The payments space has surely seen more than its fair share of disruption in the last decade. The advent of service providers like Square, Venmo, Alipay and PayPal has rewritten customer expectations around sending and receiving money. The response of payments incumbents to compete with these new offerings has pushed the industry yet further. Customers now take it for granted that they can pay, and get paid, anywhere and at any time. It all amounts to nothing less than a revolution.
But thinking that the revolution is now over, in our view, would be a grave error.
In our Top 10 Trends for 2022 report, we highlight the forces that are making the biggest changes in banking. Trend eight focuses on payments—and makes a convincing case that the biggest disruptions in payments may be yet to come.
Here’s a quick summary of our thinking.
Payments poised to open up
Consider the disruptors I mentioned above—Square and its peers. Each uses a different business model and tech to win market share, but all still have something in common with each other. And, for that matter, with Mastercard and Visa.
All of these major payments platforms operate on closed networks. For example, you cannot use your PayPal account to make a purchase from a merchant who uses Square.
This is likely to change as payments networks begin to open up and interact. We see two main drivers of this.
The first is that many regulators have developed a marked preference for open, standardized platforms that lower barriers to entry for competition. Europe’s PSD2 regulation will turn seven this October. In China, the government has issued an ultimatum to internet companies that forces them to accommodate rival links and payment services on their sites. New Indian legislation, meanwhile, demands that all licensed mobile wallets be able to connect with each other. As of April 2022, Indian merchants will be required to accept payments from all wallets.
The second driving force is that payments innovators are throwing their weight behind open, standardized platforms. By removing the requirement of a large network of payments relationships to compete, this would level the playing field for payments innovation.
For example, over 30 European banks and payments providers are collaborating on the launch of the European Payments Initiative, which is a pan-continental payments scheme that leverages SEPA Instant Credit Transfers to compete with local cards and international payments schemes. Several banks are building a pan-Nordic payments platform that will allow consumers and businesses to instantly transfer funds across borders.
An innovation wake-up call
These regulations and new platforms should serve as a wake-up call for payments players of all sizes. Regional open payments networks will drive innovation and mergers while forcing better coordination between investments and innovation initiatives. They will also intensify one of the biggest changes of the entire digital revolution in financial services: the once-submissive payments consumer base will be empowered by this competition.
Smart payments players will find new ways to satisfy these increasingly demanding customers in 2022. They must be prepared to take on a measure of risk as they innovate, while also reinforcing their resilience and security in a high-pressure environment where priorities like modernizing infrastructure and compliance can’t be neglected.
In short, the best time to start preparing for a future of open payments was five years ago. But the second-best time is right now.
If you’d like to discuss what open payments networks will mean for your organization, contact me here. To learn more, read the full report, Banking Top 10 Trends: