By Jeroen Hölscher, Global Cards & Payments Practice lead, Capgemini Financial Services and Elias Ghanem, Global Head of Market Intelligence, Capgemini Financial Services
For years, the Payments industry has undergone seismic transformation fueled by the novel approaches of new-age players, industry consolidation, and customer demand for embedded experiences – and then the pandemic accelerated change further. Now, digital adoption appears to be here to stay as digital payments’ hockey-stick growth shakes up the traditional mix of payment methods, according to Capgemini’s Top Trends in Payments 2022.
COVID-19’s impact on digitalisation is far-reaching. Lockdowns, restrictions, and health concerns disrupted daily life in ways that morphed into long-term spending trends and consumer habits, paving the way to streamlined e-commerce and food delivery. PayTechs and industry newcomers responded with new business approaches, offering seamless customer experiences (CX) with fully embedded and transparent payments that intensified disintermediation and hit payment service provider (PSP) profits.
It’s clear that we are now entering the Payments 4.X era, an experience-driven environment where customer lifestyle purchase payments are invisible. For Payments firms, profitably is being upended as value-added revenue-generating opportunities begin to replace transaction fees.
Digitally-enthusiastic consumers, across all ages, helped spark this new era as they demanded more convenient lifestyle-embedded payments. So, too, did escalating B2B2C requirements for instant confirmation, smooth reconciliations, and seamless cross-border transactions. While many sectors have been long-dominated by cash and cheque, things are now beginning to change.
Players working to remain relevant are preparing to navigate the Payments 4.X era effectively:
- Banks and payments firms are urgently modernising systems, transforming the payments mix, and boosting affinity to digital payments.
- New players are actively consolidating in search of volume, new customer segments, and market opportunities. Not surprisingly, they are exploring collaboration at scale.
Digital payment methods are challenging the traditional payments instrument mix
Source: Capgemini Financial Services Analysis, 2021Source: Capgemini Financial Services Analysis, 2021
A behavioural paradigm shift ushers in 2022
Consumer and retailer desire for seamless and frictionless experiences is driving the wave of super apps that fulfill daily life needs and business functions (beyond payments) into a single application. The result? Digital payments are now ubiquitous and invisible, focusing on a feature-rich, hyper-personalised, end-to-end payment experience.
Moreover, e-commerce and m-commerce have entered the mainstream to become consumers’ favourite ways to shop − with digital solutions being the preferred payment method. E-commerce is the growth engine behind the proliferation of digital payments and the payments’ mix shift. In particular, digital wallets will account for more than half of all e-commerce payments worldwide by 2024. Traditional payment methods, such as cards and cash-on-delivery, are losing share quickly and may account for less than 40% of e-commerce payments by 2024. As a result, expect record-high digital purchases for the holidays.
B2B customers have also boarded the digital bandwagon. Capgemini’s World Payments Report 2021 analysis predicts B2B payments are finally taking-off with a 10.2% Compound Annual Growth Rate (CAGR) from 2020-2025. Electronic invoicing and digital payments penetration will be strong growth drivers.
Payment automation is a MUST as next-gen payments and direct-to-customer options dominate 2022 and beyond
As COVID-19 catalysed a permanent, irreversible shift to digital, the industry is supporting a digital instrument mix of next-gen payments. According to Capgemini analysis, instant and e-money payments will account for >25% of global non-cash transactions by 2025 − up from 14.5% in 2020.
What are these next-gen payment methods? You’ve been hearing a lot about them lately: Buy-Now-Pay-Later (BNPL), invisible, biometric, and cryptocurrency payments. Although these emerging methods are still relatively nascent (with <20% use by customers), payments executives believe they represent huge untapped potential.
Real-time payment adoption will significantly impact digital payments volumes. While scaled use cases are embryonic and focus mainly on peer-to-peer (P2P) payments, consumers embrace the speed of real-time settlements and opportunities to include unbanked or underbanked populations. we expect e-commerce payments, in-store checkouts, and cross-border transactions will cannibalise slower, less convenient methods.
