Thanks to the pandemic, consumers have become accustomed to doing almost everything online, accelerating digital transformation and embedding new behaviours.
After a 5% in global payment revenues in 2021, the payments industry is on track to recoup its losses, and climb back to a 7% in the year ahead. As it does so, it will usher in a new era of innovation.
There’s never been a greater need for it. The disruption caused by the pandemic has exposed a number of gaps in our global payments infrastructure: travel companies struggled with cashflow, SMEs came under threat due to the complexity of cross-border payments, and debts from unregulated Buy Now, Pay Later deals surged.
As the world builds back, better payments infrastructure that helps cut business costs and risk, and improves experiences for customers, is critical.
Change is already underway. Cryptocurrency continues to gather pace, fundamentally changing the way money moves globally.
As it does so, regulators are paying attention – and though the pushback presents challenges, it also opens up new opportunities for innovation.
It’s not just crypto that regulators are interested in, though. Their increased engagement with real-time payments and lending rules is changing the way the whole industry operates, and for the better.
Amid so much turbulence, what are the most significant payments milestones we can expect to see in the year ahead? Here’s what payments professionals must prepare for:
Regulators will hammer down hard on payments companies
As payments methods like cryptocurrency and Buy Now, Pay Later continue to gain in popularity, global regulators are starting to take notice. 2022 will see increased scrutiny and stricter rules, offering greater protection for consumers – but prompting new product innovation, too.
1 – The crypto crackdown will unlock industry-wide product innovation
2021 was a bumper year for crypto. NFTs hit the news, bitcoin prices reached two all time-highs inside the same week, and institutional adoption accelerated. PayPal added
support for bitcoin, and Morgan Stanley announced it would be offering access to crypto funds for its private wealth management clients.
But as they move into the mainstream, they’re coming under more scrutiny. Crypto assets have become particularly popular with millennials and Gen Z, and today, there are thousands of crypto coins on the market. Many of them seem to be outright scams. And as inexperienced and unprotected investors start losing their money, the regulators are stepping in.
Some have responded with blanket bans. At the start of the year, Turkey outlawed paying for items with cryptocurrency, and there was speculation that India would follow. The pushback from these “crisis-riddled” countries was unsurprising. Issuing money is a privilege that governments and central banks are unlikely to give up easily, especially amid high inflation.
But now, China has followed suit. Its central bank declared all transactions of crypto-currencies illegal, in an effort to protect consumers from speculative investments, and crack down on money laundering and ransomware attacks. Meanwhile, the UK’s FCA and a number of other regulators banned Binance from regulated activity because it was “unable to effectively supervise” the platform.
Crypto companies everywhere are bracing themselves for more, with many ramping up their compliance hiring. The US is an area of particular interest. While the Federal Reserve Chairman, Jerome Powell, has said the US will not ban crypto, it’s a point of ongoing conversation among lawmakers. As yield-bearing crypto investments continue to surge, it’s clear that old rules need to be rewritten – and digital finance players held accountable to them.
Some are trying to get ahead of this, offering their own policy proposals (everything from crypto-specific rules to a self-regulatory body) to avoid the worst of the regulatory fallout. But if they fail – and they might – what does it mean for investors?
Retail and institutional investors should be ready to lose money. The global price of bitcoin fell by more than $2,000 following China’s announcement, and yields are likely to drop, too. Crypto is a high-yield asset because it’s high-risk; as it’s tamed by regulation, those returns will be compressed.
However, that might lead to new product innovation in the space. DeFi funds, for instance, are likely to grow for some time, but will eventually slow as they’re mixed with traditional yield products.
That could mean we start to see some new exchange traded funds (ETFs) emerge to support them. For some core users, for whom decentralisation is the core part of crypto’s appeal, that will be off-putting. But others will be attracted by the better balance of profitability and security.
Well-regulated and well-managed stablecoin could also bring advantages to payments. One big issue many companies face is payments settlement; moving money across geographies timezones is costly and complex. This presents a solid use case for stablecoin, which pegs its value to external reference points like other crypto, fiat currencies and exchange-traded commodities.
Wider-reaching innovations are already coming to market. With the rise of NFTs comes new identity verification models to prove their ownership. This could have enormous implications for the entire financial services ecosystem.
Ask anyone what’s holding us back from realising financial inclusion and the broader uptake of digital services, and they’ll tell you it’s identity.
It’s hard to verify identities (both merchants’ and consumers’) in an online environment – and without that trust, financial institutions can’t open access to their services without running the risk of fraud. If the new models being built to protect NFTs can solve digital identity verification, they’ll unlock decacorn growth across the whole industry.
2 – Crypto acquisition of FinTechs will put them ahead of competition
Over the last decade an enormous FinTech ecosystem has evolved. By the end of 2022 it’s predicted to be worth over $300 billion, thanks to FinTechs’ ability to uncouple and offer banking services faster and more flexibly.
