After a brief appearance in 2003 that was quickly contained, the SARS coronavirus reared its ugly head once again in late 2019, bringing life as we knew it to a standstill. Thousands succumbed to the illness, and businesses were forced to close or make huge cutbacks in workforce to survive, as economies in every country took the blow in 2020.
Payments too bore the brunt of these shocking turn of events. According to McKinsey, global payment revenues declined 5% from $2 trillion in 2019 to $1.9 trillion in 2020 – the first decline in 11 years after the 2008 financial crisis. The 7% growth between 2014 and 2019 failed to continue into 2020, although relief and stimulus payouts by governments did keep further recession in check. A key factor arresting the fall was the digitization of retail and wholesale payments that displayed a sharp upward trend as a reaction to the pandemic-driven preference for contactless. McKinsey estimates that 2021 payments revenue to go back to the 2019 high of $2 trillion, and projects that it will reach ~$2.5 trillion by 2025.
The pandemic registered a dramatic change in buyer behavior as even overly cautious smartphone users dipped their toes into online payments through P2P money transfers, bill payments, online grocery shopping, and so on. Having realized the distinct advantages of contactless, digital-savvy consumers are now demanding more speed, convenience, and security, while providers are furiously investing and innovating to grab the pie. Technology advancements and regulatory changes such as faster payments and open banking are triggering new use cases and revenue models, and all of this will likely lead to the manifold rise in payments revenue by 2025.
In this article, we highlight the key happenings in the payments world in 2021 as economies recovered and businesses resumed, and outline what we can expect in 2022 and thereafter. The focus is on the most happening areas: Real-time & cross-border payments, Open banking & embedded finance, Traditional and new payments players, Crypto & CBDC, and hot trends like Super Apps and Buy Now Pay Later.
Real-time and Cross-border Payments
Although the 2021 numbers are yet to come in, FIS predicts that the 2020 surge in real-time global payments volume and value by 40% and 30% respectively, had likely continued in 2021, mostly due to increasing adoption in India, China, South Korea, Thailand, and the U.K that together accounted for 80% of global real-time payments – with India leading the way.
The sharp upward trajectory of UPI transactions in India deserves special mention. The volume and value of UPI transactions have been climbing steadily since January 2021. In all of 2021, more than 3,800 crore UPI transactions worth Rs 73 trillion were clocked.
The growth of UPI has been phenomenal since its launch in 2016: the first billion UPI transactions was recorded in October 2019, the second billion by October 2020, the 3 billion in just another 10 months and it took only 3 months thereafter to reach 4 billion transactions per month, highlighting the massive adoption of the payments platform among consumers in India, a growth rate that was accelerated by the pandemic.
By eliminating the delays in the settlement process, real-time payments offer a plethora of new possibilities that banks and fintech are trying to piece together through intersections with technology in the form of open banking APIs, Big data, AI/ML, blockchain, IoT, AR/VR…
2021 saw new innovative offerings from FIS that employed real-time rails – (a) RealNet, a global money transfer SaaS platform that enables A2A transactions locally and internationally for businesses and (b) RealNet Central, a full stack of payments infrastructure for clearinghouses, central banks and commercial banks enabling them to modernize their legacy infrastructure and adopt real-time payments. Not just P2P and B2C, B2B real-time payments are also seeing significant growth – FIS estimates that 30%-50% of B2B payments will ride real-time payments in 2025.
Real-time cross-border payments also got a shot in the arm in 2021 when SWIFT launched SWIFT Go, a fast, cost-effective service for low-value cross-border payments built on the high-speed rails of SWIFT gpi, enabling SMEs and consumers to send near real-time payments in seconds with full transparency and strong security.
ISO 20022, the new standard that allows messages to carry additional remittance Information is playing a vital role in enabling real-time cross-border payments by driving the integration of domestic instant payment schemes. Unfortunately, SWIFT extended the date for enabling ISO 20022 messages for cross-border payments from November 2021 by a year to November 2022, since banks and regulators were not ready to implement the necessary infrastructure to make this happen. As a result, interoperability of instant payment schemes will also take more time.
Linking of domestic real-time payments systems took off in April 2021 when the Bank of Thailand and the Monetary Authority of Singapore (MAS) were the world’s first to announce a linkage of Thailand’s PromptPay with Singapore’s PayNow real-time retail payment systems. In September 2021 MAS-RBI announced a similar link-up between PayNow and UPI. In the same month, MAS and Bank Negara Malaysia started a phased linkage of Malaysia’s DuitNow and Singapore’s PayNow real-time payment systems, allowing customers of participating FIs to make real-time fund transfers between the two countries using just a mobile number.
Meanwhile, P27, the joint payments project between six of the largest banks in the Nordics crossed a major milestone in July 2021 when it received approval from the EU Commission to establish one common payments infrastructure throughout the Nordics. The P27 platform will enable domestic and cross-border payments in real-time, in batches, and in multiple currencies.