On the B2B side, instant payments offer financial service providers the opportunity to tap into new revenue streams and develop data-driven services, such as instant liquidity transfers for corporate clients.
Leading PayTech players are leveraging direct-to-customer (D2C) business models. Klarna, Affirm, and Afterpay added a D2C layer to increase their total addressable market (TAM) or build differentiation.
- Shopify tied up with PayPal to provide end-to-end solutions that enable D2C businesses in India to accept hassle-free cross-border payments.
- Warby Parker, a New York-based online D2C retailer of prescription glasses and sunglasses, offers customers BNPL financing through its partnership with Affirm. To enhance the payments experience further, the optical brand is expected to offer debit cards with direct access to pay-over-time functionality soon.
Synergistic ecosystem players enhance their digital readiness
Disrupted by new-age business models and growing customer preferences for alternate payment methods, traditional revenue model profits are dwindling. Payments executives told us they expect conventional methods, that currently contribute up to 73% of revenue, will drop to 45% by 2025, which sets the scene for new models and monetisation schemes, such as fees for Application Programming Interface (API) protocol and data sharing.
To remain competitive and profitable, payments firms must digitally generate new revenue streams – but most banks are not ready for the API economy. For example, only 18% of bank executives say their firm is prepared to take advantage of Payments 4.X opportunities, including monetising customer and transaction data.
However, a partnership-based ecosystem strategy may be the secret to bank success. Future-focused approaches such as ongoing investment in technology transformation, migration to real-time payment infrastructure and modernisation initiatives (including ISO 20022) offer viable enablement tools. Payments are a critical function within a collaborative FS environment. To win, banks and payment service providers must embrace a platform approach mindset.
Further, payments costs are going down as data digitalisation empowers PSPs to understand and serve customers better while managing risk.
Open ecosystems can ignite cross-functional and cross-sectoral collaborations in:
- Data aggregation
- Consent management
- Digital Know Your Client (eKYC)
- Financial inclusion for the underbanked/ unbanked
With an eye on efficiency, firms are welcoming regional initiative trends (e.g., the pan-Nordics real-time payments scheme, P27) to fight operational inefficiencies, especially in cross-border payments. Creating a win-win value exchange will be the Payments 4.X era’s unique selling proposition (USP). In addition to adding value and hedging against commoditisation, firms can progress their go-to-market capabilities and industrialise their innovations.
2022 Payments trends will push industry frontiers, encourage collaboration
The payments ecosystem is transforming at an unprecedented pace as digital transactions become increasingly popular and private digital currencies emerge, sometimes driven by local central banks. PayTechs that started with specialised/niche offerings are now expanding their scale and reach via inorganic approaches.
Granted, banks have earned customer trust based on years of domain excellence. However, as we begin the new year and enter the Payments 4.X era, incumbents should be encouraged to carefully craft convenient and contemporary services, rather than products, to delight consumers and deliver superior CX. PayTech collaboration will be a high-reward success trend in the borderless, embedded, open, and inclusive financial system of tomorrow.
Super apps are mobile applications that offer various unrelated services via a single mobile interface. Rather than having multiple apps for different services, a super app gives users access to multiple services from a single location. Yahoo Finance, “Digital Wallets Eclipse Cash Globally at Point of Sale for First Time During Pandemic, FIS Study Finds,” Feb 24, 2021 Capgemini, “World Payments Report 2021,” Oct 7, 2021, Executive survey, N=164. PayTech firms enable the electronic transfer of value. They are specialists in making payments fast, frictionless, secure, and exchangeable from anywhere. A payments and technology mash up, PayTech solutions can be anything from digital applications to physical contactless wearables. Inc42, “GoingD2C: Simplifying The Digital Payments Journey For India’s D2C Brands,” Nov 18, 2020. IBS Intelligence, “Affirm to launch Affirm Card with access to Buy Now, Pay Later functionality,” Feb 26, 2021. Capgemini, “World Payments Report 2021,” Oct 7, 2021, Executive survey, N=164. Ibid. Open ecosystems bring stakeholders with common objectives together to create more value for end users – consumers, or businesses.