Cryptos will be next to take advantage of their agility. Over the next year, there’ll be a surge of acquisitions in the FinTech space by Crypto companies as they attempt to keep ahead of competition by acquiring licenses as part of the deal.
The cryptocurrency market is growing at an astonishing pace, and won’t slow anytime soon: a CAGR of 11.1% is expected to the end of 2028. That means crypto companies – of which there are many – need to work fast to define and differentiate their solutions, and win market share.
As they do so, many are identifying gaps in their stack (like the ability to settle out to recipients in fiat currencies) that they need licensed fintech to address.
Banking licenses could solve a lot of problems for crypto companies First, they make crypto appear more credible, allaying concerns about legitimacy and security that are slowing its move into the mainstream.
Second, they could enable cryptos to offer a more diverse and competitive product portfolio. Crypto companies with banking licenses could offer the same kind of services that traditional banks do, like current accounts, payment cards and loans.
And there are other reasons why being licensed works in crypto companies’ favour. As regulatory frameworks are tightened globally, crypto companies without licenses might find themselves on the back foot.
Hong Kong has proposed that only licensed crypto companies be allowed to operate – and even then, that they can only provide services to professional investors. Regulators are increasingly reigning-in the freedoms of crypto companies, many of whom will look to banking licenses in order to open up new revenue and customer streams.
Cryptos have three options: work with third party FinTechs, build a bespoke solution themselves, or make strategic fintech acquisitions.
Relying on partner FinTechs could put them at a product and service disadvantage in the future. Partnerships mean cryptos lack full visibility and control over the user experience, and are distanced from the regulatory and compliance processes that are critical to scale their business safely.
Becoming licensed themselves is complex. It takes a long time, a lot of upfront capital and in-house compliance expertise to meet with anti-money laundering (AML) and counter-terror financing (CTF) requirements.
Some have already gone down the partnership and licensing routes. But many more are likely to opt for acquisition in order to create their own on/off payment rails and capabilities.
A competitive field of crypto-specific FinTechs is already emerging, especially in the risk and compliance space, which cryptos will take advantage of to get to (and conquer) the market faster.
Acquisition lets cryptos keep their foreign exchange (FX) costs low, add new revenue streams and stay closely involved with core processes. As they win more market share and grow in stature, some bigger cryptos will look to establish in-house capabilities to consolidate their position. But with the market still so nascent, that’s a way off yet.
2- BNPLs will be forced to become credit brokers
Buy now pay later (BNPL) is now a $100 billion industry, and it’s expected to keep growing. Now one of the fastest growing payment methods globally, it’s particularly popular in Europe and is set to double its market share in the UK by 2024.
But the easy, short-term loans that have popularised BNPL are only possible because it exists in a grey area between payment licenses and lending licenses. Technically, they have the former, but not the latter.
As a payment license holder, BNPLs can advance payments in the form of a credit to the merchant, but don’t need to abide by credit regulations. This has allowed many BNPLs to make the argument that they are not a credit service, but merely a payments provider – exploiting the loophole to dangerous effect. Now, regulators are starting to scrutinise the sector.
A major concern is the way in which BNPL is contributing to personal debt. BNPL firms aren’t required to conduct rigorous credit worthiness assessments, and so BNPL is often used as a second-best option by consumers who don’t qualify for credit cards.
As a result, More than 10% of UK consumers who had used BNPL were already overdue at the beginning of 2021. Elsewhere, the Australian Parliament found BNPL was present in 20% of consumer insolvencies, and two-thirds of BNPL users in the USA were already at 75% of their credit card limit when they made a BNPL purchase.
Another issue with BNPL is that it doesn’t require credit risk assessments to be shared with credit ratings agencies. Under regulated credit agreements, lenders have to share the information they capture about borrowers with credit bureaus, in order to strengthen their data.
When that doesn’t happen, it creates a gap in a borrower’s credit history, which can cause future lenders to overestimate their credit worthiness. The result is a shadow segment of subprime borrowers. At the rate the industry is growing, that could become a substantial segment – and pose a significant threat to the economy.
Regulators are responding
In February 2021, the UK’s FCA recommended that all BNPLs be held to consumer credit regulations “as a matter of urgency”. Likewise, questions have been raised by a number of European regulators, and several BNPL cases have been in the spotlight in California. But it’s unclear exactly what direction regulators will move in, and that raises question marks for the future of the industry.
The ability to advance payments is a necessity for legitimate payment services providers (PSPs), and so it remains to be seen exactly where regulators will draw the line as to what constitutes an advance payment, and what constitutes a loan. If they move in favour of BNPLs to blend payments and credit rules, then a lot of traditional lenders will start adding BNPL capability, swelling the market further.
