How the payments industry was disrupted

The pandemic prompted a surge in the uptake of  digital payments technology and 2021 has seen these new trends set  in for the long haul

Whether you run a restaurant, bank, retailer or any other business, payments have been transformed over the past few years. In the blink of an eye, digital payments have gone from the peripheries of the business world to dominate the landscape. This evolving environment brings a host of opportunities but also challenges as businesses struggle to meet the growing expectations of their customers.

Estimates from ResearchandMarkets.com suggest the digital payments industry grew from $5,058.96 billion in 2020 to $5,872.89 billion in 2021 at a compound annual growth rate (CAGR) of 16.1%. Payment avenues such as the internet, mobile, QR payments, online delivery and other new channels have surged in popularity as the world came to grips with the challenges of COVID-19. The need to make purchases remotely and a desire to reduce physical contact have taken digital payments into the mainstream.

However, what for some was a reaction to the practical challenges of the pandemic, may have become the new normal, with many of the measures and the technologies which became prominent during the pandemic set to retain their popularity into the future. That’s because the pandemic wasn’t so much the transformative force it appeared – it merely accelerated channels and methods which were already well in development.

As a survey from Mastercard in 2020 shows, seven out of ten consumers believe digital payments would replace cash with half of consumers saying they plan to avoid using cash altogether. These solutions are faster, easier, more convenient and mean that people don’t have to deal with fiddly pieces of change. What’s more, as digital uptake has increased, they are proving to be relatively secure.

This is crucial because prior to the pandemic, the biggest stumbling block to digital adoption – both for consumers and businesses – was the uncertain and unfamiliar nature of these technologies. Concerns about security, and usability overshadowed the many benefits digital payments could bring. Adoption was growing, but it was a gradual rather than sudden process, as people became used to new forms of payments.

Related: Why accepting online payments in a digital-first world is a must

What the pandemic did, therefore, was push those developments into overdrive. Suddenly it didn’t matter so much whether a business or individual was comfortable with the technology – it became the only way of doing business.

Restaurants, for example, got around the lockdown restrictions by switching to online ordering and delivery mechanisms. Retailers processed fewer cash transactions and more contactless and mobile transactions. Bars used table service and apps which allow customers to place orders and make payments online without having to call a waiter or go to the bar. In other words, processes and trends which were already in development moved on a step with the arrival of the pandemic.

That they proved to be so successful shows that, despite genuine and understandable concerns about security, the benefits have outweighed the risks.

This has therefore led to a very different payments landscape in which businesses of all kinds are having to get to grips with a much wider range of payment options.

These include:

• Credit and debit cards: A long established staple for customer facing business credit and debit cards continue to be the most popular form of payments. However, the pandemic has seen this change. Cards with near field communication (NFC) technologies have become the norm meaning they can interact with card machines without having to make physical contact. Mobile phone apps such as Apple Pay also allow people to use these cards virtually by scanning the card into the app and allowing a smartphone to act as a digital extension of the card.
• Mobile payments: Millions of people are now choosing to pay using their phones rather than their cards. It allows them to manage much more of their lives through one single device. Using the same NFC technology as debit cards, they can hold a user’s details making payments digitally.
• QR codes: The distinctive QR codes are becoming more common. All users have to do is to scan the code of an establishment and make a payment.
• App payments: Businesses of all kinds have been developing apps which allow them to take payments. The user can download an app, upload their details and make payments. They have been especially popular in the hospitality sector, where reduced contact can alleviate the strain on staff and reduce the risk of disease transmission. In many cases, these apps came in as part of a business’ response to COVID-19, but they have proven to be extremely popular and convenient.

One of the biggest sectors to be affected has been financial services. The rise of fintech disruptors, challenger banks, financial apps and open banking have made it possible for people to manage payments online and bring all their financial dealings together into single apps. For example, one area of financial payments innovation has been in financial management apps which use open banking to provide access across multiple accounts. These can make it easier to save money, make payments and plan for the future.

Innovation is unrelenting and coming from all quarters. Small, agile, fintech start-ups are using digital technology to offer services and payment solutions which are not available from the traditional banking sector. However, more established banks are also upgrading their services to cater for a more digitally savvy consumer.

According to data from Research and Markets, digital banking is likely to experience double digit annual growth over the next five years. They estimate the digital platform market is going to grow at 11.6% year on year between 2021 and 2026.

This rapid growth will be driven by digital transformation in the banking sector as well as greater usage of smartphone devices and enthusiasm for innovative digital banking services from all sectors of the market. Crucially, this is not the preserve of younger consumers. Digital payment is becoming increasingly popular amongst all age groups from generation Z to the war generation.

Digital banking services are opening new trends in digital payment innovation in the B2B sector such as:

• Automated payments: Digital payment technology is facilitating the spread of automated payments among businesses. Previously, this would have been a labor-intensive process requiring lots of manual processes, and administration. Digital technology is making it possible to automate most of these processes which allows for increased transparency in financial management, quicker payments of invoices and faster, lower cost, transactions.
• Blockchains and cryptocurrencies: The need for lower cost, faster and more transparent payments – especially cross border – is also driving adoption of blockchain-based transactions such as using crypto currencies. Even digital banking requires a financial intermediary which can lead to transaction fees and slower processes. Cryptocurrencies allow for faster transactions without the need for extensive admin and banking fees. Transactions which might once have taken days can now be handled almost instantly.
• Digital payments: With both their customers, their own service providers and partners, businesses are turning to digital payments. These use payment gateways and other emerging technologies to process payments more quickly and efficiently than ever before.
• Cross border payments: For freelancers and other businesses providing services, the traditional approach to cross border payments could often be slow and costly. They would depend on bank and wire transfers which could take days and involve bank fees and fluctuating exchange rates. Technologies such as distributed ledger systems and other automated technologies have opened the door to faster, cheaper and more convenient cross border payments. Banks have automated their systems while a rising tide of digital fintechs such as Square, Billpay, Veem and Melio are coming up with new ways to accelerate the B2B digital payments landscape.

It has often been a surprise at how far B2B payments and financial services have lagged the trend on payments. Digital technologies have been offering new, faster ways to make payments for years, but much of the B2B payment industry has been stuck in the dark ages. The pandemic gave them the push to investigate some of these digital payment technologies which, in turn, have been upgrading their own systems to suit.

That’s not to say there aren’t still concerns. Fraud and cyber crime have been growing concerns during the pandemic. The challenge for businesses going forward is that they upgrade their own security systems to meet this new normal. While the pandemic created opportunity for adoption the speed with which some businesses had to move caught some by surprise.

However, adoption is not a question of if, it’s a question of when. With businesses adopting digital payments, consumer expectations have grown. Businesses have had to embrace digital banking and digital payments in order to keep pace with demand and the competition. Those that do not increasingly stand out and run the risk of alienating their customers. Businesses will need to upgrade their own infrastructures to ensure they are well placed to cater to these growing demands now and into the future.