Newcomers in the payments industry

These new players are often more agile and digitally savvy, therefore better able to take advantage of modern customer expectations, leveraging new technologies, while avoiding some of the more debilitating regulations.

With the global digital payments market size expected to increase from USD 79.3 billion in 2020 to USD 154.1 billion by 2025, banks will need to change their business models if they’re going to keep pace with their fintech competitors and make the most of this booming sector.

digital payments market size

A move toward digital payments systems

The worldwide lockdowns accelerated the move toward digital systems “by two to three years,” according to Insider Intelligence. This technological evolution in the way consumers carry out day-to-day payments has led to a plethora of cutting-edge systems and the more-or-less sudden arrival of new players in the payments sector.

These players are reacting to the dynamic nature of emerging markets and to the development of different user expectations when it comes to payments, for both consumers and merchants. These expectations include a general desire for free, easy, safe, digital payment methods, with zero tolerance for fraud and security breaches.

Consumers are particularly eager to be in control of their payments. Easy-to-use, safe, secure systems – such as digital wallets and digitalized debit cards accessible via smartphones – are becoming more and more popular as traditional payment methods – such as cash and credit cards – struggle to keep up.

Merchants, on the other hand, have become enlightened to the spending possibilities of digital payment systems. These naturally help customers purchase more with a seamless conversion during the sales funnel. Furthermore, the seemingly endless possibilities of e-commerce markets have encouraged international expansion and the minimizing of fraudulent activities.

Big Tech and fintech arriving on the market

These digital expectations have fueled the rapid growth of electronic payment markets, which signaled the arrival of a “new brand” of mobile and tech-savvy innovators, eager to reap the benefits as governments and regulators encourage to digitalization of the market in the name of financial inclusion.

The challenge for regulators has been trying to find the right balance between innovation and protecting consumers’ interests. This has led to the development, in some jurisdictions, of new regulatory frameworks specifically designed for digital banking, which are rather attractive for the new generation of players in the payments industry.

There has been no shortage of new entrants into this exploding digital market. Tech giants have come to see digital payments as a pillar of the future financial market, with payments considered essential to enrich their global value proposition. Major tech giants around the world, such as Google to Amazon, Facebook, Apple and Tencent, have all developed state-of-the-art mobile payment initiatives. The Tencent-backed WeBank, for example, already serves over 200 million people just five years after its launch.

big techs

Furthermore, the advent of the fintech industry has heralded the arrival of “pure players” in the payments market. Sixty-six out of the 222 so-called “FinTech Unicorns” of the 21st century are 100 percent devoted to payments. Think PayPal, Stripe, Square and Shopify, among others.

The sheer number of new players has inevitably led to increased pressure on industry incumbents.

How traditional banks can get involved

Of course, banks around the world have sat up and taken notice. They’re aware of the changing landscape, new customer expectations and the need to offer increasingly innovative payments services to meet those needs.

However, unlike fintechs and Silicon Valley tech giants, traditional banks often have to contend with a vast array of regulatory challenges, which renders innovation all the more complicated.

Furthermore, many traditional banks are labored with legacy IT systems, sometimes built on obsolete technology. Innovating on such systems can be incredibly challenging. And replacing or updating said systems is time-consuming and costly.

Despite these challenges, banks have made progress. Many traditional banks have already begun offering innovative payment services and products previously mentioned in this article.

Traditional banks are also investing in new industry entrants in the payments sector – from emerging fintechs to tech giants – to build lasting partnerships, while also keeping a foothold on the latest innovations.

 

Whether these steps will be enough in the long run to stave off competition is yet to be seen, but it’s certainly a start. However, there are plenty more challenges ahead. The onus is still on banks to prove their worth with regards to payments, by embracing the digital payment strategies, as well as being a core part of emerging ecosystems.

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