Which trends are shaping the digital payments ecosystem?

In today's rapidly evolving world, consumers are seeking convenience and simplicity in every aspect of their lives, and the payment industry is no exception to that. The demand for effortless and seamless payment experiences has led to increasing pressure on payment service providers to adapt new innovative payment methods. However, in most of the cases this comes with a complexity and costs, which makes it challenging for them to accommodate low fees expected by the merchants. Consequently, this leads to the appearance of certain payment trends that are trying to solve this paradox.

Payment trend #1: Mobile payments

There are many mobile payment solutions across Europe, but when crossing national borders, we are confronted with the fact that interoperability between solutions is still lacking  which is a challenge that needs to be addressed.

As a result some European banks have come together and established the European Payments Initiative (EPI). Launched in 2020, the initiative has undergone a major overhaul in the last two years, but its ultimate goal has not changed. EPI aims to harmonise the European payment ecosystem. To achieve this goal, EPI is working on a pan-European digital wallet which is based on the SEPA Instant Credit Transfer transaction (SCT Inst).

EPI recently announced two acquisitions in the Benelux countries, iDEAL and Payconig, which will serve as the basis for the establishment of the intended payment ecosystem.

EPI is currently owned by 14 banks and two payment service providers. The owners include major European banks such as BNP Paribas, Deutsche Bank, ING, and DZ Bank and Rabobank, which are contributing to the initiative. Worldline is also a co-founder of EPI.

Payment trend #2: Instant payments

Instant Payments are gaining more and more space, slowly becoming an alternative option for card payments, and the expectation is that these two payment options will coexist and converge to each other.

The spread of instant payments in Europe could be catalysed by the European Commission's legislative proposal to make the introduction of euro-based instant payments (SCT Inst) mandatory with a set timetable.

If adopted, the proposal would make it mandatory for banks in euro countries to start accepting SEPA instant payments from Q1 2025 and to start sending payments from Q1 2026. The deadlines for the countries outside the eurozone would be to receive euro instant payments as of Q3 2026 and to send as of Q1 2027.

The proposal also stipulates that the fees for instant payments should not be higher than for traditional SCT transactions. The expectation is that the introduction of SCT Inst will contribute to the reduction of merchant fees.

Payment trend #3: Open banking

Open Banking has emerged as a result of the Payment Services Directive (PSD2) which has come into force in January 2018 with the aim of increasing innovation and competition in the banking sector. To comply with PSD2 regulations, the banks were required to publish the data of their customer through open APIs, and secure the connections with strong customer authentication (SCA).

The Payment Initiation Service (PIS) of PSD2 gives further ground for the wide spread of account-based payments by implementing transactions such as account-to-account payments or recurring payments.

In addition, open banking can effectively support the development of Buy Now Pay Later (BNPL) services, both in the loan application and in the repayment process. PIS can really take off in countries where instant payments have been implemented.

It is important to highlight that PIS is not a standalone payment method, but it provides comfort and therefore convenience to the users for initiating account based payments.

Payment trend #4: Autonomous payments

With the wide spread of Internet of Things (IoT) devices, we can expect to see more and more payment solutions, where the payment is initiated by a device or software solution instead of the consumer directly. These payments are called autonomous payments.

They are around us, however in many cases they are invisible. We encounter them in our daily lives, for example when paying regularly for services we subscribed for (e.g. Netflix, Amazon, LinkedIn etc.) or in-car services, such as electronic, car-mounted, toll "stickers" (e.g. Croatia, Italy) where users get charged automatically when passing a toll gate.

Autonomous payments do not require permanent user attendance. Therefore they can be operated at lower costs, however they bring lots of complexity to the payment infrastructure. Payment service providers must continually invest in technologies and infrastructure that can effectively handle the complexity associated with autonomous payments. By doing so, they can guarantee efficient and seamless operation of their payment systems, ensuring maximum quality of service for their customers.

Payment trend #5: Central Bank Digital Currency  

More than 100 central banks around the world are actively involved in Central Bank Digital Currency (CBDC) projects.

Last summer, the European Central Bank (ECB) announced the launch of the testing phase of the Digital Euro project, which could lead to a decision on the implementation of digital central bank money in the euro countries.

As part of the test phase, the ECB selected five service providers to prototype five use cases, focusing on end-to-end transaction testing, from the front-end prototype, developed by the selected service providers, to the interface and back-end infrastructure, provided by the Eurosystem.

Worldline, as Europe's leading payment service provider, is one of the five service providers contracted by the ECB to develop an end-user prototype. In this respect, Worldline is developing the peer-to-peer offline payments use-case. The results of the prototypes are expected to be reported in Q2 2023.

CBDC initiatives are aimed to provide commercial banks with a more efficient way of making payments and settlements. However, it is important to highlight that once commercial money is "converted" into central bank money, it cannot be further used by banks for lending and therefore it would limit them to perform their main activity.  

As a result, commercial banks have started to think about a different form of digital money, whereby the commercial (account) money is digitised in a so-called "Multi-Bank Digital Currency" (MBDC), that would allow commercial banks to keep using it as account money, which they can settle among them.  

Payment trend #6: Metaverse

Worldline was one of the first payment technology providers to open a virtual showroom in the metaverse last spring, which is located in Decentraland, Crypto Valley. It is in fact a virtual sales and community platform where Worldline makes its broad portfolio of payment solutions available for testing the potential of the metaverse with its customers.

As the metaverse continues to evolve, it is widely anticipated that this immersive form of digital space could become the next major platform for commercial interactions. While it is still in the early stages of development, the metaverse represents a potentially valuable avenue for companies in the years to come, but it is equally evident that the process of adoption will require sufficient time and effort.

Conclusions

The emerging payment trends are trying to address the challenges of the current payment ecosystem. On one hand they aim to provide convenience to the consumers, on the other hand they aim to reduce the complexities of the payment infrastructure and last but not least to lower the fees that merchants have to embrace.

In this light, instant payments and digital currency payments are bound to gain ground. They are not yet in the phase of dominating the payments globally, however there are lots of efforts put in place to encourage their adoption which is dependent on several factors.

Firstly, while convenience is essential in the uptake of digital payments, it is not sufficient on its own.

Secondly, the benefits and incentives that are perceived by consumers and merchants are crucial to the success of specific payment solutions. Understanding the needs and preferences of the target audience and providing them with a compelling value proposition can encourage the uptake and foster sustained use.

Thirdly, while technology is important in enabling digital payments, it must remain seamless and invisible to users, with the focus on ensuring that transactions are secure and reliable. This will create trust and confidence in users, resulting in increased adoption and usage.

In conclusion, for any trend to gain a foothold and drive widespread usage, large scale adoption is required.

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