Worldline dives into the megatrends in global payments. This article guides financial institutions and merchants on how best to accommodate these trends while mapping the challenges and opportunities they will bring.

 

Buy Now, Pay Later

Buy Now, Pay Later (BNPL) is a fast-growing alternative to the traditional fee- and APR-based credit card models of consumer financing. It provides greater flexibility to consumers, removing the need for credit approval, with only ‘soft’ credit checks being carried out by the companies offering BNPL. While the BNPL phenomenon started as a digital payment solution, and online use of BNPL has increased among consumers and a growing number of merchants offer it, it is now offered for in-store purchases. Payment service providers such as Klarna and PayPal take on the credit risk while merchants immediately receive the full transaction amount.

Klarna claims that brands with instalment financing have seen a 58% increase in average order value and a 30% increase in conversion rates: British fashion brand Next is one of those retailers offering their own interest-free instalment payment plans. Now that PayPal has entered the market with their ‘Pay in 4’ instalment programme, combined with the recent shift towards e-commerce and the huge increase in m-commerce, a sharp rise is likely in new payment models over the next five years such as BNPL. Following this trend, there may be an increase in partnerships and consolidations to make way for payment models such as BNPL.

However, a point of concern in the BNPL market, unlike the payment card market, is the lack of regulation. The only current exception is the UK, where the Financial Conduct Authority has announced that all BNPL activities will be regulated. Despite consumers’ risks of taking on credit and increasing their debt, BNPL is ready to expand globally [1] due to high customer demand, whether or not it is regulated.
 

Account payments

Account-based payments are not a new trend since payment systems such as iDEAL in the Netherlands and Swish in Sweden have been used by consumers and merchants for years now.

According to the PSD2 regulation, all European banks have to offer interfaces to enable licensed third-party providers to initiate account-to-account payments via SEPA credit transfers. Worldline predicts market penetration for account-based payments to reach 10% of all payments over the next five years.

In contrast to card payments, account-based payments allow consumers to pay higher amounts more securely with their smartphone. The consumer controls the payment initiation and does not need to sign any mandate, as they would with direct debits. Account-based payments also greatly benefit merchants, as this payment method can considerably reduce costs by removing interchange and scheme fees. Additionally, the settlement is faster, and no additional payment guarantees need to be provided because the payment transaction is irrevocable.

Advanced Analytics For Payments

With new fintechs competing for their attention, consumers have become used to customised user experiences, seamless data-sharing capabilities and 24/7 accessibility when managing their finances. With a Personal Finance Management (PFM) app, consumers can monitor their finances with the help of AI, smart analytics, automation and open banking, but without traditional banking features such as the ability to transfer money between accounts and pay bills. Digital-only banks rely heavily on PFM solutions as a substitute for the advisory services offered by traditional banks. While PFM solutions have existed for a long time, they have become increasingly sophisticated and are moving toward predictive and even prescriptive analytics [2].

Self-Service Payments And Investing

During the Covid-19 pandemic, many people have become more engaged in managing their finances, saving for financial security or perhaps even investing money for the first time. The emergence of cryptocurrencies and the rise in Bitcoin’s value, widely reported in the media, are also likely factors. The growing interest in investing could also be due partly to the media attention given to Gamestop in January 2021, when amateur investors managed to raise the value of its shares by 1,700% [3]

Cashless Societies

The world’s response to the Covid-19 pandemic has accelerated some pre-existing trends [4], such as moving towards contact-free environments and cashless societies. Most governments around the world see significant benefits in digitisation and financial inclusion, with people having bank accounts.

Essentially, cashlessness comes down to identity infrastructure: identity is central to the use of digital financial services. India has mandated The India Stack, a series of pieces of technology enabling citizens to access different elements of government services. India managed to register 1.3 billion people who can now open bank accounts with their new official IDs in the process. Official citizen IDs enable governments to shift from high-risk cash payments to direct deposits and increase the value of digital payments.

Denmark also has a national digital ID scheme resulting in the majority of the adult population in Denmark having a bank account. Over the last 20-30 years, the Danish government has pursued a strong digitisation agenda including ID, financial services and online public services, which has encouraged cashlessness as a side-result [5].

The Cloud

With its associated digital payments, global eCommerce is growing exponentially, being expected to hit $4.5 trillion in transaction value by 2023. Consumers expecting and demanding immediate payments, increasing access to smartphones, and worldwide government initiatives promoting digital payments contribute to this growth. Banks are also prioritising new technology investments in payments automation, particularly automation technologies such as artificial intelligence (AI).