There is no doubt that open banking is playing a critical role in accelerating innovation in payments. In some countries, open banking is regulation driven (UK, Europe, Brazil, Australia, Hong Kong…) while in others it is market driven (N. America, Canada, Asia, Singapore…). A recent Mastercard report, ‘Open Banking Readiness Index: The Future of Open Banking in Europe’ has found the Nordics and the UK best placed in terms of pushing the Open banking agenda in Europe. Most European countries have planned their own ways of implementing an Open Banking ecosystem and transforming their domestic cardless payment schemes into digital A2A payment schemes. Of these, the Nordics collaboration model and the P27 initiative stand out as frontrunners in open banking digital awareness as well as digital payment readiness.
Open banking and the API economy have opened the door to Embedded finance, with non-financial companies wanting to provide payments, lending, and insurance services in partnership with banks. While digital platforms and tech companies want to embed finance into their platforms to provide value-added services for their large user-bases, Banks/FIs benefit through greater access to a larger customer pool, and enhanced profit through credits and loan underwriting, by providing the regulatory and compliance requirements that accompany such initiatives. Fintechs meanwhile provide the software or tools to connect the platforms with the FIs. The embedded finance and Banking-as-a-service business has boomed in 2021 and the upward surge is expected to continue in the years to come.
2021 – The Year of Open Banking in India
Back in India in September 2021, SBI, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, and Federal Bank have all joined the new Account Aggregator (AA) network in India, an open banking platform where customers can opt-in to share their financial data among the FIs who then can provide tailored products and services for them. Account aggregators are Non-Banking Financial Companies (NBFC) that act as intermediaries to collect and consolidate data from all Financial Information Providers that hold users’ personal financial data (like banks) and share that with Financial Information Users (like lending or wealth management companies that provide financial services).
Open banking in India is semi-regulated. While it has the full support of the Indian govt. through the India Stack and RBI initiatives such as the RBI Innovation Hub, market forces and intense competition have led to 2021 being described as the Year of Open Banking in the country. Payments players of all sizes are establishing banking partnerships and launching neobanks to widen their offerings – regulation in India requires that new offerings can only be built on top of traditional banking services, e.g., Google has partnered with small finance bank Equitas whose users will now be able to open fixed deposits on Google Pay. With more banks exposing open APIs, and the entry of NBFCs and neobanks all utilizing the India stack, together with heavy fintech funding, India is setting an example for the entire world to follow.
Fintech Disintermediation of Traditional Players
The failure of the $5.3 billion Visa-Plaid merger (that would have been Visa’s largest acquisition till date) in January 2021 brought Plaid into the spotlight. It was a blessing in disguise for the fintech that could now challenge the dominance of the card giants by leveraging its relationships with 12,000+ U.S. FIs to lets users connect their bank accounts to finance apps and transfer money, potentially cutting Visa and Mastercard out of debit transactions.
The rapid disruptions in the payments world driven by the rise of new payment networks and ground-breaking disruptions by Big Tech and smaller Fintech have the power to remove the middleman for payment transactions, potentially hurting established, age-old players in the payments world. The first real possibility is that banks will bypass the payment rails of the card schemes and use the networks built by banks and federal authorities such as UPI in India, the forthcoming FedNow in the U.S., Canada Real-time Rails and the P27 platform being readied in the Nordics. The threat will be greater once individual domestic networks are interconnected, although that may take time.
The much greater risk is when consumers start trusting Fintech enough to bypass their banks for their financial needs. Banks will then get disintermediated by Big Tech and Fintech and a logical outcome of that will be that the card giants will get disintermediated as well, due to their heavy dependence on bank partnerships. Fintech and data aggregators like Plaid are in a mutually beneficial relationship, especially with the Biden administration issuing executive orders, allowing customers to access and share their financial information and banking data – moving the U.S. closer to an open banking regime. Most of Plaid’s collaborations with leading banks in 2021 were in anticipation that Open banking would now be regulation-driven, and they were proved right.
Card Giants are not resting on their laurels
Threatened by the rise of domestic and regional networks that are gradually linking up, and path-breaking innovations in payments, Visa and Mastercard are continuously formulating strategies, partnering, and innovating to stay ahead of the game. While Visa and Mastercard have both benefitted from the move to cashless, Visa appears to be strengthening its focus towards consumer payments while Mastercard is likely concentrating on the B2B space – it recently announced Mastercard Track Instant Pay a next-generation virtual card solution that uses machine learning and straight-through processing to enable instant payment of supplier invoices. Visa and Mastercard have been continuously acquiring several companies to further their respective agenda for innovation and growth in all major areas such as open banking, P2P payments, cross-border payments, cloud, cybersecurity, bill payments, and cryptocurrencies.
Blockchain, CBDC, NFT Commerce
The rise in the popularity of cryptocurrencies and stablecoins has led to countries exploring retail and wholesale versions of a Central Bank Digital Currency (CBDC) with the objective of promoting a digital agenda that places focus on financial inclusion especially in developing economies.
