7 Digital Payment Trends 2021

Payments are the lifeblood for financial institutions. Yet this vital source of revenue, data, and customer engagement increasingly stand at risk. Between fintech and big tech wallets and the massive impact of COVID-19, the payment space is being upended as never before. Here’s what you need to know to stay in the game and succeed in 2021 and beyond.

Accenture predicts that a total of 2.7 trillion transactions worth $48 trillion will shift from cash to cards, interbank payments, and alternative payment instruments such as person-to-person (P2P) and point-of-sale finance (buy now, pay later). This represents a $300 billion opportunity for payment providers. However, Accenture states that banks are scrambling to respond as the scale of disruption and tempo of change have grown dramatically. The need to modernize legacy payments infrastructure has never been more important for traditional institutions. Reimagining the post-COVID world in payments could offer new opportunities to reignite performance.

Here are the seven trends for 2021 and beyond:

1) Digitization, E-Commerce, and Changed Payment Habits

Consumers expect the transition from retail to e-commerce will continue even after the virus has been contained. New players are becoming more popular with 30% of consumers worldwide using a big tech for payment services and 50% already using a challenger bank for some payments. Capgemini found that nearly two-thirds (64%) of consumers said they had used contactless cards during the pandemic (distinct from digital wallets or QR code payments). 41% of consumers said they used contactless cards for the first time during the crisis. Consumers and merchants are exploring a range of new solutions, including ‘in-aisle checkout, QR code scan solutions, and completely contactless solutions like Amazon Go stores.

2) Incumbents Face Big Payment Revenue Squeeze

Payments attract many players because it can be a lucrative business. On the other side, traditional payment revenue sources have been hammered by low-interest rates, higher credit-card losses, and pressure on interchange and other payment fees due to regulation and competition. The “cost of ownership” of payments services, as McKinsey puts it, will remain high, leaving little to invest in new products to improve customer experience. Yet the need to do so is growing.

3) Disruption Accelerates — Credit Cards at Risk from ‘BNPL’

The payments business has been “disrupting” long before the term became a buzzword in the fintech era, and it has picked up dramatically in 2020 and will continue. Buy Now Pay Later (BNPL) solutions, pioneered by fintech enable consumers to select a credit card or installment plan either at the time of purchase or in some cases after the purchase.

Debit cards are not immune from disruption, and they have benefitted from consumers’ decreased use of credit, to stay out of debt during the recession. On the other hand, they are becoming increasingly vulnerable to disruption from person-to-person (P2P) transactions which have grown rapidly during the pandemic and are being used more often to pay for services previously paid for by card.

4) B2B Payments in Fintechs’ Sights

While corporate payments and trade finance have seen much less disruption so far, due to the complexity of these transactions, fintech entry into the small and mid-size business (SMB) payment market is now in full swing. Fintechs thrive on reducing complexity and small businesses need all the help they can get.

5) Big Techs on the Prowl in Payments

Google and Facebook have made no secret that they see payments as a means to gain a foothold into growing markets. Google updated and expanded its Google Pay digital wallet in the fall of 2020. Also, the wallet incorporates the company’s new Google Plex checking and savings product offered in conjunction with a growing list of financial institutions, with Citibank topping the list. Payments are a gateway for big tech firms to encroach further into the financial services landscape. Their strategy has been one-stop-shop super/lifestyle apps, around which they have strengthened their ecosystems to get into the larger FS space — wealth management, insurance, lending, SME services, checking accounts.

6) Further Ahead — Digital Currencies and DLT Will Reshape Payments

It may be several years before digital currency ecosystems reach critical mass, but much is already happening with several central banks planning to introduce their digital coins and tokens, as well as Facebook moving forward with its digital currency Libra. Once digital currency ecosystems reach critical mass, “the first-mover advantage will be hard for others to overcome.” Financial institutions need to analyze the potential

implications and begin actively exploring what role they want to play and what partnerships they will need to strike.

7) Modernization, Collaboration, and Other Ways Forward

Current investments are not driven by customer needs, but by compliance or governmental factors, which results in a poor ROI. McKinsey outlines four options for how traditional institutions can rethink their payments operating model:

I. Financial institutions should consider whether a carve-out and scale-up of the payments business — operated as a separate P&L — may create more value for customers and other stakeholders. That would allow the unit to serve other organizations/broader customers. Eventually, this could even lead to a spinoff.

II. Shared payments utilities. Consider partnering with one or more peers on certain

payments functions to improve and expand on offerings to a larger customer base, such as jointly developing a real-time payments solution.

III. Payments-as-a-service (PaaS) technology providers, using cloud-based

platforms, allow financial institutions to expand quickly and modernize their payments capabilities without a high upfront investment. These specialized services would be integrated via application programming interfaces (APIs) that link to core banking platforms.

IV. By outsourcing certain services, institutions that can’t afford to build or upgrade a full payments tech stack can still offer best-of-breed products. While there can be some loss of control over product and service quality with outsourcing, financial institutions do retain control over customer touchpoints, and, in many cases, transaction data.

These 7 trends are critical in order to stay in the game and succeed.