Research Note: The future of digital commerce and payments in a digital society

To remain competitive and optimise customer satisfaction, application leaders responsible for digital commerce must anticipate the future of consumer payments. Payments have the potential to be entirely cashless, but may bring additional challenges in reliability, security and convenience.

The future of commerce payments in a digital society will be largely shaped by four key developing trends observable in the market today. (See below) This Gartner based research note aims to help understand the current trajectory and future impact of these trends and to prepare for the future of digital payments within your organisation.

Mobile Payment and Digital Wallets

Payments in a digital society will be largely conducted via mobile devices. While it is likely that cash will not disappear completely for 25 years or more, plastic cards are likely to largely disappear from use within the next 10 years. Consumers will continue to demonstrate a preference for mobile and wearable devices as the origination point for everything, and payment is no exception.

Payment via mobile devices, including wearables, is rapidly increasing worldwide. There are three primary types of mobile payments in the market today:

• Mobile point of sale (POS): This type of mobile transaction occurs when a merchant business (seller) uses a mobile device in place of a fixed POS terminal. Examples include when a hardware dongle is attached to a mobile phone or tablet, or when an app on the phone is used to read or render a QR or bar code, and that initiates a financial transaction.
• Remote mobile payments: This is any transaction conducted by using a mobile device to connect to a website or an app and to make a purchase. For instance, shopping on Amazon or Taobao, paying for streamed content, such as music or videos, or buying virtual assets within a native gaming app.
• Mobile proximity payments: This type of mobile transaction involves a consumer using their mobile device at a POS in lieu of cards, cash or checks. This type of transaction can be achieved using Near Field Communication (NFC) technology, allowing the phone to emit a signal that is natively readable from an NFC-enabled terminal such as Apple Pay or Google Pay. Additionally, it could be a consumer rendering a QR code that is read by a merchant and initiates a “pull” payment transaction. It also could be a consumer using their device to read a QR or bar code from a merchant, initiating a “push” payment transaction (such as Alipay, WeChat Pay). In simple consumer terms, this is described as, “Using my mobile device to make a payment at a cash register/POS by waving it or scanning a bar or QR code at a cash register/POS.” (See “Digital Banking Customers Expect Their Banks to Take On New Roles.”)

For purposes of this research note, the focus is on remote mobile payment and mobile proximity payments, both of which are strongly tied to the use of digital wallets. Digital wallets are commonly used by consumers performing mobile proximity payments, and their use is steadily increasing for remote mobile payments.

Mobile proximity payments are predominantly supported through one of the following technologies:

• Near Field Communication (NFC)
• Quick Response (QR) codes

Both technologies allow a consumer to use their mobile device in lieu of a card, cash or check during a face-to-face transaction. QR code usage is growing quickly due to its relatively low cost, little or no new hardware requirements and easy accessibility even absent electricity or data connectivity. NFC is popular for OEM wallet support, and, due to its small form factor, is more practical for smartwatches and other small wearable devices. Anticipate support for both payment technologies in the digital society.

Digital commerce is rapidly shifting from the desktop to the mobile device. In the US, it is estimated that more than half of all e-commerce transactions will be conducted from a mobile device by 2021.¹ Globally, that growth is substantially faster with an estimated 67% of all e-commerce transactions being conducted from a mobile device in 2019.² Data shows that abandonment rates are more than twice as high globally for commerce conducted from a mobile device than from a desktop.³ One way to mitigate this is to simplify check-out through use of wallets, notably reducing the consumer effort for data entry of payment details. This can be achieved by leveraging either closed loop wallets or open loop wallets, or a combination of both.

• A closed loop wallet is a single-store account validation that unlocks the consumer’s stored payment methods. A closed loop wallet is often offered by merchants to encourage purchases at their own stores — for example Starbucks, Walmart, Target, etc. Although sometimes not referred to as a “wallet” by the merchant, any stored payment methods that can be accessed by validating the consumer’s identity qualifies as a closed loop wallet.
• An open-loop wallet will carry its own brand — such as PayPal, AliPay, WeChatPay and Venmo — and will typically be accessed by the consumer on the check-out page and perceived as a method of payment. This type of wallet can be used at any merchant that accepts it as a form of payment and is not limited to any one store or brand.

