The payments landscape has evolved rapidly in recent years, with the COVID-19 pandemic giving a boost to the rise of digital and mobile payments. But as the worldwide economic climate worsens, competition intensifies and regulatory scrutiny increases, the payments industry faces new challenges.
Recent reports from big accounting and consulting firms Ernst & Young, Forrester Research and McKinsey & Company examined the forces at play in the payments industry and offered projections on what’s to come. Here are some of the highlights from those reports, all of which were published last month.
Payments revenue growth eclipses pre-pandemic levels
In its annual report on payments, McKinsey estimated that revenue for the global payments industry now exceeds pre-pandemic expectations. It also offered a new forecast, predicting revenue will rise to $3 trillion by 2026. That's compared to revenue rising 11% last year to $2.1 trillion, relative to 2020, according to the Oct. 7 report.
The Asia-Pacific region accounted for more than half of global payment revenue last year, generating $1.1 trillion, with North America generating just $500 billion.
Growth in the Asia-Pacific region was driven by a rise in account-to-account payment transactions, while card transactions, which principally prevail in North and South America, grew at about the same rate as previously.
The firm also noted the growth of online payments. “As much as 33 percent of global card spending — 50 percent in the US — now takes place online,” the McKinsey report said.
Threat presented by payments disruptors set to grow
A recent EY report, entitled "How the rise of Paytech is reshaping the global payments landscape," sets the stage by pointing out that there is a battle in the offing. In a veiled warning, the report says: Banks and traditional payments providers "still have a chance to keep pace with disruptors by investing in key areas."
The report estimates that about a quarter of the fintech industry is made up of "paytech" companies that are part of the payments value chain, whether acting as or servicing facilitators, payment providers, networks or equipment suppliers.
The accounting firm estimates the payments market at about $240 trillion, and figures the paytech portion has "exploded" to become a $2.17 trillion portion. "As the digital economy grows and customer appetite for seamless payments increases, PayTechs are offering integrated solutions for both consumers and merchants to meet this demand," the report said.
Paytechs are also creating a new sphere in which data flowing through payments is monetized. Specifically, they're developing new ways to store, manage and leverage the data for the benefit of merchants and consumers alike, the report said.
Open banking, cross-border payments shaping the industry
Open banking trends giving consumers more control over their financial tools and real-time payments increasing the speed of moving money will combine to provide consumers with more account-to-account capabilities and give payments players more opportunities for commerce, EY said.
The report also noted important changes on the cross-border payment front because regulators are laying the groundwork for modernizing these payments and paytech firms are stepping in with improved business models for providing services.
"Demand for omnichannel payment methods, embedded finance, instant cross-border payments and payments using digital currencies will require payment providers to drive further agility and flexibility in operating models," the report concluded.
Economic headwinds likely to lead some payments companies to fold
With venture capital becoming harder to find and transaction volumes expected to fall, Forrester predicts one-quarter of payments companies will shutter in 2023. In a report released Monday, “Predictions 2023: Payments,” the firm noted chief financial officers focused on growth are being replaced by those with cost-efficiencies in mind.
That’s leading many payments companies to take a closer look at expenses and cut where they can, be it staff or marketing. Forrester notes this is “not an easy task in a low-margin, high volume business.” This more nimble approach is also likely to stifle innovation, the report said.
Firms “without strong defenses” will be at risk of takeover by big payments companies, Forrester predicted. Other companies will grapple with wage inflation “as the delay of IPO paydays dims the appeal of stock options.”
‘Swipe’ fee frustration could inspire merchants to promote bank-based payments
Card network interchange fees – also called “swipe” fees – have been a necessary expense for merchants. But as those fees climb and legislators aim to rein them in, Forrester predicted at least one global retailer will aim to get around those fees in 2023 by incentivizing customers and launching a global campaign to push the use of bank-based payment methods.
Forrester pointed to some brands promoting ACH payment acceptance on U.S. websites. Additionally, bank-based merchant payment processors like GoCardless, Catch and Trustly have gained traction and Volt has a “transformer” product that turns debit card transactions into account-to-account payments.
Push payment fraud projected to grow
Broader adoption of multifactor authentication protocols, as well as advancements in tokenization, mean card-based payments fraud will drop in 2023, Forrester predicted. Plus, mobile devices are bringing biometrics into the payments picture.
But those developments are likely to lead fraudsters to sharpen their attacks on consumers themselves, targeting them with social engineering schemes in the push payments realm, Forrester said. Fraud on peer-to-peer networks like Zelle has caught the attention of legislators such as Sen. Elizabeth Warren (D-MA).
“Many banks and payment service providers are insufficiently prepared for push-based payment fraud: They lack advanced authentication approaches like behavioral biometrics and haven’t educated customers on self-protection,” the Forrester report noted.