Big Four consultancy EY and law firm Clifford Chance have both recently published reviews of trends in the paytech sector, setting out how these trends will affect businesses and their customers. Each report suggests a number of scenarios – taken together, it is possible to see 10 trends that will have a significant influence over today’s payments landscape:
1. Open banking
2. Open finance
3. Real-time payments (RTP)
4. Buy now, pay later (BNPL)
5. Digital wallets and super apps
6. Embedded payments
7. Digital currencies and CBDCs
8. Cross-border payments
9. Operational resilience
10. Anti-trust authorities’ scrutiny
Each one of these forces is an indication of how quickly the sector is evolving. As Alla Gancz, EY UK payments consulting leader, says: “With the rise of paytechs, we see a boost of innovation and new propositions that are redefining the payments landscape and powering connected commerce, while offering consumer choice that we have never seen before. Fundamentally, payments are becoming more instant, frictionless and embedded within customer journeys – hence invisible.”
And, says Clifford Chance: “Regulation of the payments sector continues to evolve as technology drives further changes to consumer and wholesale payments, from blockchain-based central bank digital currencies and stablecoins to operational resilience and new embedded finance offerings.”
According to EY, open banking provides new possibilities for faster, more secure, cheaper payments that are convenient for customers by connecting merchants and customers directly, effectively creating very compelling “open payments” or “pay by bank” options.
Holly Coventry, vice president of international open banking payments at American Express, says: “Open banking is accelerating innovation within the payments sector and providing forward-thinking businesses of all sizes with a competitive edge by enabling them to offer flexible and frictionless options at checkout.”
However, global fragmentation in payments will require variations in approach across different markets.
Open finance is the natural continuation of open banking foundation and mandates; and open data will enable further industry convergence. According to EY, policy-makers in markets around the world are exploring the extension of open banking into open finance, and broader initiatives to open up economies even further, embedding principles of access to services and data as wider fundamentals.
EY partner May Lam says: “Open banking has extended to open finance, which has also fuelled the acceleration of embedded finance. Spurred by the rapid adoption of new technology alongside the boundless demands in consumer preferences and behaviour, this brings us to the next digital frontier – open data economies and monetisation.”
Clifford Chance notes that in the EU, publication of a new framework for Open Finance is scheduled for Q2 2023 following a consultation in 2022.
According to EY, deployments of RTP are at an all-time high thanks to innovations in technology, changes in regulations and customer demand for easier access to funds. However, the maturity and adoption rates of RTPs vary by region.
The consultancy adds that, although the base RTP infrastructure is a step toward the future of payments, the true value of RTP is only realised when surrounded with value-added services or overlays, such as request to pay, instant cross-border payments, and fraud and liquidity management tools.
As EY says: “Consumers and businesses alike are looking for ease of use and immediate access to funds. With the increasing availability of overlay services to bolster revenue, those who have not yet adopted RTP are going to be left behind.”
BNPL continues to grow at a rapid pace given its appeal to consumers and merchants. Despite current headwinds, BNPL has established itself as an alternative payments method and will continue to expand.
According to EY, retailers and merchants use this innovative credit option to drive sales, attract customers and decrease cart abandonment. Consumers choose BNPL for its convenience, low cost and predictable payments schedule.
However, EY says the BNPL model will need to evolve to deliver sustained profitability and consumer protection given the rising cost of capital and increased regulatory scrutiny.
Digital wallets are helping to significantly reduce payments transaction fees while offering customers a single destination to manage their finances. By leveraging data, super apps are setting out to fulfil almost any financial, leisure, or lifestyle need their users may have.
Interestingly, EY notes that APAC is leading the way compared with the North American or European markets. The consolidation of major players in APAC has influenced a direct leap from mainly cash-based societies to digital payments.
EY predicts further expansion of digital wallets that offer new services in order to grow their user base. This will help to increase adoption rates and convince merchants to accept payments. “We also expect to see super apps with social media-initiated payments, voice activated payments, cryptocurrencies, NFT management, metaverse payments and biometric payments, including facial recognition, all become mainstream.”
Embedded payments constitute the largest subsector within embedded finance, and their market value is estimated to be approximately $4.5 trillion by 2030, by when 74% of digital consumer payments globally are expected to be conducted via platforms owned by non-financial services players.