As society becomes more digital, merchants must anticipate a continued shift toward mobile payments and support quick, simple and safe expedited check-out options, whether online or in store. These payment options are evolving to become even easier to use, while maintaining customer security, by integrating biometrics and other streamlined authentication methods. For a look at the myriad ways that a phone can be used for authentication, see “Technology Insight for Phone-as-a-Token Authentication.” To remain competitive, application leaders must implement streamlined check-out solutions that require minimal, if any, manual data entry for their digital commerce sites, and stay abreast of authentication technology developments. Digital wallets, whether open-loop or closed-loop, will remain a key way to achieve this ease of use in the digital society.

Open Banking and Interoperability

Payment methods in a digital society will be far more ubiquitous and consistent than they are today. There will be fewer of them and all will demonstrate more global utility. The current fragmented payments landscape impedes innovation, especially where supported and preferred payment methods vary greatly from country to country. FinTech companies and other innovators need to create separate instances or implementations for each unique locale, which increases the effort per innovation by many magnitudes. The only globally near-ubiquitous payment types today are the major network branded debit and credit cards, which may be a small proportion of the digital commerce payments made in any one country.

In order to promote innovation, many countries or regions are encouraging or mandating open banking and other interoperability initiatives. European PSD2 regulation is indicative of the trend toward opening previously locked away data and increasing interoperability.

Under the regulation, European banks are mandated to provide APIs that enable access to consumer bank account data. Banks have previously closely held detailed data regarding their customers’ accounts, spending habits and financial health. Under the new regulation, customers can give explicit permission to trusted third parties to access their account data. This could be for the purposes of enabling account aggregation across different banks within a single mobile app, or facilitating account comparison and switching services, etc.

This improved access also enables payment gateways to offer real-time payments from a customer’s bank as a payment option within the merchant check-out. As a recent example, the acquirer processor, Adyen, introduced such functionality — Dutch airline KLM is an early adopter, allowing customers in the UK to pay for flights using real-time bank payments facilitated by open banking APIs.

Similar payment innovation, and more, can be anticipated from the likes of the Unified Payments Interface (UPI) in India, to the NetsUnion initiative in China, as open banking initiatives create more ubiquity and cohesiveness.⁴ This forms a foundation upon which to build new functionality that can reach more consumers more quickly and is therefore more interesting for technology companies to invest in (see “Market Guide for Digital Commerce Payments”).

Real-Time Payments (RTP)

Similarly, faster or real-time payment capabilities are developing and advancing in many countries and regions. Examples include the UK’s Faster Payments Service (FPS), The Clearing House (TCH) in the US, and Australia’s New Payments Platform (NPP). Visa and Mastercard also support real-time payments in the US using Original Credit Transactions (OCT) — branded as Visa Direct and MoneySend. The promise of funds that move from one account to another in near real time creates a fertile environment for innovation. As these new networks gain traction and reach the critical mass level of adoption, FinTech companies will introduce creative new solutions to consumer needs.

Real-time payments carry several characteristics that have previously been accessible only with cash:

• Immediate: Like handing physical cash from one party to another, the transfer of funds in real-time payments happens nearly instantaneously.
• Payer initiated: Unlike credit or debit card payments, cash is always pushed from the payer to the payee. Conversely, when a consumer pays online with a card, they are providing the payment credentials to the merchant. The merchant then uses those credentials to contact the issuing bank and “pull” the funds from the consumer account. The issuing bank does not have any direct interaction with the consumer during the commerce transaction, and therefore needs processes to support consumer disputes of invalid transactions at a later time. Most real-time payment initiatives require active payer authentication and a “push” of funds to the requesting merchant.
• Reliable: Once someone places cash into your hands, they cannot get it back without requesting it or stealing it from you. Historically, delayed settlement windows have been a significant means to support payment reversal due to errors or fraud. Real-time payments need to be irrevocable in order to support an environment of trust for the financial institutions that are holding and moving the money. Most real-time payments achieve this through the “push” payment approach. Payers must authenticate with their bank (or other depository institution) and authorise the payment. This reduces the possibility of fraud or account errors.

