Superapps, BNPL, Digital Currencies & Changing Payments Industry
By Alexey Zelenkin
Until recently, paying with QR codes and NFC by phone seemed innovative. However, today they are giving way to wearable devices and biometrics. The payments industry is changing, not only in terms of payment methods: the very laws by which the market operates are being transformed. What trends are now shaping the face of the payments industry, what its participants need to prepare for, and what all this will mean for consumers?
The End of Plastic: New Payment Methods
The market for cashless payments is growing at a tremendous pace: according to forecasts by PwC, by the end of the decade, global volumes of non-cash transactions will grow by almost three times compared to 2020. The growing demand for more convenient payment methods, coupled with the active penetration of non-bank players into the industry, is leading to the transformation of payment mechanisms.
First of all, this concerns the payment methods themselves: PwC have noted that consumers around the world are gradually abandoning bank cards and accounts in favor of electronic wallets. Thus, emerging markets often go directly to using wallets, bypassing the card stage. On the other hand, in regions where digital banking for consumers is well developed, there is not much difference between electronic wallets and payment cards, except that a wallet is usually easier to open than a bank account.
Another factor blurring the line between electronic wallets and bank cards is the spread of virtual cards, including mobile payment systems (such as Apple Pay). Plastic is gradually becoming a thing of the past: a digital card is more convenient, it cannot be lost, and this is a smarter choice from an environmental point of view.
But even these payment methods are beginning to give way to payments using wearable devices: smart watches, rings, bracelets, even jackets with built-in NFC chips. Lyle & Scott produced a contactless payment jacket in 2015. By 2027, the size of the global market for wearable payment devices could grow by more than double, to $90.5 billion. The development of this segment suggests that there is a gradual move away from specialized items for making payments and moving towards using items that we use in everyday life, from phones to rings. The culmination of this trend is the complete rejection of any physical media for making payments: in other words, biometric methods.
Blink to Pay: The Future of Biometrics
We actively use biometric identification methods these days, mainly to unlock our phones or access applications. However, in terms of payments, this method is not developing as fast, although some regions, mainly India and China, have already advanced quite far in using this technology. In 2020, the global volume of payments made using biometrics reached $404 billion.
To accelerate the development of a unified biometric system (UBS), authorities are trying to make biometric payments as easy as possible. If we talk about financial products, a UBS can already be used for all sorts of services and payments, both online and offline. One example is the Brazilian facial recognition payment startup Payface, a company that uses face biometrics and liveness detection to enable customers to ‘pay by face’, eliminating the need for cash, cards, and even phones.
So far, people are being slow to adopt the opportunities that are available. It takes time to overcome the resistance of consumers. But it is possible that for the next generation making payments using biometrics may become as normal as it is for today’s generation to make payments by smartphone.
Utilities Subscriptions: Recurring Payments and BNPL
Simultaneously with payment methods, payment models are also being updated. Likewise, BNPL is now gaining more and more traction around the world. The abbreviation, which stands for “Buy Now, Pay Later”, is already, in fact, a common form of payment in retail. The client buys the goods in installments. They pay the initial amount, and the balance is automatically debited from their card in equal installments over the following months. This model is especially popular in the west: for example, in 2021, American buyers made purchases using BNPL totaling about $100 billion (in comparison: a year earlier this figure was only $24 billion).
The arrival of recurring payments from online subscriptions to retail, including offline payments, is a signal that in the future they may penetrate into other areas: for example, paying taxes, housing and communal services, and the rental business. However, there are factors that may slow down the development of this model, the foremost of which is consumer fear of losing control over spending. For recurring payments, all withdrawals, except for the first one, are direct debits: the user gives their consent to withdraw funds just once. Automatic withdrawals create an illusion for a person that the seller has full access to their savings, and do not provide an opportunity for the person to authorize each and every transaction. This may prevent the spread of recurring payments in areas such as taxes and utility bills, where the amount of the payment changes every time, that is, the consumer sees the amount of debited funds only after the fact.
One way to overcome this barrier is through separate financial instruments for recurring payments. In other words, it can be a special account, card, or electronic wallet, on which the user will store small amounts for monthly debits. In this way, they can be sure that large sums of money will not be withdrawn without their knowledge.
Digital Currencies of the Central Bank
Not only payments, but money itself is going digital. Along with cryptocurrencies, the digital currencies of central banks (CBDC) are developing, which, according to forecasts made by PwC, will become one of the key factors in the development of payment markets in the next 20 years. In early 2021, the prospects for digital currencies were studied by approximately 60% of central banks and 14% of them have already launched pilot projects. Last summer, the European Central Bank started a pilot for the “digital euro”. China’s central bank has rolled out the digital yuan, dubbed e-CNY, for Olympians and visitors during the 2022 Winter Olympics. The digital yuan’s international debut for global users during the Winter Olympics follows more than a year of pilot runs in about a dozen regions across the country. By the end of 2021, more than 260 million people had e-CNY accounts and total digital yuan transactions reached nearly 90 billion yuan ($14 billion or €12 billion), according to the bank.
Store Banks: Market Liberalization and Superapps
Another important trend that is now determining the development of the financial industry is its liberalization. Access to the market by non-bank players deprived banks of their exclusive right to provide payment services. Fintech companies, retailers, and representatives of other businesses have been able to launch their own products for customers. In some cases, bypassing cooperation with their bank.
All this threatens the banking sector in its traditional form. In general, the banking industry is very slow in terms of change. More flexible fintech and retail companies adapt faster to new trends and the needs of users, winning in terms of gaining their loyalty. The function of making payments is gradually moving towards fintech companies, and banks are taking on the role of infrastructure providers. For example, an American company called Goalsetter offers its clients a range of financial services: a payment card, a savings account, an investment platform, and other services based on the products of major financial institutions. The business idea of Goalsetter is that banking solutions are noticeably inferior to those offered by fintech companies in terms of convenience, but banks can reach modern consumers through fintech services, in particular, by working with a white label model.
Another effect of the liberalization of the payment market was the development of superapps. Having gained popularity in Asia, they are now gradually expanding to other regions. Retail giants have also joined the trend, for example, Walmart is developing their own superapp. There are also products that are initially built as ecosystems: for example, in Uzbekistan in 2020, the first superapp in the country, called Humans, was launched, which combined a fintech service, cellular services, and an online payment storefront. Despite the fact that this product was absolutely new for the market, in just a year and a half the number of its users exceeded one and a half million. This suggests that superapps are a viable model and as such will always find customers. Of course, there is also an audience for which such an ecosystem is not suitable, but what will eventually win the hearts and minds of most of the market, well, only time will tell.