EY argues that the next great payments leap is into further invisibility. “Specifically, the idea behind invisible payments is eliminating the need to provide any additional credentials for authentication. Instead, the invisible payments system will automatically recognise and authenticate the customer, often with biometric data. This means that consumers will be barely aware that a transaction is taking place at all. The payments just happen as a part of their interaction.”
Clifford Chance adds that data flows related to the provision of embedded financial services will be impacted by the evolving legal landscape for cross-border data transfer. New privacy laws and changes to data governance regimes are on the horizon in 2023 – including in the US, the UK, the EU, India and Saudi Arabia. The year ahead will also see international cooperation efforts, such as the EU-US Data Privacy Framework, seeking to ease some of the current challenges in international data transfer.
Digital currencies and CBDCs are gaining momentum and rising to the top of the agenda for payments providers that are looking for regulated alternatives as first industry solutions emerge. But the full benefit of distributed ledger technology (DLT) will come from tokenisation, programmability, smart contracts, combined with a network effort by allowing banks to participate on a single platform (open loop).
However, EY predicts that the ultimate benefit of digital currencies will be instant/atomic settlement, increased automation, transparency and efficiency, as well as support of new business models via programmability of money.
Clifford Chance adds that many CBDC projects have a domestic, retail focus. However, international standardsetting bodies such as the Bank for International Settlements (BIS) are pushing for the use of CBDCs to facilitate cross-border payments. “Solving the issue of interoperability between initiatives is key,” the law firm says.
The volume of international payments continues to rise and is expected to reach US$200 trillion in 2027. Wholesale B2B payments represent the largest share, while retail payments and remittances remain small in comparison. With regulations laying the groundwork for cross-border payments to be modernised, paytechs are moving at pace to take advantage of these changes to transform the cross-border payments business models and customer experiences.
According to Clifford Chance, international efforts to address challenges and frictions in cross-border payments are ongoing. In February 2023, the Financial Stability Board (FSB) published a report detailing actions to be taken on payment system interoperability, legal, regulatory and supervisory frameworks and cross-border data exchange for the next phase of work under the G20 Roadmap for Enhancing Cross-Border Payments. The FSB makes clear that much remains to be done to enhance the cost, speed, access and transparency of cross-border payments ahead of the G20 Roadmap's 2027 target date.
However, as EY notes, interlinking instant payments systems offers a new way of moving money across borders safely, quickly and at a low cost. Domestic schemes are collaborating to develop a global, immediate cross-border payments system to support multiple currencies across multiple countries.
For example, EBA Clearing, Swift and The Clearing House have launched an immediate cross-border program (IXB), which is based on ISO 20022 message standards, in an effort to speed up and enhance cross-border payments through the interlinking of USD and EUR payment systems.
Growing digitisation of customer experiences, greater automation of internal processes and increased use of third-party providers all make firms increasingly susceptible to technology disruption events. The financial, reputational and societal impact of high-profile IT failures means that operational resilience (or ensuring the continuity of key business services) remains a high priority for boards, regulators and consumers alike.
In October 2022, following a G20 request, the FSB published a consultation on Achieving Greater Convergence in Cyber Incident Reporting, while the EU's new Digital Operational Resilience Act (DORA) is intended to establish uniform requirements for the security of network and information systems of companies operating in the financial sector, including crypto-asset service providers, as well as any critical third parties that provide information communication technologies services to them.
The UK has introduced a Financial Services and Markets Bill that includes proposals to regulate cloud service providers and other critical third parties supplying services to UK regulated firms and financial market infrastructures.
In 2023, according to Clifford Chance, we will see the impact on the payments sector of new antitrust legislation in several jurisdictions. The EU's Digital Markets Act came into force towards the end of 2022, including rules on in-app payment mechanisms and access to near-field communication technology used for payments.
In the UK, new legislation is expected to be passed and in force by the end of 2023, giving new powers to the Competition and Markets Authority's Digital Markets Unit. In the US, new antitrust legislation has also been proposed, but the future of this is less certain.
Also in the UK, In the UK, we will see the UK Payment Systems Regulator's interim findings from its market reviews into card scheme fees and cross-border interchange fees. The Financial Conduct Authority will also publish its feedback statement following its discussion paper on competition impacts of ‘Big Tech’ entry into retail financial services, including payments.
Philip Smith is editor of The Treasurer