Innovation in payments will charge ahead in 2023, though not in the same way it has in the past few years. With venture capital firms tightening purse strings and startups floundering, legacy players are likely to pick off some industry small fry.
Meanwhile, other fintechs may close down amid challenging economic conditions, including rising borrowing costs and the threat of a recession.
One new payments area primed to advance in any case is embedded finance, and specifically embedded payments — the practice of bundling payments with a service or product in a seamless sort of way. Companies across the spectrum are considering ways they can employ such tools and they’re likely to move beyond consumer uses to corporate applications as well.
The arrival of FedNow, the Federal Reserve’s real-time payments system, is also expected to spur not only more efficient payments, but also new rails for developing services and inspiring more startups in the industry.
While buy now-pay later mania has cooled since the COVID-19 pandemic fueled online use, it will continue to be a hot theme in the industry as it adjusts to in-store use and new regulations in the offing for 2023.
Meanwhile, regulators won’t be the only ones keeping an eye on consumer safety. Lawmakers and payments companies alike will join in a campaign to beef up cybersecurity in the arena amid the rise of digital payments.
FedNow on the way
There are high expectations for FedNow’s launch, which could come as early as May, with industry participants wagering it will super-charge the use of faster payments in the U.S. and spur innovations.
The new national system allowing payments of up to $500,000 to be made in seconds on any day and at any time may also allow the U.S. to catch up with other countries already speeding ahead with the technology.
The system will build on an existing private sector real-time payments network, RTP, begun by bank-owned The Clearing House in 2017. While RTP roped its big bank owners into the real-time fold, FedNow is aimed at luring more small- and mid-sized banks.
“In 2023, in the U.S., real-time payments will start becoming real,” said Sanjay Gupta, who heads the biller segment at payments company ACI Worldwide. Instant payments have been transformational in other countries, he explained. Now, U.S. companies, including ACI, are ready to make use of real-time payments too, Gupta said in an interview last week.
More banks using real-time systems will mean more U.S. businesses have access to those services through their financial institutions and can increase the efficiency of their payments.
As more companies adopt real-time payments, it will allow them to upgrade other aspects of their payments and finance infrastructure, Modern Treasury CEO Dimitri Dadiomov said in an interview this week.
While the service might seem pricey relative to automated, or ACH, payments, it’s less expensive than wire transfers and more efficient than check-writing, Dadiomov noted. Plus, over time as FedNow, The Clearing House and banks compete for real-time customers, the prices will move lower.
“All in all, I think it's going to be a pretty significant, if not the dominant type [of payment], in a couple of years,” he said of real-time payments. “I don't really think of cost as a big obstacle.”
Eventually, digital requests for payment are likely be a bigger part of the real-time realm too, Dadiomov said. RTP has “been kind of like a send-only way of using it,” Dadiomov said.
Needless to say, the rise of digital payments is also likely to boost business-to-business payments as companies realize the benefits of faster payments, especially in a high-interest-rate environment that increases the importance of holding money, Dadiomov said. Instant payments can also increase cost savings.
“Given the market environment, the main priority for people is efficiency,” Dadiomov said. Payments and operations in the office of the chief financial officer are key places where they can increase those efficiencies, he explained.
Eventually, real-time payments will also improve cross-border payments, but that won’t happen this year, according to Dadiomov.
Funding challenges won’t slow competition
Startup competition is unlikely to let up, even as funding becomes harder to secure. It will favor some areas over others though, with more interest in business-to-business (B2B) or infrastructure concepts, and less in consumer or cryptocurrency, payments players said.
Fintech infrastructure companies “will be in vogue,” said Sunil Singh, CEO and founder of card issuance fintech Tallied. “There’s still a lot of different parts of the economy that can benefit from, sort of, a technology upgrade.”
Embedded finance and cross-border e-commerce hold promise this year, said Rob Anderson, a partner with San Francisco-based venture firm FTV Capital.
Startups have become more accepting of current valuations and a tougher economic climate, he said. “I think you’re starting to see that now flow through in people’s mindsets for 2023,” he said.
Money is still there for early-stage fintechs, said Jordan McKee, a principal research analyst with 451 Research, part of S&P Global Market Intelligence. “The challenge is for those fintechs that are more mature,” and looking for significant funding, around $100 million-plus, McKee said. That’s where investors have become more skeptical, in terms of plans for profitability and scale.
Given venture capitalists’ pullback, collaboration between fintech startups and larger companies may accelerate in 2023, said Tom Zschach, the chief innovation officer at international financial message firm Swift.
After a period of so much capital and too many competing ideas, some startups will drop off too, he said. “But it also makes the survivors a lot stronger, and more focused, and they're going to have to create value faster,” he added.
Embedded payments on the rise
Consulting firm Bain & Company has projected the transaction value of embedded finance will reach $7 trillion by 2026. “We are seeing a big focus on embedded finance” this year, said Jodie Kelley, CEO of trade group the Electronic Transactions Association, in an email.
A host of fintechs are pouncing on the opportunity to sell embedded financial services to software companies that haven’t monetized payments, said Maast CEO Tom Bell. Maast is a subsidiary of Synovus Bank, which sells banking and payments services to software providers.
