A Peek into the Future of Payments (#20)

Recap of 2020: Real-time payments, APIs, Card-on-file, CBDCs, Crypto, BNPL, and more

Dec 20, 2020

As the year comes to a close, I reflected on whatever has gone by in payments in this weird and equally crazy time. For one, it is a lot. So much has happened this year that it would be tough to cover it in one write-up. Even if I was scraping only the surface.

Reflecting on the trends has meant that this article will not be a deep-dive that I usually prefer. Instead, it will be a brief recap of some such payment trends over the last twelve months. Hopefully, this gives you a clearer picture of what’s going on in the industry. So, here we go!

Everyone wants a Real-Time Payments (RTP) system

In the simplest form, real-time payments are digital payments from one bank account to another that happen within seconds and where the confirmation of the payment completion is provided instantly to both parties.

The applications of RTP systems are enormous. Take, for example, peer-to-peer transfer of credit, immediate bill payments, vendor payments from corporates, and social disbursements in times of crisis – all would save costs with the benefit of speed. More so, faster payments reduce the risks of settlement, making the ecosystem more secure.

India, with its large gig and informal economy, is fortunate to be ahead of the real-time-payments curve. IMPS and the API-layer of UPI built over it have been hugely successful over the last half of the decade. Recognizing the need, RBI even declared RTGS 24x7, applicable only since last week.

Elsewhere, we saw Brazil launching the much-awaited instant payments system – PIX – last month. European banks are coming together to lower their reliance on the west with the European Payments Initiative (EPI). They will leverage their existing instant-payments transfer infrastructure for EPI. Even the U.S. is stepping on the accelerator with FedNow Service, announcing a pilot only two months ago (FYI: ACH is not real-time since the transactions are processed in batches). For those interested, the FIS Global report does great justice to the topic, highlighting the successes of Australia’s New Payments Platform (231% transaction value growth) and Philippines’ Instapay (482% YoY) through real-time payment rails, and covering RTP systems of over 20 countries.

Two other trends favoured real-time payments this year. One, the increased interest in the Central bank digital currencies (CBDCs), which are intended to be real-time. And two, more clarity on the monetization opportunities of immediate payments. For example, Grab (in Singapore) utilised PayNow to provide real-time payment convenience to users, which helped it gain market share. We realize it more today that real-time transfers can be differentiators for businesses. There is little doubt then that the adoption of existing RTPs and implementation of new systems will continue to be at pace.

Card-on File and Subscriptions take giant strides

A card-on-file is when a retailer, a merchant, or a payment facilitator stores your card details for processing future transactions.

Think of a LinkedIn premium or a Netflix automatically debiting the month-end payment.

The growth of card-on-file is an important trend for businesses since sales are the single-biggest driver of their decision to allow a payment service. And solutions that improve consumer convenience in purchases and consumer loyalty to businesses hit the bullseye. This is where the card-on-file services come in. For consumers, if security is not a concern, card-on-file reduces significant friction at checkout. For example, why would you enter card details for each separate Amazon order, if you can simply store card information and do with typing only an OTP?

Subscriptions or card-on-file payments are not new, of course. But there has been a different surge to these payments. With the fear of COVID, not only are the Ubers and Netflix of the world providing card-on-file, but even our local restaurants, grocers, salons, and pubs are using card-on-file based contactless readers such as QR codes or digital wallets at the point of sale.

This, coupled with the rise of subscription-based services, has allowed card-on-file to become quite common today. From Uber for travel, Spotify for music, Prime for streaming, Swiggy for food, Instacart for groceries, to Zoom for calls, and Newsletters for news – every traditional service has become a pay-per-product. Revolut even launched a smart subscription feature in-app that allows users to keep track of such payments, while the payments giant – Lightspeed – has launched subscriptions for point-of-sale merchant terminals.

Even as pandemic subsides with the vaccine, there is little going back on card-on-file for businesses and consumers.

APIs are ruling the world; Capital and Growth push M&A

BaaS, PaaS – whatever you call it. Payments and banking services are being unbundled at every level and offered as APIs. Such APIs have surrounded us for long, but the level of growth in API-based payments companies and the complete takeover of tech stacks are new.

With hundreds of thousands of businesses moving online, the valuations of developer-focused payments companies such as Stripe and Adyen have more than doubled. Those relatively lesser-known such as Rize, Moov, and Unit have seen similar trajectories. Even Goldman Sachs sees the opportunity to provide APIs for embedding payments services to businesses.

A great enabler of this surge, outside COVID, has been the rise of open-banking initiatives such as PSD2 in Europe. This includes the introduction of multiple such developer sandboxes in Asia-Pacific countries as well - API Playbook in Singapore, IndiaStack in India, API Center in New Zealand. These ecosystem plays have allowed greater standardization in API integration for businesses. To add strength to the argument, API provider TrueLayer saw Payment Initiation – a payment method under PSD2 - grew >800% during this year.

And a direct consequence of the API economy has been a growth in partnerships between businesses. For example, Starling Bank – with the distinction of being the first profitable neobank – connects its business users to over 20 applications through its marketplace, incl. Slack and QuickBooks, and its retail consumers to 11 personal finance services, incl. PensionBee.

