In all likelihood, the size of the global digital payments market will exceed $8 trillion by the end of this year [1]. This is considerable, especially since this market is expected to continue to grow at a double-digit rate over the next five years. Payments continue to transform from year to year, particularly retail payments, reflecting our changing consumption patterns. Biometrics, card, mobile, data, crypto, digital currencies are symptoms of digital payments spreading everywhere and going so far as to become invisible in some of the most successful customer experiences.
Payment remains a complex alchemy
However, the rise of digital payment cannot make us forget that it is first and foremost the result of a complex alchemy. The payments ecosystem that has grown over the years has become sophisticated. It needs infrastructure, regulations and supervisory authorities, compensation and guarantee mechanisms, information and messaging systems to address the different types of transactions, payment initiation and account servicing providers. Also retailers and e-commerce present wishes and constraints that have an impact on the market. The ecosystem needs international standardization (eg: ISO 20022) and specific processing and counterparties for cross-border transactions. The ecosystem requires liquidity and cash management, risk management, and fraud detection, and increasingly highly resilient processing systems.
The payment market is diverse and is looking for fit and robust cooperation for elements working well with each other. How will the market face the double challenge of its perceived evolution? On the one hand, the growing globalization of payments and the growing share of cross-border transactions. On the other hand, the digitization of payments with their impact in terms of speed and its consequences in terms of irreversibility and/or settlement-delivery between stakeholders and/or intermediaries.
Retail payments: the rise of data following the open-banking movement
The retail payments market has experienced a decisive moment with the implementation in many countries of Open-Banking policies, opening access to bank accounts and their payment information to regulated service providers. In Europe, the centerpiece of this development has been the second payment services directive (PSD II), adopted in 2015 and implemented since 2018.
Four years later, the implementation of this regulation has translated into massive datafication of payments: programming interfaces (APIs), data aggregators, data formats... The retail payment market has become a set of data exchange platforms generating, structuring, exchanging pseudonymized (encrypted or tokenized) data whenever necessary.
Strong authentication (SCA) and the granted mandate remain hardly visible parts within this massive data orchestration. Often ordered around the digital identities of the participants stakeholders and usually processing hundreds of data pieces for the determination of contextual risk, and the qualification of transaction optimality by a score or an artificial intelligence engine.
In summary, we can consider that the open-banking movement has granted the importance of data within payment operations and paved the way for the more general digitization of payments.
Mobile payment, innovations and digitization
Retail payment has taken a new turn over the past few years, encouraged by health conditions and sanitary constraint: contactless and remote payment, most often included in a seamless service. Most often it is based on mobile phone use, via an electronic wallet or an application, and sometimes with the support of the contactless card, biometrics, or even other connected objects such as watches in order to improve the quality of the customer experience and the secure practice of authentication.
Payment is taking a new digital flight, as it is now processed in the continuity of a digital journey and the flow of services distributed from a cloud platform. It is anchored in a more general customer experience where all the factors are taken into account such as the connection terminal, real time geolocation, the regularity of transactions, the amount of payment, etc.
While the data is somewhat similar to that considered in the previous paragraph, the difference with Open Banking is the insertion of the payment transaction into the digital customer global service experience. Payment operation now becomes a simple point of contact and gradually tends to fade when it acquires a repetitive or innocuous side. Physical commerce also tends to accompany this trend by offering the digital receipt by email or even consent to by default trust for small transactions.
Painless or even invisible payment becomes further inserted into the customer's digital experience, thanks to their biometrics, data and proximity devices.
In search of digital currency
This gradual conquest of digital payments has yet to cross the finish line. This will likely only be achieved several years after central bank digital currency goes live.
In China, this is already an experience for several hundred million people. In America and Europe, the prospect is announced and wholesale currency experiments progressing toward a gradual adoption of a retail digital Dollar or Euro.
Money as a unit of account and reserve naturally goes far beyond the functions of payment. The arrival of digital currency is however expected to be a determining factor in the digital evolution of payments. It promises to be a new factor of upheaval. For example, on a European scale, the question arises as to how will it affect the payment market (SEPA) with its 150 billion annual transaction volume between its 530 million citizens and 25 million business organizations [2]?
Finally, the digitization of payments promotes interferences between related fields. Data protection, consent management, digital identification, relationship entry, customer knowledge and anti-money laundering policy, used to be independent fields. They are now becoming increasingly intertwined with the payment activity that has gone digital. Market players must now take them into account and integrate them into their payment strategies.
Welcome to the era of digital payment. This article has highlighted some of the key developments in the payment market by analyzing the characteristics and consequences of its increasing digitization.
TRUSTECH, which will take place in Paris from November 28 to 30, 2023, brings together many public and private actors, around the subjects of payment and innovations. The conferences are an opportunity to meet decision-makers and prescribers of the market and to discuss its evolutions. Thematic issues include regulatory and supervisory infrastructure; Open-Banking and data aggregation; mobile payment, risk and resilience, digital currencies and assets. The most innovative technologies around the card, mobile, biometrics or cryptos will demonstrated on the exhibition floor.
[1]https://www.statista.com/outlook/dmo/fintech/digital-payments/worldwide?currency=USD
[2] Source World Payment Report 2021 – Cap Gemini