Fintechs, e-commerce firms and banks will all see a turning point in payments.

The introduction of new regulation, combined with new technologies, changing customer expectations and the expansion of Chinese payments firms in the West, is leading to a rapid evolution of the payments industry.

Digital payments to boom in the short term

The digital payments industry is expected to see huge growth in 2018-19. Are you ready for some staggering numbers? The volume of online payment transactions for e-commerce activities worldwide will rise by 35% to 76.5 billion in 2019 from 56.5 billion last year, according to the World Payments Report by Capgemini and BNP Paribas. Mobile payments are expected to grow even faster, by 55%, to nearly 109 billion in 2019.

New technologies and new market entrants, such as fintech firms and big tech companies, like Amazon, Facebook or Alibaba, will drive future growth in digital payments. The adoption of alternate payment channels, such as contactless, wearables and augmented reality, coupled with modern authentication and authorization methods, would further fuel growth, Capgemini and BNP Paribas said.

China is expected to emerge as the market leader in non-cash payments in the next few years, overtaking the US. Growth in North America are likely to remain relatively modest because of the development of proximity mobile payments, supported by the usage of mobile wallets, like Apple Pay, Android Pay and Samsung Pay. Merchants in the US will increasingly adopt mobile points of sale (mPOS), which are tablets or smartphones functioning as sale terminals.

Instant payments to expand in 34 countries

Regulatory changes are expected impact digital payments a great deal in Europe. The EU’s credit transfer instant scheme (SCT Inst), introduced in eight countries in November last year, allows customers to transfer money almost instantly, even on holidays or weekends. This near real-time cross-border euro transfer system will progressively become available in 34 countries on the continent, with several countries joining in 2018-19. Participation is not mandatory.

Instant payments have been available in several countries around the globe for many years, but it is now likely to become the ‘new normal’ for industry at large, Capgemini said. It could also emerge as an alternative to cash for retail and corporate customers. What is more, implementing instant payment systems is also expected to bring traditional banks and fintechs together “for meaningful collaborations”, Capgemini reckons.

Payments after PSD2: rise of the tech giants?

Fintechs and e-commerce firms have more opportunities to expand into payments since the EU’s revised Payment Services Directive (PSD2) was introduced in January this year. This requires banks to open their customer data to third parties, including non-banking firms.

Third party players can now handle their own payment processing and e-commerce companies can offer the option to customers to pay directly from their accounts, rather than using their credit or debit cards. This also helps third parties to cut the fees they currently pay for card processing.

These changes will be huge. PSD2 will create a new ecosystem in payment services, which will disrupt the industry by bringing in new rivals and increasing competition, according to Capgemini’s prediction. There is no doubt, for example, that US tech giants and e-commerce firms Google, Amazon, Facebook and Apple will all jump on this opportunity.

One of the key trends emerging in 2017 was the increase in competitive partnerships between alternative payment methods and the more conventional payments ecosystem. One example of that was PayPal expanding its partnerships with Facebook and Skype to include peer-to-peer payments, enabling users to send money via instant messaging. There will be a surge in new partnerships like these after PSD2 was introduced, payments firm Hyperwallet said.

Demand for Chinese e-wallets up in the West

Chinese digital wallet services, including Alibaba’s Alipay and Tencent’s WeChat Pay, are expected to increasingly challenge for the leadership of the payments industry in the next few years. One direction of growth is international expansion for these players.

As population and capital continues to flow westward, all-encompassing platforms like WeChat will continue to conquer the world, improving everything from communications to cross-border money transfers, Hyperwallet has predicted.

WeChat is focusing on recruiting an international customer base: it launched its digital wallet in South Africa in 2015, Hong Kong in 2016 and the UK in late 2017. And WeChat Pay will become available in Italy too in early 2018 based on an agreement between Italian firm Digital Retex, one of Tencent’s partners, and the European subsidiary of global digital payment firm NTT Docomo.

For its part, Alipay operator Ant Financial has been signing co-operation deals with US and European partners to allow the increasing number of Chinese tourists to use Alipay abroad. The payment service is in an expansion mode around the world. It currently boasts more than 500 million registered users and plans to grow that number to exceed 2 billion within the next 10 years as it expands its global reach.

Banks need to smarten up to fend off threats

Growth in digital payments brings new opportunities and risks for traditional retail banks. BCG has warned that banks failing to keep pace with leaders in digital payments will lose market share to non-banking companies.

Here is the main risk: the reduction in payment interactions will have a ripple effect on the rest of the business, since payments often serve as the primary relationship gateway between banks and customers. This shift is already hurting banks in China and India, which are rapidly losing ground to the leading fintechs, BCG said.

Traditional banks have a lot to lose. Payment-related revenue – such as revenue from accounts, non-card payments, debit and credit cards – still accounts for a third of banks’ top line, BCG said. It has suggested that banks need to redesign and personalize the payments experience, collaborate strategically to keep pace with the digital giants, and substantially improve their approach to protecting and monetizing data.

If they pick the right partners and are skilled enough in the dance, then they’ll stick around long enough to benefit from the new value being created. But if they are not careful, they risk falling over their own feet. Banks need partners in this new dance,” Accenture said.

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Digital sales: 12 strategies for banks to win in the digital world war

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