Guido Vermeent
From my front row seat working with banks, businesses and consumers 2022 was a rollercoaster year. From crypto-crashes to e-commerce booms, alternative payments to mobile identity, the world around us is changing fast, especially when it comes to moving money. And, as is often the case, disruption drives innovation and we saw plenty of it.
The challenge for many is that disruption and innovation affect businesses differently.
In Europe, some of the larger banks and payment providers have been working on their digitisation projects in earnest for the last decade at least – and these have been better able to adapt to the changing conditions we now see. Others, meanwhile, have been held back by a lack of demand, resources, or momentum, and are now facing the prospect of having change forced on them, either by legislation such as PSD3 or the changing demands of digital-first retail. As we head into 2023, with a tighter economic market, looming regulation and more pressure on businesses to make payments seamless, flexible and secure – not to mention profitable – let’s look at the key trends we expect to make a difference in the year ahead and how this will shape the landscape going forward.
Security and identity have always been a key element of enabling financial transactions, but the rise of e-commerce has made fraud management increasingly important. As regulators, consumers and partners put additional pressure on providers, 2023 will see increased focus on security as a CX concern.
As the volume of digital transactions grows, organisations are having to implement more stringent checks within their processes – a shift that will likely be accelerated with the coming of PSD3 in 2023 adding new security benchmarks for payment providers.
The challenge is how to ensure end-to-end security while still meeting customer expectations for a seamless digital experience. Businesses that can effectively balance the two will have a chance to differentiate their services in an increasingly competitive market.
One solution to this problem is the integration of mobile and digital identity into the payment process. By incorporating biometric methods such as facial recognition or fingerprint scanning, businesses can provide a secure and customer-centric experience. However, there is still the question of who will own and control this digital identity – whether it be the bank, issuer, merchant, or payment service provider.
It also remains to be seen how security will be managed across borders, managing data access and exchange between countries. Domestic payment schemes will need access to international rails and connections to source and analyse the necessary data to manage fraud at scale, along with the development of secure digital environments to manage security between app providers, merchants, and institutions.
As payment monetisation has become more complex and challenging, businesses have considered multiple means of solving the issue. Some have opened up to integrated services, while others have closed their systems to manage costs. 2023 may show the limits of the latter approach.
The enduring market share of cards has been a headache for businesses for years, leading to high fees and in some areas outdated stakeholder ecosystem. Closed-loop payment systems – where payment methods are part of the system themselves – are now a popular solution, with over half UK and US payment teams looking set to establish their own.
This also reflects the ways in which data is becoming an increasingly valuable commodity in payment. As payments become further integrated into the digital world, providers are now able to use customer payment information and history to offer connected experiences, target loyalty schemes and streamline their back-end journey. However, while closed loop solutions help brands manage their costs, there is a long-term cost to consumers – managing multiple payment methods, the inability to move between providers, and limited holistic value.
The alternative – one that we have built our business on – is an integrated, open approach, based on account-to-account payments in a connected ecosystem. Consumers have embraced A2A, with 81% of those in the EU saying they are “likely” to make an A2A payment in future. However, to fully exploit this future requires better harmonisation of technical, data and security solutions between stakeholders.
One of the major trends in recent years alongside the rise of online commerce is the move away from cards as the only form of payment. Financial institutions, merchants, and payment service providers will need to diversify their current acceptance and enable more payment methods to stay competitive.
Cards were not designed for the online world and come with high fees, acceptance issues and an increased risk of fraud,while struggling to offer the customer experience modern users expect . These issues make other payment methods more convenient and allow for the added value of additional features. Europe’s real time payment scheme today reaches 85% of bank customers in SEPA and processes over two million Instant Payment transactions worth 1.5 billion euro per day on average – and volumes continue to grow by up to 50% on an annual basis. We have seen the same in our own work with European payment businesses where Payconiq now processes over 4 million transactions per day on an account-to-account basis – including a peak of 6.5 million on Black Friday.
For banks, merchants and PSPs, this will drive the need for increased flexibility, creating payment systems that can cater to a broad range of use cases according to customer type, location and need.
Legislative and market pressures are forcing greater collaboration in the payment industry – at the same time as incumbents and fintechs find themselves in dramatically different positions, leading to new opportunities for collaboration, or consumption.
In the European Union, payment harmonisation efforts such as EMPSA are pushing for a consistent digital standard across the region. However, the majority of EU banks are not yet ready for account-to-account (A2A) payment solutions, with only the larger ones having the ability to offer this functionality.
Meanwhile, tightening economic conditions and a rush away from risk have left fintechs in a more precarious position, making them more open to acquisition by larger institutions. This could lead to greater collaboration or even acquisitions in 2023 as banks seek to boost their technology back-ends.
Global fintech M&A activity rose sharply in the first half of 2022, with 591 recorded deals as bargain hunters shopped around for discounted prices, as well as in the crypto and blockchain segment.
In a tighter economic market, there will be a need to refocus on system efficiency, service provision, retention, and efficient growth – all delivered through payment systems that can enable margin and improve the customer experience. Integrating new acquisitions will also present new challenges for incumbents on a technical, cultural, and compliance level. For some, acquisitions may actually slow down technical progress, and banks could be better served by partnerships rather than acquisitions.
Either way, we will likely see an increased focus on innovation as the pressure mounts – hopefully one built on collaboration and openness, rather than closed systems.
After a turbulent year of cryptocurrencies, 2023 could be the year that crypto leaders make the important, if less exciting, choice to focus on infrastructure to drive adoption and ensure the longevity of their operations.
With the recent crypto-winter and the volatility of trading revenue, these businesses will need to become more integrated into the traditional financial system in order to survive – something regulators are already pushing for in the US and UK in the aftermath of high-profile failures in 2022.
Global investments in cryptocurrency companies pulled back to $14.2 billion in the first half of 2022 from a record $32.1 billion last year, a slowdown that will likely continue after the events of the second half. However, investors have still shown interest in blockchain infrastructure projects, particularly those that involve the use of blockchain in updating financial technology.
As these tools become more embedded alongside existing financial systems, payment providers will need to find efficient ways to engage and leverage these services for consumer or operational improvement. Concepts such as blockchain-based digital ID schemes, P2P payments across borders and hybrid digital asset management will create opportunities for more flexible, hybrid financial systems that offers more transparency to users, but will demand increased back-end sophistication from financial institutions.
The changing demands on payments are already reshaping the market in front of our eyes and 2023 may well be the year that we see a strong shift in strategy from incumbent institutions.
Early indications are that a revised Payment Services Directive 3 (PSD3) or SPAA (SEPA Payments Account Access) recognise the need for a layer of consumer-focused services on top of the core PSD APIs as consumers start to expect more from their payments. This move towards flexible services could be monetized for banks, and bring much-needed standardisation to the industry, but the real impact will depend on how it’s implemented.
New infrastructure demands will put banks face to face with the need for infrastructure change in the way they facilitate retail payments. However, if the implementation of these new services is optional, it creates uncertainty for consumers about which banks will offer which services, creating a two-tier payment market. Meanwhile, fintechs who offer this functionality will have the chance to acquire new customers, either from, or in collaboration with, existing institutions.
Payment businesses who choose to embrace this model will have a chance to add additional revenue streams, retention driving services (including third-party security and verification) and increase their unit efficiency on payments. These institutions will have the chance to build a long term competitive advantage on multiple fronts – provided they can implement systems that provide the necessary connectivity. We’re working with leading providers to help them prepare for a more dynamic, connected payment future, whatever the market brings. If you’re looking to change your approach in the year ahead, I’d love to hear from you.
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