As these criteria are addressed, combined with the features of digital payments that are superior to cash — exact change and instant accessibility — a wholesale shift away from cash and any lingering check usage becomes more inevitable. Real-time and other forms of digital payments will eventually become the norm, even at the POS. Combined with the possibilities of bidirectional NFC and QR codes, the traditional payment card reader could become a thing of the past.

Cryptocurrencies

With more than 2,600 cryptocurrencies on the market today, a global market cap exceeding $271 trillion,⁵ and reports indicating as many as one in 10 people have at one point owned cryptocurrency,⁶ it’s clear that cryptocurrency is not a fad. Large financial institutions have begun issuing their own coins for institutional money movement, such as the JP Morgan Coin.⁷

Venezuela issued its own oil-backed digital currency Petro,⁸ in order to combat hyperinflation and other political and economic issues. Though its success has been quite limited, other countries are rumoured to be working on their own national cryptocurrencies as well, such as China and Iran.^9,10

Tech giant Facebook recently announced its own collaborative cryptocurrency initiative, Libra,¹¹ and the pending BAKKT exchange initiative, which includes such mainstream names as Starbucks and Microsoft.¹² At some point, the market will reach a tipping point, at which time cryptocurrency will settle into its role in digital society.

What will that role be? Cryptocurrency has one inherent advantage over other currencies and methods of payment — it is inherently not limited by national borders. It may in some cases also carry anonymity and speculator value, but these attributes are the ones that cause angst among regulators.

Acknowledging these issues has led to increasing efforts for knowing your client and trackability, and to the advent of stable coins tied to other assets, such as fiat currencies, in order to protect against viability.

Once regulatory support is achieved, the future role of digital coins will be largely dependent on the same thing that most payment methods’ success is dependent upon: adoption. While inherent global acceptance may seem as though it would ease the path to global adoption and ubiquity, with nearly 2,700 digital coins on the market today, there is more fragmentation in cryptocurrencies than there is in national currencies. Over time, winners will emerge. Determining factors will be:

• Consumer utility — The most obvious consumer “hook” that will drive material adoption is moving funds across borders. Digital currencies are inherently global and uniquely positioned to reduce cost and complexity for cross-border money movement of any kind.
• Consumer trust — Consumers have lifelong familiarity with their national currencies, creating an inherent level of trust. While recent events in Venezuela demonstrate that national currencies are certainly not infallible, the familiarity with national currencies gives consumers a degree of decision-making confidence. Consumers are not going to gain this same level of confidence in a new concept quickly, nor are they going to hand it over to just anyone. Consumers will decide whether private industry, government or banks inspire the greatest level of trust and these will be the currencies that continue to gain traction as the market inevitably consolidates.
• Accessibility — With any form of payment, there always is a chicken-and-egg scenario in which consumers do not want to adopt a form of payment unless they can use it widely. And merchants do not want to adopt a form of payment unless consumers are already demanding it. Governments, banking giants and huge global brands all have large “user” bases, but those with technical relationships to their users (banks, social media companies, etc.) are uniquely positioned to make the transition to digital currency both easy and attractive.
• Consumer value — Finally, consumers will adopt cryptocurrencies only when they feel it provides them with value above and beyond what they receive today through other methods. Sometimes, convenience alone is enough, as has been demonstrated in China by the rapid progression from a largely cash-based society to nearly ubiquitous use of mobile and digital wallets. But Starbucks has demonstrated its ability to gain customer adoption of its digital wallet through loyalty rewards, offers and discounts. This same approach may accelerate the adoption curve for cryptocurrencies.