But the likelihood is that regulators will instead clamp down on BNPLs, forcing them to become credit brokers in order to protect consumers.
As authorised lenders, BNPLs will need to dramatically overhaul consumer transparency, making it clear that they are offering credit, and redesigning their user journeys to highlight lower-risk payment methods.
They’ll also need to make urgent investment into risk assessment technology to help them perform credit checks effectively without interrupting the user experience (UX).
The regulatory legwork to become authorised credit brokers could mean smaller retailers opt out of offering BNPL at all. And while consumer demand for BNPL is unlikely to dry up, new rules and restrictions will put a dent in the revenues of BNPLs.
In H1 2020, 60% of Klarna’s revenue came from consumers; BNPLs depend on high volumes of customers to succeed, and regulation will inevitably restrict what, and to whom they can sell. As the unit economics of BNPL fluctuate, margins will shrink, causing many BNPLs to pivot to other products, or exit the space altogether.
The travel industry will accelerate payments innovation
Travel is rapidly returning to pre-pandemic volumes. As it does so, the whole industry is re-evaluating its payments infrastructure. In 2022, travel companies will look to fintech to fix issues and take the competitive lead – but might find the payments space more challenging than anticipated.
4 – The ‘roaring 20s’ of travel will drive payments innovation at pace
While every industry took a hit last year, travel felt the impacts of the pandemic more than most; the tourism industry lost an estimated $4.5 trillion in 2021.
Now, restrictions are starting to ease. The US opened its borders to vaccinated passengers in November 2021, the cost of testing has dropped, and many airlines are bridging A380s back online in order to meet increased customer demand. Already, Easyjet is flying at 70% of its pre-pandemic capacity.
Travel is set to rebound, and dramatically, ushering in a ‘roaring 20s’ for the industry. 57% of consumers expect to be travelling within two months of the pandemic being contained, and are in a strong position to do so, with household saving rates having spiked 10 – 20% in the US and Western Europe.
And it’s not just leisure travellers: business travel spending is expected to jump 37% as conferences make a comeback and offices reopen.
One big winner from this return to form will be travel cards. They performed surprisingly well during the pandemic; of all credit card applications in 2021, 25.6% were for travel credit cards, up from 17.13% the year before.
Card providers that support travel as a specific use case will prosper in the coming year. Specifically, those that offer favourable FX rates, travel insurance and rewards, and easy reimbursement of travel and entertainment (T&E) expenses will lead the pack. Instarem’s amaze card, the first of its kind in APAC, is already being heavily used for travel.
But as overall volumes recover, travel companies will need better payment capabilities to meet demand. The pandemic exposed quite how inadequate current payment systems are. Some travel firms saw almost half of their booking cancelled or rescheduled, causing headaches with refunds and chargebacks.
Often, travellers pay months in advance for their trips; it improves liquidity in the system, but is enormously complicated and time-consuming to recoup when things go wrong. This causes frustration for travellers, who can be left waiting months for refunds, and damages brand loyalty.
The complexity of international payments and the high cost of payments processing (3.2% of topline revenue, on average) exacerbate the problem for travel companies. Now, innovation in travel payments processing is urgently needed in order to improve margins and cashflow, and smooth out the customer experience.
Travel companies will look to unlock new payment options and modes that help increase demand while lowering the cost of supply. Options like BNPL are already on the rise, with some also considering direct bank transfers and digital wallets. 22% of travel executives see the implementation of new payment models as a top priority in the year ahead.
Enterprise resource management (ERP) and treasury management systems (TMS) transformation is imminent across the industry. In 2022, travel firms will infuse new-age payment capabilities and replace legacy systems with digital solutions, unlocking automated payment processing, refunds, accounts receivable and more, without opening travel companies up to fraud.
Global payments will be transformed by new infrastructure and acquisitions
The pandemic accelerated digital transformation across every industry, and payments in particular. In 2022, new infrastructure and consolidation in the industry will help payments players adapt to changed consumer behaviour.
5 – North America will finally catch up with real-time payments
Small and medium enterprises (SMEs) are a critical part of the global economy: they make up about 90% of businesses and account for over 50% of employment.
During the pandemic, some struggled. The sharp drop in economic activity hit small businesses harder: it cost SMEs in the UK twice as much as anticipated, while a third of SMEs in the US remained closed well into 2021. But thanks to support from local
communities (53% of global consumers think it’s more important to shop with local businesses now than before the pandemic) and government bailouts, they’ve managed to survive and scale domestically.
As borders and trade reopen globally, they’re setting their sights on international expansion. But that comes with challenges. Typically, SME transaction volumes are too low for large business payment platforms. That means they’re faced with a complex, piecemeal infrastructure of banks and processors in order to make cross-border transactions.
