Payments in the Future: IDC InfoBrief Commissioned by Episode Six Looks at 2023 and Beyond

It’s no secret the process of how we pay for goods and services is changing before our eyes and the latest IDC InfoBrief commissioned by Episode Six speculates on what the future will look like.

In 2030 they expect 74 per cent of global consumer payments to be handled by non-financial institutions. Incumbents will have a place in that future, if they can re-envision how they deliver that service.

The trends are clear. Payments processed at financial services institutions are rising at an annual rate of six per cent, less than half the 16 per cent rate seen by non-financial institutions. That higher rate is driven by innovators providing positive experiences. The value of digital payments in 2030 is projected to soar to 3.4 times its 2020 size to reach $476.1 trillion.

Buy now, pay later (BNPL) services, along with digital wallets play key roles in this shift, the report finds. BNPL is displacing cards in developed economies and cash in emerging ones.

Add CBDCs to the list too. The authors suggest they could grow from no share of payments in 2020 to four per cent, which is equal to $18.6 trillion, by 2030.

The report identified six payment trends to be on the lookout for, with the first being how real-time payments will drive innovation in the payments experience. Better such experiences increase customer expectations.

“Seamless, contactless, and instant payments built into fluid user interfaces and which can interact with ecosystem partners have become the standard which payments are held to,” the report states. “More will be delivered before, during, and after payments authorization due to better processing technologies.”

By 2030, 95 per cent of physical, non-cash payments will be contactless, the authors believe.

Gone are the days of slapping a digital front end on a clunky back one and calling it innovation. Improvements must occur throughout the design process. And it better come quickly to market, given the level of competition.

The second trend is the growing multitude of payment asset classes. Everything from CBDCs and other digital currencies to even loyalty points and vouchers are driving change, By 2030, 60 per cent of folks will have made a transaction using something other than fiat.

That brings a lot of responsibility onto institutions. Payment workflows must change to accommodate more data. KYC must expand to include know your transaction and know your data elements. Supporting technology must be designed in a way so providers can quickly adjust to shifting regulations. In-house skill sets must grow to reflect these new technologies.

No surprise here but there will be increased competition and margin pressure from new entrants who are mobile-savvy, given that by 2030 80 per cent of consumer payments will be handled by non-financial institutions. The pressure is on for incumbents to reduce their reliance on legacy systems.

The fourth trend is how. advancements in technology are creating new roles in the payments industry. Firms should be mindful of the impacts many new technologies such as modern cloud-native core technology platforms, software- as-a-service or platform-as-a-service platforms, application programming interfaces (APIs), banking-as-a-service, and the Internet of Payments can have on their bottom lines.

These companies need to redesign their systems so as to accommodate modern technologies more responsively.

Expect regulatory moves to shake up incumbents . These include actions in the areas of open banking mandates, domestic real- time payments schemes, and CBDCs. IDC estimates that by 2030, open banking-derived revenue for financial services institutions will make up the largest portion of services income.

This will put pressure on all financial firms to create additional value for their payment products. This can be achieved by working with partners and investing in the technology that can create such experiences. Regulators need to quickly establish ground rules.

The final trend is a push for integration and interoperability, which will drive payments firms to excel within integrated systems. IDC estimates that by 2030, more than 90 per cent of global real-time payments schemes will have been linked to at least one other country’s network. This will take some work to integrate older systems. Those who are overly cautious could miss lucrative opportunities.

Relationships between financial services institutions and fintechs are becoming increasingly symbiotic and converged. Examples include DeFi, API interoperability, embedded finance, Internet of Payments and mergers and acquisitions. That brings several advantages including shared skills, branding benefits, scalability, risk mitigation and funding.

These trends can be bad news for the many financial services companies around the globe who have been slow to update their technology. IDC estimates 73 per cent of companies have infrastructure which is poorly equipped to handle payments in 2023 and beyond, while a mere three per cent are future ready.

In between 15 per cent are still operating with early legacy systems, while 58 per cent deploy modern legacy technology. Roughly one out of four (24 per cent) are digitally native while those remaining three per cent are future ready.

There are three main factors that impede companies from upgrading their payments infrastructure. The first is too many legacy systems and restraints. Technology silos impede innovation. The lack of configurability is constricting go-to-market speed and the ability to evolve products over time as is needed to be competitive and profitable.

Companies can reimagine their payments systems by considering them through a few key benefits. Systems as revenue drivers are designed to connect with ecosystems and deliver payments to any end-user. They can accept all present payments across asset classes and future asset classes and currencies and can deliver real-time settlements. Data-rich transactions linked to ecosystem partners.

A second consideration is cost reduction. Companies should focus on fluid and flexible native integrative capability, and universal interoperability of systems designed for any deployment model.

In the area of product innovation, they should design systems with high degrees of modularization and configurability. They should also be scalable.

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