Financial Inclusion Initiatives

Payments in a digital society need to be accessible to everyone. This explains why cash will not disappear completely for many years. Financial inclusion efforts will gradually shrink the need for cash. But niche use cases requiring unique cash attributes such as anonymity or usability in pockets of non-tech-enabled regions will keep it around in limited use long after society has gone largely digital.

According to The World Bank, financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs — transactions, payments, savings, credit and insurance — delivered in a responsible and sustainable way.¹³ Financial inclusion is on the rise globally (see Figure 1), but was still below 70% as of 2017, according to the Global Findex Database.

Efforts to accommodate the unbanked and underbanked vary in approach and impact. For example, in India the Pradhan Mantri Jan Dhan Yojana (PMJDY) initiative relaxed identification and financial requirements and has resulted in more than 360 million beneficiaries having opened accounts under the initiative.¹⁴

Conversely, in the UK and parts of the US, there are legislative initiatives underway to ban cashless businesses, citing that this discriminates against the unbanked. Rather than creating incentives to correct the unbanked status of that population segment, these initiatives protect the use of cash in all commerce, potentially contributing to inertia.

As the world becomes more digital, full participation in digital society will become increasingly reliant on digital financial inclusion. Initiatives that generate reach into the banked and unbanked create massive pockets of untapped opportunity, resulting in more technology investment and innovation.

Expect to see more FinTech involvement in the provision of basic savings and lending services, both in partnership with and separate from traditional banks. At the intersection of financial inclusion, real-time payments and open banking initiatives lie extraordinary potential to move money quickly and easily — from any business or consumer to any other business or consumer, including across borders.

But it is time-consuming, expensive and complex. Rather than risk falling behind, application leaders should adopt processes to stay current with financial inclusion initiatives, not only in the populations and geographies they process in, but also globally to spot trends that may impact them in the future.

As the payments landscape evolves and inevitably converges, FinTech innovations are less likely to net new forms of payment, and more likely to provide customer experience benefits that accelerate consumer adoption of the payment methods and underpin them.

These may range from more customer-centric digital support of loyalty, rewards and discounts to the fluid integration of payments into emerging technologies such virtual reality (VR) and augmented reality (AR), Internet of Things (IoT) and conversational commerce.

Application leaders for digital commerce should anticipate the unexpected, supporting planning processes that allow for pivoting in the event of rapid innovations. Ensure that business leaders and strategists are staying current with the rapidly changing landscape and exploring possible impacts and opportunities for your business.

Evidence

¹  “U.S. Mobile Retail Commerce Sales as Percentage of Retail E-Commerce Sales From 2017 to 2021,” Statista.

²  “Mobile E-Commerce Is Up and Poised for Further Growth,” Statista.

³  “Benchmark Report,” Montate.

⁴ “About Us: Nets Union Clearing Corporation,” NUCC.

⁵  “All Cryptocurrencies,” Investing.com.

⁶  “Mobile Banking,” ING International Survey.

⁷  “Digital Coin for Payments,” J.P. Morgan.

⁸  “Turns Out Venezuela’s Oil-Backed Petro Cryptocurrency Is Real After All,” CCN.

⁹  “Facebook’s Libra Forcing China To Step Up Plans For Its Own Cryptocurrency, Says Central Bank Official,” South China Morning Post.

¹⁰  “Iran Completes Development of Rial-Supported National Cryptocurrency,“ Bitcoin.com.

¹¹  “White Paper.” Libra.

¹²  “Bakkt Begins User Testing Bitcoin Futures,” Yahoo Finance.

¹³  “Financial Inclusion Overview,” The World Bank.

¹⁴  “Pradhan Mantri Jan Dhan Yojana Progress-Report,” India Dept. of Financial Services.

¹⁵ “DataBankGlobal Financial Inclusion.” “The percentage of respondents who report having an account (by themselves or together with someone else) at a bank or another type of financial institution (see definition for financial institution account) or report personally using a mobile money service in the .past 12 months (see definition for mobile money account).” The World Bank.

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