Investors have been attracted to embedded finance even as capital has become less plentiful. That’s because such businesses are able to scale without the capital a consumer-focused fintech might need, McKee said.
“It's not about acquiring users one by one by one,” McKee said. “It's about selling into a large platform or a large technology company in accessing all of their customers through one relationship.”
Increasingly, the business-to-business realm is being drawn into the trend. Embedded payments has focused mainly on bundling products and services with payments for consumer use, but will move into a 2.0 stage where it picks up speed with respect to back-office business payments, said Extend CEO Andrew Jamison.
The next iteration of embedded payments is going to start to permeate business use of software like Intuit's Quickbooks and German software provider SAP payments, Jamison predicted.
BNPL matures under new pressures
Buy now-pay later will experience growing pains this year, as the industry faces shopping shifts, debt-saddled consumers and potential regulation.
The installment payment providers, such as San Francisco-based Affirm, Sweden’s Klarna, Block-owned Afterpay, Australian Zip and Minneapolis-based Sezzle, are tightening underwriting as inflation bears down on consumers.
They’re also grappling with investors pressing for profits over growth, and bracing for regulation following last year’s Consumer Financial Protection Bureau report on the industry.
Regulators are “behind the eight ball” when it comes to BNPL, said Capco Managing Principal Daniela Hawkins, but it’s under scrutiny now, as they realize consumers who struggle with debt management may overextend themselves.
Hawkins said she’s watching to see when interest rates and rising debt levels prompt consumers to cut spending, and how that will affect products like BNPL. “Will they fall out of favor, because the amount of consumer debt has become challenging?” she said.
Additionally, BNPL companies that benefited from the e-commerce surge are scrambling to beef up their brick-and-mortar usability with the return to in-person shopping.
“These players are going to have to figure out how to be easy to use in physical locations, otherwise they’ll find themselves stuck in digital channels,” said Jason Barro, founder of Bain & Company’s NPS Prism, a customer experience benchmarking service.
BNPL’s quick maturity suggests it filled a need in the marketplace, but Aite-Novarica strategic adviser Thad Peterson and other payments consultants expect 2023 will bring attrition among BNPL providers. That’s likely to lead to consolidation in the industry, with some companies bought by others.
Deal-making revs up
Acquisitions are widely expected to increase in the payments industry this year as difficult economic conditions and less available venture capital lead to lower, more attractive price tags for businesses.
In the first 10 days of 2023, one acquisition has already been announced with the Canadian company Nuvei saying it will purchase Atlanta-based payments integrator Paya for $1.3 billion.
Also, Florida-based payments software company ACI Worldwide is reportedly considering a sale, according to news outlet Bloomberg.
Deals are likely to crop up across the payments landscape, among big and small players alike, and won’t necessarily lead to consolidation because some large companies may be on the cusp of divestitures too.
Investors owning shares in the mega payments processors Fidelity National Information Services and Fiserv are pressuring those companies to consider divestitures that could lead them to break off chunks of their businesses. The companies have declined to comment on those possibilities.
Large incumbents and private equity firms still have plenty of capital for acquisitions, even if smaller fintechs don’t, and that will drive an increase in deal-making this year, said Jamison, whose company sells virtual card and expense management software services.
“Opportunities will arise for M&A to actually accelerate because there's still plenty of money out there in the ecosystem,” Jamison said. ”There's going to be some good technology out there available to purchase because a lot of fintechs will start to run out of capital,”
Young fintechs that find it difficult to raise their next round of capital may suddenly find themselves thinking about a sale, with larger peers waiting in the wings to snap up talent, technology and intellectual property.
Jack Henry & Associates CEO David Foss has said his company is eager to make acquisitions once prices come down. Digital payments behemoth PayPal may also become acquisitive as activist investors push the company to jump-start financial results, Truist Securities analysts suggested in a report last week.
Beating back bad actors
With digital payments on the rise across all sorts of rails, from real-time to B2B to peer-to-peer, fraudsters and other criminals follow the money trail.
That’s why cybersecurity is likely to be an important trend this year too, as payments companies seek to prevent fraud and protect their customers. It’s not just companies taking up defenses. Regulators and lawmakers are seeking to increase safeguards too, especially in light of the FTX crypto exchange collapse.
“Cybersecurity is the area where people are going to continue to double down,” Jamison said.
There has been a proliferation of companies selling software and services for payments protection, from digital identity verification companies, such as Socure, and chargeback fraud prevention firms, including Chargebacks911.
The industry’s efforts to combat fraud have paid off, with card fraud declining for instance, but cybercriminals are evolving too.
“The people who are nefarious actors are becoming more and more sophisticated, using phishing, social phishing, a variety of things, taking over accounts,” Gupta said. “The area of security is an important theme, but I think it's becoming even more important this year.”
Some payments players and software companies, including tech giant Google, have been advocating a move away from passwords to biometrics for years as a way to fight back. Nonetheless, biometrics as a payments method appears to be one would-be trend that won’t take off this year.