Recognising the opportunity, more venture capital is flowing into the API economy as well. The growth and capital are equally pushing mergers and acquisitions higher for the goliaths. An impact of the partnerships and M&As has also been greater diversification for payment companies – for example, towards point-of-sale credit. This will again continue as businesses continue to move online and depend on APIs to accept payments, provide credit, and manage their finances.

If the last few months are any indication, there are plenty of API-based payment companies up to take the Unicorn tag the next year itself.

Digital currencies gain more attention

2020 has been a big year for digital currencies. From CBDCs piloting in China to over 80% of Central Banks surveyed across the world engaging in research, experimentation, or development of CBDCs, the skeptics have grown less wary. Finally, six years after China began its DC/EP experiments, the idea of a change from the inefficient, loosely controlled, and costly fiat system is gaining followers. If you want to read more about this topic, I wrote in detail about it here.

CBDCs are not the only digital currencies to benefit, however. The rhetoric surrounding cryptocurrencies has also shifted towards positive, with many large institutional investors buying crypto and, especially, Bitcoin. In fact, Fidelity reported that ~36% of 800 institutional investors surveyed have increased their crypto holding this year.

And to be fair, the rise in popularity this time seems far from an upper end of the hype cycle. PayPal now enables millions of its users to conduct commerce through cryptocurrency. Square holds $50Mn in Bitcoin on its balance sheet. And JP Morgan has predicted ~$600Bn in bitcoin demand. Even influential investors such as Ray Dalio, who were staunch skeptics not long ago, are turning heads.

These are just some of the many big names voicing their support for blockchain technology and Bitcoin as a medium of currency today. So, what has changed?

Confidence in the security of transactions, trust in smart contracts technology, a completely borderless experience, and the opportunity to diversify from the traditional equity and debt have been some of the facilitators for this. What also helped is a change of heart from regulators. A greenlight to store crypto at federally chartered banks, for instance, has bought in more institutions as possible buyers. Cryptocurrency Act of 2020 in the U.S. and softening of stance towards crypto earlier in the year in India are other examples.

This has been a long road for crypto and there is a longer road ahead. Doubters and believers continue to be at crossroads. But even if crypto-assets were to go bust next year, many institutions (and I, personally) will continue to remain bullish in long term on the applications of blockchain and DLT platforms for payments.

BNPL challenges conventional credit purchases

Lastly, the one thing everyone in fintech has been talking about: Buy now, pay later. These are payments broken down into four or three interest-free instalments, similar to a traditional zero-cost EMI. But interestingly, these payments have caught on with the credit-averse Gen-Z and the younger millennials, who are increasingly using BNPL applications with the benefit of simple UI and transparent costs at checkout.

There is little to question the popularity that the payment option has gained in the consumers’ conscience. BNPL has continued to be the fastest-growing payment method in the U.S. and around the world this year. Worldpay even expects BNPL schemes to be the fastest-growing online payment preference in the next five years.

But the easier access to credit that BNPL provides has not been without opposition. Capital One recently blocked the BNPL credit card transactions, terming them as risky. Several other organisations and experts also cast an untoward eye to warn of the possible mountain of debt piling on Gen-Z.

Either way, BNPL is here to stay for years with giants such as PayPal and Klarna pulling their weights behind it. This, like others, would be an exciting trend to keep an eye on next year.

If you wish to learn more about BNPL, I have written on why retailers and consumers get lured into it before.

And some more…

The above are some of the top disruptions in payments today. But if you are interested in reading more, I am highlighting a few that you can research further:

Big-tech reaches down its wallets: Led by Amazon and Facebook, the presence of big tech in payments is being felt to a greater degree. Amazon One, Google Pay with Plex, Libra, WhatsApp Payments are some products waiting to disrupt payments. As always, apart from the private innovations, the deep pockets are allowing these companies to grow wider faster than others. There is an acquisition or investment in fintech every other week from one of these companies. For example, Amazon acquired PAYFORT - a payment gateway in UAE – only last week. Not that we would be able to, but there is no downplaying the big tech in payments.
QR code goes mainstream outside Asia: perhaps the biggest benefactor of the pandemic have been the contactless payment systems. QR code payments, which were already popular in China and India, have suddenly gained a larger following in the west as a POS payment method. The increase in following is obvious from the contribution of QR payments to PayPal’s growth this year. Moreover, major retailers in the U.S. such as CVS, Nike, and Bed, Bath & Beyond have started accepting QR codes, as people gain preference for touch-free checkout experiences. As the pandemic ends, the convenience of the QR will continue to remain in consumers’ psyche.
Contactless and Tokenisation grow for cards: tap-to-pay contactless payments and tokenised wallet transactions have shaped convenience and security in payments for the last five years. This year was no different, as the top card networks saw the use of contactless card payments and virtual cards grow due to the pandemic. These two topics would be good to get started on understanding card payments innovation.

Lastly, I would point out that the above trends were mostly product-oriented. Idid not cover the trends at the organization level for acquirers, issuers, and the networks. These would include the changes in costs and margins, the ongoing bundling and unbundling through M&As, and the many partnerships. Perhaps, a topic of discussion for some other day. Till then, happy holidays :)

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