The Forces Reshaping Payments - Part 1
In the digital age, payments have become more convenient and secure than ever before. In fact, nine in ten Americans are using some form of digital payment and more than two billion people use mobile payments. With PayTech technologies such as Buy Now Pay Later (BNPL), digital wallets, and open banking services, consumers can choose from a range of payment options that best suit their needs. These technologies have revolutionized how people make purchases online or in-store, enabling them to access funds quickly and securely while offering convenience for buyers and sellers alike. Let’s explore some forces reshaping payments today by looking at Buy Now Pay Later (BNPL), digital wallets, and open banking services. We will also discuss how these innovative technologies create an ecosystem that offers credit union consumers greater choice when making payments.
So, what is PayTech?
PayTech is a term used to describe the rapidly evolving technology and payment solutions developed by fintech companies. 25% of fintech companies are PayTech-focused and are valued at $2.17 trillion today. PayTech solutions are revolutionizing the payments experience. Digital payments offer a limitless landscape to create innovative, efficient, secure, and convenient payments experience. Mobile technology has increased consumer expectations to pay for goods wherever and whenever they desire. In the past, payments were bifurcated between traditional financial institutions and non-financial institution players (as they were referred to before the term “fintech” was introduced). In the digital ecosystem, partnerships between traditional financial institutions and PayTech companies make sense to enable traditional financial institutions the ability to offer a wide range of payment services in a short period of time. The speed of digital has made financial institutions reconsider the notion of to “build or buy.” PayTech providers increase speed to market enabling financial institutions to meet current and future payment services demands.
Buy Now Pay Later
Buy Now Pay Later (BNPL) is revolutionizing how consumers make purchases and payments online, in-store, or at point of sale (POS). BNPL has traditionally been thought of as an installment loan alternative for larger, one-time purchases. But, BNPL usage for everyday purchases (gas, groceries, subscription payments, etc.) was $229.2 million in 2021. BNPL provides consumer access to funds quickly and securely, providing them convenience and flexibility while paying for purchases. Traditional installment loan preapproval programs cannot compete with the speed and convenience of BNPL. In addition, consumers are attracted to BNPL, as many providers offer 0% financing over the loan’s original term. BNPL users can spread interest-free payments over time, helping them budget/installment and manage their monthly finances more efficiently. In addition to the traditional BNPL acquisition channels, many financial institutions and credit card companies are now offering BNPL post-purchase by identifying large dollar items in a cardholder’s monthly transactions and offering the option to spread the item amount over a series of payments.
Digital Wallets
Digital wallets are revolutionizing the payments landscape by enabling consumers to make convenient, secure, and fast payments without needing a physical card. Furthermore, digital wallets can provide consumers with discounts, rewards, and loyalty programs - which can increase member retention and generate income to the provider. In a 2022 Digital Payments survey by McKinsey, digital wallet users cited store loyalty, payment consolidation/ease of use, one-time deals, and financial services app integration as primary drivers for digital wallet usage. Digital wallet users are expected to reach an astounding 4.4 billion by 2025. And with many digital wallet providers considering or offering traditional financial products, such as a high-yield savings account, financial institutions should strongly consider offering a digital wallet as a deterrent to disintermediation.
Embedded Payments
Embedded payments have become a core value proposition for businesses of all sizes. By enabling consumers to pay for goods and services quickly and securely within an app or website, embedded payments enable merchants to increase their customer base while providing consumers with a seamless payment experience. Furthermore, embedded payments have been proven to reduce shopping cart abandonment as a result of their speed and convenience, as consumers no longer must leave the checkout page to make a payment. This has led to increased engagement and loyalty from consumers, who appreciate the ease of use of embedded payments. Traditional financial institutions should consider offering an embedded payments experience by enabling an account holder to initiate a payment from within their transaction history. As with the shopping cart experience above, the more steps involved in making the payment, the greater the chance of abandonment to another provider. Additionally, by using tokenization technology, which masks sensitive information such as credit card numbers, embedded payments eliminate the need for merchants to store confidential consumer data on their servers - reducing risk and providing an extra layer of security for both parties involved in the transaction.
Open Banking
Open banking is yet another technology revolutionizing the payments space. Open banking gives users complete control over their finances by providing consumers access to their aggregated financial data from all their financial services providers. Open banking has the potential to reduce fraud rates by enabling consumers to monitor the totality of their transactions among all their accounts through an aggregate view (dashboard) of their financial relationships. Open banking tokenizes account data, masking sensitive information in the same manner as the tokenized card example above. And open banking uses direct connections between financial services providers through Application Protocol Interfaces (APIs), mitigating the risk of a fraudster acquiring account data or credentials during the data exchange process. In the past, the exchange of information between accounts was accomplished through screen scraping, which is highly insecure, and a target for fraudsters. It can often break since changes to screen layouts or log-in sequences can render the screen scraping inoperable. Open banking avoids all these issues. It is no wonder that open banking is quickly becoming the preferred choice for many consumers and financial institutions alike - offering the perfect balance between security and convenience.
Threats and Opportunities
The dynamic shift in payments is both a threat and an opportunity for financial institutions. On the one hand, innovative technologies such as PayTech have enabled consumers to make seamless payments with minimal effort. This has led to increased competition in the payments space, reducing customer loyalty and creating challenges for traditional financial institutions. On the other hand, financial institutions have new opportunities to leverage these emerging technologies to provide account holders with a more convenient and secure digital payment experience. Such solutions can potentially increase retention, attract new accounts, and open new revenue streams. And, of more significant concern, many (maybe all) of these technologies will quickly become table stakes to compete for the digital consumer.
Investment and Strategic Partnerships
Financial institutions should look beyond traditional payment methods to unlock greater value for their account holders. To achieve this, they must invest in the latest technologies and establish partnerships to achieve their strategic goals. It is said that the United States is at the forefront of PayTech investment, with 52% of investment deals in the payments industry being larger than $10 million. In other words, payments are a critical component of revenue for the PayTech providers and the financial institution using their services. Technology-based payments are no longer a blue ocean consideration but a red ocean necessity. Financial institutions that do not offer PayTech solutions will have a difficult, if not impossible, time competing in the financial services landscape.