According to a July 2021 CBDC tracker update from the Atlantic Council’s GeoEconomics Center that features eighty-three countries worldwide (double the number in the 2020 tracker),
5 countries have fully launched CBDCs, with the Bahamas being the first. Of the remaining, 33 are in research, 15 in development, and 14 in pilot stage. China is blazing ahead with its Digital Yuan, having successfully run several pilots through 2021. Visitors to the Beijing Winter Olympics that started on February 4 this year will have just three options to pay: Cash, Visa, and the Digital Yuan (also called e-CNY). Distribution of the digital currency takes place using a two-tier system that transfers e-CNY from China’s Central Bank to commercial banks, who then distribute the currency directly to consumers. e-CNY already has 261 million unique users who have made transactions worth $13.78 billion at 8 million merchants!
In February 2021, China, Hong Kong UAE, and Thailand have been successful in an experiment to settle international payments for their respective digital currencies using a distributed ledger. The payments took seconds, instead of days. Making CBDC interoperable between platforms promises to ease the pains of cross-border payments.
Back home, the Finance Minister of India has just proposed in her Budget for FY 2022, a plan to introduce a Digital Rupee in India by FY2023 that will use blockchain and other technologies.
Cryptocurrencies have also fuelled the growth of NFT (Non-Fungible Tokens) Commerce that has taken off in a big way in 2021. NFT or non-fungible tokens are a way to represent ownership of digital goods such as unique artwork, videos, or pieces of text, with proof of ownership stored on the blockchain. NFT sales volume reportedly rose to $25 billion in 2021 from $95 million in 2020. In August 2021, Visa announced it had bought CryptoPunk 7610, a pixel art image for 49.50 Ether (~$150,000). It may seem amazing that one would pay millions for items that do not exist physically, but supporters feel that NFTs are the future of ownership in the upcoming metaverse ‘avatar economy’ which presents life in a virtual world that threatens to take over entertainment, social media, and everything else that can be done online – Canada based Token.com has invested $2.5 million on a piece of a 3D virtual land in Decentraland, a metaverse real estate with its own currency – the possibilities are infinite.
With mobile app usage speeding up across the globe. all-in-one Super Apps have emerged to address the diverse needs of users under one umbrella. Already popular in China and other parts of Asia, the Covid-induced preference for digital is leading to the rising popularity of Super Apps. The closest that India has got to a Super App is Alibaba-backed Paytm which is still far behind behemoths like China’s WeChat. The race for grabbing the Super App space rapidly escalated in 2021, with two of India’s largest conglomerates, the Tata Group and Reliance Industries Ltd., well on their way to launching their own Super Apps very soon.
With open banking and data sharing gradually becoming the norm, Super Apps are aiming to be Payment Super Apps that would need to ensure ‘invisible yet secured’ payments. This in turn requires in-depth knowledge of payments from experts who have worked with the complexities of the payments world.
Buy Now Pay Later
2021 saw a sharp upward trend in the preference for Buy Now Pay Later (BNPL) schemes that enable shoppers to pay in installments without needing to apply for credit cards or run credit checks. While many buyers utilized the scheme to manage their financial hardships during the lockdowns, for most it has been just a way to possess things that were previously out of reach. Swedish BNPL player Klarna has been leading this space, registering 300% growth in H1 2021 thanks to the pandemic-driven surge in ecommerce. Amazon, Apple, PayPal, and other big players have already launched their own BNPL products and others like Square announced in August 2021 that it is acquiring Klarna-rival Afterpay. Visa’s July 2021 announcement of its BNPL APIs was quickly followed by Mastercard’s launch of its Mastercard Installments program in September 2021, which will allow consumers to pay for online and in-store purchases through equal and interest-free installments.
Meanwhile authorities the world over have expressed grave concern about how BNPL is pushing many into debt, with ~40% defaulting on payments. Regulation of this space seems imminent.
Payments have seen another roller-coaster year in 2021, with continuing disruptions due in large part to the pandemic that has hugely transformed buyer behaviour. The expectations of speed, safety, and convenience will keep driving changes in 2022. More countries will get their own faster payment rails and experiment with different technologies to establish cross-border links between them. This together with regulatory reforms will lead to closer partnerships and collaborations among Banks, FIs, Fintech, Big Tech and a host of other middlemen who will continue to innovate to secure improved experiences for consumers.
Newer payment methods like crypto will not just see more merchant acceptance but also more sophisticated crypto heists that will grow the security and compliance space with newer players working on more advanced ways to combat crime. Established BNPL players and start-ups that are seeing record funding are slowly moving into B2B payments and are likely to take over the space formerly enjoyed by credit cards. B2B payments are already showing robust growth with innovative invoicing/AR/AP management solutions. Incumbent banks have started tying up with Fintech for sophisticated Treasury solutions. Many companies have already started to experiment with the metaverse and digital identities – despite extensive criticism, the metaverse seems to be the next audio-visual extravaganza that is all set to take over the world and completely transform the customer experience.
2021’s forced move to digital is helping fuel the ongoing transformation in payments. The opportunities are endless, as is apparent from the billions being invested in this space. Biometric facial and voice payments, IoT connected device payments, livestream payments, faster payments without internet connections…the list goes on.
2022 will be interesting to watch, as the initial shocks wear off, people learn to live with the virus, and economies rebound. Stay tuned for updates.