprehensive set of actions covering 19 "building blocks" identified by the CPMI across five focus areas.
With immediate focus on the ISO 20022 migration, we will see greater adoption of enhanced and rich data that will drive better quality of outgoing messaging and improve cross-border payments.
By staying up to date with new technologies and regulations, PSPs can improve their strategic offerings around cross-border payments.
Buy now, pay later and its more sustainable future
Buy now, pay later (BNPL) is a newer payment method that offers instant credit decisioning and payment options via installments at the point of sale. Retailers and merchants use this credit option to drive sales, attract customers and decrease cart abandonment. And consumers choose BNPL for its convenience, low cost and predictable payment schedule.
While BNPL was initially used for lower-cost fashion purchases, its application has expanded. BNPL is now being offered in corporate purchasing and non-discretionary purchases, such as healthcare, legal services and auto repairs. Nonetheless, the BNPL model will need to evolve to deliver sustained profitability given the rising cost of capital and increased regulatory scrutiny.
For banks, BNPL is an opportunity to explore a new channel to drive lending growth and collaborate even further with PayTech partners.
Digital wallets and super apps: a one-stop shop of vast capabilities
Digital wallets are helping to significantly reduce payments transaction fees while offering customers a single destination to manage their finances. By going a step further, super apps are setting out to fulfill almost any financial, leisure or lifestyle need their users may have. The APAC region has witnessed the biggest adoption of digital wallets and super apps compared to North America and Europe, which are still heavily reliant on payment cards and card networks.
However, digital wallet providers outside APAC are striving to transform into super apps by expanding their array of omnichannel services, such as crypto wallets, contactless pay modes and more. Overall, user behavior is driving the evolution of digital wallets. Their popularity is also linked to embedded value-added offerings, such as loyalty programs, security, and the transformation of closed to open loop wallets.
Financial institutions can explore PayTech digital wallet strategies and apply them to existing propositions to extend value to the customer base. We expect to see banks further expanding digital wallets, offering new services in order to grow their user base.
Embedded payments: the future of payments is invisible
As businesses move toward providing their customers with more personalized, frictionless experiences, embedded payments have become a core value proposition. Embedded payments are associated with business models where non-financial services companies (e.g., Uber or Shopify) offer payment functionality to their business customers.
As such, embedded payments are becoming very common for all B2B2C and B2B2B business models like platforms and marketplaces, and PayTechs continue to play a major role in driving adoption rates. Embedded payments are expected to scale and become more invisible as non-financial services providers integrate payments into customer journeys.
PSPs have an opportunity to reimagine their merchants’ acquiring business while exploring new business models. Banks have assets that most payment innovators do not have; it is critical to bring them to merchants and consumers in the e-commerce ecosystem. As consumer and commercial commerce change rapidly, banks need to use data to identify distinct customer verticals that will maximize the value from payment services – and provide tailored solutions for those verticals.
Digital currencies and the future of money
Digital currencies and CBDCs are gaining momentum and rising to the top of agenda for payments providers that are looking for regulated alternatives as first industry solutions emerge. The full benefit of DLT will come from tokenization, programmability and smart contracts, combined with a network effort that allows banks to participate on a single platform (open loop). The ultimate benefit of digital currencies will be instant and atomic settlement, increased automation, transparency and efficiency, as well as support of new business models via programmability of money.
Crypto and digital currencies will offer not only new payment methods, but a new infrastructure enabling instant settlement through DLT, programmability, smart contracts and tokenization. We expect the broader adoption of digital currencies to rise as acceptance by banks, merchants and regulators increases. New use cases are also expected to proliferate.
Banks can explore the value pools and feasibility of incorporating digital currencies into their products and services.
Now is a pivotal time to assess the level of innovation enabled by PayTechs across the payments landscape. There is a significant opportunity to transform payment offerings to deliver better customer experiences, simplify back-end infrastructure in order to keep up with the pace of change, and leverage PayTech innovations to benefit both business and consumers.
For banks, the dynamic shift in payments is both a threat and opportunity. Banks must continue to embrace digitization and transform their payments model to create more benefits for consumers and merchants alike. Banks and other payment providers will need to focus on value beyond payments, by investing in technology, rethinking business models and partnering with PayTech providers. Demand for omnichannel payment methods, embedded finance, instant cross-border payments and payments using digital currencies will require payment providers to drive further agility and flexibility in operating models.
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Summary
Through in-depth analysis of the PayTech landscape and perspectives from industry leaders, EY senior strategists, technology leaders and PSPs, this new report offers actionable insights to help PSPs navigate the shifting PayTech landscape.