To streamline payment processes, reduce operational overheads and stay competitive, SMEs will be on the search for smoother remittance platforms. One of their key criteria will be the ability to send and receive payments across borders in real-time.
SMEs have been crying out for real-time payments for the last 5 years. As far back as 2017, 43% of SMES globally said real-time payments were essential to their success. Real-time payments deliver a range of important benefits, including lower costs, better visibility, improved cashflow and liquidity, and a superior experience for customers.
Now, with the UK rolling out its ISO20022 guidelines, stricter transaction referencing will be required. As a critical element in invoice reconciliation, that opens up a whole host of new B2B use cases, and opportunities for SMEs to drive value from real-time payments.
Luckily, much of the world has already adopted real-time payments. Today, 56 countries offer them, with adoption having increased fourfold between 2014-2019. In 2020, 70.3 billion real-time payments transactions were processed worldwide – an increase of 41% on the previous year.
That trend is set to continue. 97% of banking, FinTech and payments organisations think there’ll be a shift towards more real-time payments in the years to come, as more commerce moves online. Starting in 2022, more countries will add real time payment rails.
The most significant new adopters will be the US and Canada. Thanks to a myriad of regulatory and technology issues, North America has lagged behind other jurisdictions in implementing real-time payments. It’s a space where innovation has been led by Asia: Korea, India and China were among the earliest adopters, but now even countries like Vietnam, Cambodia and Thailand have overtaken North America.
Now, the US and Canada are playing catch-up. The FedNow program is currently in pilot with over 200 financial institutions in the US and due for launch in 2023.
Likewise, Canada’s Real-Time Rail (RTR) is expected to launch in 2022, as a part of ongoing efforts to modernise its payments infrastructure.
American banks have an outsized impact on the movement of money around the world, and therefore the ability of many (especially SMEs) to do cross-border business. As they join the rest of the world in offering real-time payments, it will open up commerce, competition and ultimately better customer experiences.
6 – Hundreds of small FinTechs will be swallowed up by bigger players
Acquisitions in the payments industry are nothing new. Ever since the first wave of FinTechs hit the market, established financial institutions have been keen to acquire them. Facing disruption, they’ve partnered with FinTechs to get access to tech talent, build better products and customer experiences, and get them to market in a more efficient, agile way.
That trend towards using the FinTech ecosystem as a “supermarket” for capabilities didn’t slow during the pandemic. In the last year, there have been several major acquisitions of FinTechs by established FIs, including American Express’ acquisition of Kabbage.
In fact, 56% of FinTech acquisitions were made by trade and financial institutions in 2021.
In the next year, this trend will continue: 53% of corporate and private equity firms expect merger and acquisition (M&A) activity in Europe to increase in 2022. But it won’t just be established players acquiring FinTechs. Hundreds of smaller FinTechs will be acquired by bigger firms in the next 18-24 months.
Currently, the fintech landscape is oversaturated with small, undifferentiated players. The question of whether we had reached ‘peak fintech’ was already being raised in 2019, when there were about 12,200 FinTechs globally.
Now, there are 26,000.
Consequently, many feel all the valuable end-user relationships have already been won. Smaller FinTechs unable to offer genuine innovation or unique access to data are struggling to win the attention of either customers or investors, and are at risk of joining the 75% of FinTechs that fail. Instead, many will opt to sell out and merge into market leaders.
In particular, B2B payment FinTechs will look to acquire smaller B2C FinTechs to mine their tech and talent. Forrester predicts that by the end of 2023, B2B eCommerce in the USA will be worth $1.8 billion.
That represents an enormous opportunity to conquer a growing market for B2B FinTechs who have (or can acquire) expertise in designing strong end-user experiences. Meanwhile, cryptos will seek to accelerate their transition into the legitimate mainstream by acquiring licensed FinTechs.
There are a number of reasons why acquiring long-tail FinTechs is attractive for the bigger players. Acquisition helps them expand their product set and capabilities, rapidly filling gaps in their own tech stacks. The pandemic exposed where those gaps were, and highlighted the importance of developing a differentiated offering.
FinTechs that only offered one service – especially things like retail or travel payments – struggled, and are now looking at acquisitions to expand their customer base.
This spate of acquisitions will accelerate the trend towards greater ecosystem collaboration and ‘rebundling’ of the fintech stack. And that’s good news for consumers, who’ll benefit from an increased pace of innovation, and the development of new digital finance solutions with a focus on quality over quantity.
As global payments reconfigure in the year ahead, there’ll be winners and losers. Increased regulatory pressure and the complexity of building payments capabilities will force some players out of business, or into acquisition, reshaping the entire ecosystem. But others will rise to the challenge, developing new products and services that respond to the changed needs of both other businesses and consumers post-pandemic.
As the global payments infrastructure continues to evolve, change will be the only constant in the next twelve months and beyond.
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