The global COVID-19 pandemic has changed not only the way we interact, but also the way money moves.
According to Everest Group report, Modernizing Data, Applications, and Infrastructure for the Next Phase of the Payments Revolution, the pandemic has accelerated the digitalization of payments and prompted consumers and businesses to rely on digital and contactless payment options when buying and selling goods and services.
Although cash and cards still dominate in many geographies, the pandemic has accelerated momentum for already growing traction for alternative payment methods (APMs) across the globe.
With the rise of digital payments and increase in online shopping, retailers are partnering with banks and FinTechs to offer a Buy-Now-Pay-Later (BNPL) facility to customers at check-out. The pandemic gave a massive boost to BNPL adoption and is expected to come under more regulatory scrutiny going forward, but that isn’t going to slow down this trend.
The Asia Pacific region, particularly China and India, has experienced higher adoption maturity, spurring the mobile payments revolution. APMs account for nearly 55-60% of total e-commerce spending across Asia. In China, digital wallets account for nearly 45% of e-commerce transactions.
The North American region is seeing a rapid increase in adoption of contactless cards and mobile payments. APMs are expected to capture over 50% of the market by 2022. Digital wallets are leading the pack in the US and bank transfer in Canada.
Banks and Payments Service Providers (PSPs) have been investing in payment modernization initiatives to shift to an open API-based architecture and adhering to the ISO 20022 payments messaging standard, which allows them to capture rich and structured data. These initiatives will help improve the payment experience.
In addition, evolving regulations and customer demands for a seamless experience across multiple channels are pushing banks and payment services providers (PSPs) to invest heavily in modernizing their payments technology stack. Payments technology service providers are investing in next-generation digital technologies such as the cloud, API, and AI/ML to provide an integrated payment ecosystem with value-added services, while managing risk and reducing fraud. Usage of data, advanced analytics and AI is fuelling the rapid growth in next-generation fraud management solutions and value-added services.
With the rise of APMs such as cryptocurrencies, digital wallets and Central Bank Digital Currencies (CBDCs), regulators are amplifying their scrutiny of new players and offerings. It has become mandatory for banks to upgrade their risk and compliance management systems for better fit to regulatory requirements and emerging security risks as a result of adoption of new forms of payments processing.
Cryptocurrency as a payment method will soon become mainstream, as regulatory uncertainties gradually settle down and the market sees more institutional investments.
Digital fiat might not replace cash, but the hesitation toward CBDC adoption will not last long; emerging economies are leading the race for CBDC development.
Real-Time Payments (RTP) platforms—which initiate and settle payments nearly instantaneously—are being embraced globally; however, RTP maturity varies across countries due to differences in legacy infrastructure, richness of overlay services and the FinTech ecosystem, and openness to alternative payment methods.
Banks and technology vendors are taking a partnership-led approach to offer innovative payment solutions for merchants, corporate entities, and specific industry verticals. BigTech firms are also getting into the race, tapping into the changed consumer behaviour for payments by launching new offerings to grab wallet share.