Despite digital payments’ popularity with consumers, financial institutions are still at high risk of chargeback fraud and report difficulties and high costs when updating their legacy systems to accommodate instant payment systems. This can compromise the onboarding process and customer experience and, ultimately, lead to loss of customers to more agile fintech competitors [6].

A competitive solution for banks is running their payment services in the cloud, which can give scalability and agility to their payments strategies. This enables banks to pay only for what they use, resulting in significant cost savings. Digital payments have evolved swiftly during Covid-19. Instead of investing in on-premises hardware, signing up with a cloud provider and moving to a more resilient cloud platforms makes it easier for banks to adapt as digital payments evolve.

By migrating to the cloud, banks can leverage their on-demand infrastructure and address many of their traditional payments pain points, such as Black Friday and Singles’ Day, which require extra processing power.

Cloud-native solutions will also prepare banks for potential regulatory challenges. Many banks were late to meet the revised Payment Services Directive (PSD2), and the sector has now been given extra time to meet the EU’s new Strong Customer Authentication (SCA) rules. Although the regulatory landscape is constantly changing, banks working with a cloud solution, together with a proven software vendor, will find that adapting and complying to new regulations is faster and requires fewer resources [7].

AI-powered innovation in user experience

Social distancing during 2020 caused bank customers to pay fewer physical visits to bank branches and turn instead to digital banking, meaning that banks now deploy even more resources in their digital operations and focus more on the digital user experience.

In a highly saturated market such as banking, AI-powered UX can also play an important role in digital banking differentiation. Digital-only banks offering insightful and easy-to-use UX designs have expanded rapidly. AI can play a key role, providing insights into spending and customisation of the user experience: these features are an important part of digital banks’ appeal, while AI cannot leverage analytics unhindered within traditional banks due to legacy infrastructure. Digital-only banks continue to acquire users because they meet customers’ new expectations, which Smartphones have helped to shape, as they have made insights and analytics easy to access.

If traditional banks want to retain their customers, they need to invest in a compelling and seamless UX. By deploying new AI-powered technology that complies with local regulations, traditional banks can provide their customers with more detailed insights into their spending habits and savings, making money management easier and more accessible and, in the end, amplifying customer engagement [8].


For banks, this digital transition enables them to serve more customers, expand market shares and increase revenue at a lower cost. Banks can also access the bigger, richer data sets required for powering advanced analytics (AA) and machine-learning (ML) decision engines. Ultimately, these decision-making capabilities, powered by AI, can generate additional value for a bank’s customers, partners, and the bank itself. When leveraging machine-learning models to calculate the best way of engaging with each customer in (near) real-time, banks can increase value by crafting highly personalised messages at each step of the customer acquisition journey, enabling them to continuously and intelligently engage with their customers and strengthen their relationships while lowering costs, by automating tasks such as document processing, reviews and decision-making [9].


Competing in the future

Fintechs are well-funded and popular with consumers. If banks want to compete with their new fintech rivals, they must provide their customers with easily accessible insights and analytics regarding their spending habits, savings, budgeting etc. Banks also need to rethink their UX, making it as seamless as possible. This could involve a transition towards cloud solutions to reduce any friction the customer might experience on busy banking days or during regulatory adaptation periods.

 

[1] Top 10 Fintech & Payments Trends 2021 by Juniper Research
[2] Beyond open banking 2021 by Bud
[3] Beyond open banking 2021 by Bud
[8]Top 10 Fintech & Payments Trends 2021 by Juniper Research

 

 

MORE IN THIS EDITION

Worldline’s story

The Worldline story began in 1973 when it won the first-ever card transaction processing contract. Over the years, it acquired Equens and Cardlink. It entered a new chapter in 2020 when it acquired Ingenico. Find out more about how Worldline became a new global leader in the payment services industry.


Read more ›

Mergers And Acquisitions In The Payments industry across Europe

The payments industry is seeing an upturn in the mergers and acquisitions in the payments industry as companies consolidate to compete for scale and reduce costs in the face of the challenges posed by fintechs and new companies specialising in e-commerce payment systems in a shifting regulatory environment.
Read more ›

New Worldline, New Strategic Goals In Payments

Former Ingenico Senior Vice President Grégory Lamertie is now Head of Strategy, M&A and Public Affairs at Worldline, assesses the current payments market and outlines Worldline’s strategic opportunities, synergies and goals over the next few years.



Read more ›