The first half of 2023 has seen continuing rapid change in the payment methods space, with the complexity of payments further increasing. Here, we will examine three of the biggest trends within payments: cross border payments and solving their challenges, the increasing complexity of payment methods and how merchants will choose between them, and the continuing rise of instant payments.
Historically, cross-border payments have not only been slow and costly, but there has also been a considerable lack of process transparency, with money flowing through many different parties. These challenges are beginning to be addressed by two key technologies we will see progress over the coming months – CBDCs (Central Bank Digital Currencies) and stablecoins.
Stablecoins, a type of cryptocurrency with its value linked to fiat currency, have been a major way parties have been addressing cross-border payments, improving both costs and speed, by bypassing traditional cross-border networks. Stablecoins started to be adopted for cross-border use cases, but this will take some time to feed through to the wider network. The mixed adoption of stablecoins means that it will take some time for a network sufficiently advanced to solve the challenges in the space to emerge.
If successfully implemented, stablecoins can be greatly beneficial to merchants, as they no longer need to wait for an extended period for cross-border payments to be settled. With lower processing time and reduced reliance on intermediaries, the cost associated with foreign exchange payments is significantly cut down.
However, CBDCs, a central bank-issued digital form of a traditional currency, also have the potential to be a major force within the cross-border payments ecosystem. While central banks’ money is typically only accessible by residents and businesses, this is changing, with cross-border payments coming increasingly in-scope for CBDC pilots. This means that overall, CBDCs could be joined together in a system that can transact faster and cheaply across borders, but this will require schemes to be merged together. Thus, cross-border networks such as SWIFT will be critical to achieving improvements in this hotly contested area of the market.
The challenge for both approaches is not creating a system that works – but scaling up a system across geographies and verticals. Whatever approach is taken, government support will be critical, meaning that CBDCs do have an advantage compared to other payment types vying for success in this market.
The past few years have seen a rapid rise in the number of payment types available in any given market. Whether it is a new digital wallet service, a BNPL (Buy Now, Pay Later) service, or an Open Banking payment option, these methods are multiplying quickly. As such, this presents merchants with a new debate – which to accept?
How a merchant decides its acceptance strategy is of vital importance. Depending on the method, the costs to accept a payment can be much higher or lower than existing methods, with certain approaches having less associated fraud risk, or typically generating a higher AOV (Average Order Value). As such, merchants increasingly will decide along two criteria: what is popular for their users, and what reduces their costs. What is popular for their users is distinct from what is popular for the general population, meaning merchants must conduct thorough user research. Choosing to offer lower-cost payment types, such as Open Banking initiated instant payments, can substantially lower costs to merchants, as well as potentially reduce the risk of fraud.
Getting this balance right will be important for merchants, and as with anything, it requires knowing their customer bases, with the potential rewards for the optimal strategy being significant.
Instant payments, also known as real-time payments, continue to rise. Here at Juniper Research, we forecast that the number of instant payment transactions globally will exceed 376 billion globally by 2027, increasing from 97 billion in 2022, a 289% growth.
The reasons for this growth are numerous. Many central banks can offer lower fees than a commercial instant payment rail, as they do not need to turn a profit from their operation. This can be seen with instant payment systems such as Pix, in Brazil, where there are no transaction fees for individuals. This makes instant payments extremely accessible, and once an individual is using a service, they are less likely to change the service they use.
Regulators are also playing a key role in the growth of instant payments. The prime example of this is the EU’s promotion of its SEPA (Single Euro Payment Area) system. In October 2022, the EU published a legislative proposal requiring all PSPs (payment service providers) to make cross border instant euro payments available to their customers. FedNow is also expected to roll out in the US, with the initial launch phase set to July 2023. Legislation such as these examples means that instant payments will continue to gain ground, but this regulation-driven nature will perpetuate the uneven roll-out of instant payments.
Ultimately, these changes mean that the payments market continues to change, and all the key stakeholders in it must change with them. The payments mix in each country is changing rapidly, as new methods displace legacy payment types. As such, staying on top of changes and continuously evolving acceptance strategies is central to gaining an advantage in this rapidly changing area.
This editorial piece was first published in the Payment Methods Report 2023, which provides an in-depth overview of the latest worldwide developments in how people pay, the payment methods space, the innovative technologies that these methods work upon, and the best strategies on how to win at conversion and retention.
Nick Maynard is VP of Fintech Market Research at Juniper Research. His key area of focus is the fintech and payments area, including embedded finance, Open Banking, and digital wallets, among others.
Juniper Research specialises in providing best-in-class market research across mobile, online, and disruptive technologies. We offer in-depth reports, forecasts, annual subscriptions, and consultancy. Our global clients include banks, payment providers, and many others. To find out how we can help you, contact info@juniperresearch.com or visit www.juniperresearch.com.
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