Digital payments are gaining popularity as cash usage declines around the world. While card payments still dominate in countries where they have a large incumbent advantage, digital products like payment apps, digital wallets, buy now pay later, and account-to-account (A2A) payments are gaining traction. This trend is driven by changing customer behaviors and reimagined customer experiences, fueling the move to frictionless, embedded finance journeys. In this series, we’ll be looking at the effect these payment trends will have on various industries. But first, we have an overview of what’s happening right now across industries around the adoption of digital payments, and what’s coming in the next few years.
- Cash use is in rapid decline: A largely cashless society is becoming a reality in many markets, accelerated by the popularity of contactless payments and e-commerce transactions during the COVID-19 pandemic. For example, in the UK, ATM cash withdrawals dropped by 60% during COVID-19. The movement from cash to e-commerce and digital payments means merchants across all industries are under greater pressure to ensure their payments solutions are frictionless and secure.
- Changing customer expectations: Customers now expect effortless—even invisible and embedded—payment experiences where transactions are smooth and secure. Payment providers and merchants will need to keep up with technological advances and ever-higher expectations to retain customers as they become more comfortable with digital payments.
- New payment methods: Businesses need flexible back-end systems that allow for quick implementation of the technological changes required to make new payment methods work. Merchants will need to review and potentially update their existing providers and regularly reassess their payments strategy to ensure that the payment experience continues to meet changing customer expectations. An agile approach to payments will help companies stay on top of advances in the industry, which are developing quickly.
- Payments regulations: Various regions are introducing and refining regulations around data security and privacy, Open Banking and strong customer authentication (SCA), which is a requirement of the EU Revised Directive on Payment Services (PSD2). As the regulatory framework expands, payments are likely to make more use of mobile technology. The ease of integrating biometrics into mobile apps gives them an advantage over card-based payments options, particularly for SCA requirements.
The acceleration of digital payments that began during the pandemic is unlikely to backslide. The current momentum is supported by a range of technical and regulatory innovations that will keep moving things forward in the digital realm. Here are some of the key factors that will fuel the growth of digital payments across industries.
- Simplified and embedded payments: Merchants will need to adapt their payment methods to make payment effortless. While several digital payments providers already use new payment methods like pay by bank, buy now pay later and QR codes, developing technologies that will continue to simplify customer journeys will further benefit merchants and payments providers. New solutions will need to be user friendly and simple to set up, support accessibility and inclusivity, and be interoperable. Once payment methods are built into apps and platforms, payment will become invisible to the customer. This type of embedded payment is becoming more common and will likely continue to expand over the next several years, since it will not only improve customer experiences and drive revenue, but also reduce operational costs.
- Standardization and open data: The shift toward open data will provide a supportive regulatory environment for next-generation payments and standardized data that will encourage interoperability and partnerships. This will make the payments experience seamless for customers, since they will no longer need to provide their data separately to each merchant or platform.
- Flexible payment options: Customers are changing the way they interact with businesses. From the rise of subscription-based pricing to the expansion of digital wallets, customers will expect the companies they interact with to offer a variety of payment options. The need to enter credit card numbers and other cumbersome details will soon feel unacceptably slow and dated. Purchasing journeys will need to have fewer steps and be truly “no click.”
How to prepare
Below are five key actions for businesses to take now to prepare for the future of digital payments. The interplay between the five areas will provide opportunities for the strongest digital payments players in the coming years to move beyond payments and create a dominant platform.
- Create partnerships: The e-commerce market will continue to advance hand-in-hand with the growth in digital payments. Merchants will want to partner with providers that give their customers a high-quality, frictionless and flexible payment experience. Businesses should look for partners that are committed to evolving as digital payment technologies continue to improve, so they move forward together.
- Revise payments strategies: Strategies that were developed even a couple of years ago are likely to have already become out of date. The acceleration of the move to digital payments brought on by the pandemic has affected almost every type of business, and any company that hasn’t revisited its payments strategy since 2019 should do so without delay.
- Embrace Open Banking: Companies should take advantage of the growing momentum behind Open Banking, making it integral to their business model and creating more tailored offerings across the payments life cycle through fully integrated in-app experiences.
- Think biometrics: While largely in experimental phases, voice-activation and facial-recognition or behavioral authentication may soon become the norm. Companies that invest early or develop strategic fintech partnerships will reap the rewards and avoid having to play catch-up later.
- Scale through social: The players with the biggest potential for mass adoption are those that can tap into and leverage social networks, which provide the scale and ubiquity required for digital payments to take off and act as the foundation for a successful “super app.”
In upcoming posts, we’ll be taking a closer look at how digital payments are evolving in some key industries—including travel, utilities, media and technology, software and platforms—and how those industries can respond to the rapidly changing payments ecosystem.
Contact us to find out how your business can get ahead of the curve on digital payments, and be a market leader for the future.
If you would like to learn more about the future of payments read our report ‘Back to the Future of Payments: Reflections on how banks can drive payments innovation’.Register to view full report