As we move into the new year, payments experts and lay people alike are wondering, What developments deserve our attention, and which ones are simply fads? With a flurry of new technology, diverse payment options and services, and an ever-shifting market, zeroing in on the most crucial moves in the payments industry can be a daunting task.
To learn more about three key payment trends to watch in 2022, PaymentsJournal sat down with Vanni Parmeggiani, Director of Open Banking and Real-Time Payments at GoCardless, and Sarah Grotta, Director of Debit and Alternative Products Advisory Service at Mercator Advisory Group.
Wallets become the “magnetic pole” for the consumer relationship
Digital wallets are fast becoming the primary payment method and are on their way to surpass credit cards. Two major factors account for this shift: consumer preference and mobile commerce.
Super apps, including PayPal, Venmo, Apple, Google, Klarna, and Afterpay, offer rich shopping and marketing experiences that go beyond the traditional “pay now” model with basic rewards. “They allow you to trade crypto, they have a social element to them, and that’s all on top of payments where consumers can get all of these benefits and experiences directly on their apps,” said Parmeggiani. “Super appealing.”
Additionally, mobile commerce is becoming the preeminent channel for digital commerce, on track to overtake at-home web commerce in the U.S. and elsewhere. “Eight in ten consumers globally have already used contactless payments at the point of sale,” noted Parmeggiani.
BNPL credit steals the show from revolving credit
These changes are indicative of a larger phenomenon around payments evolution, including the groundswell of Buy Now, Pay Later. “Buy Now, Pay Later innovators have really cracked the code on how to deliver credit in a digital retail world,” said Parmeggiani. The reasons are threefold: accessibility, control, and fees.
With a soft credit check or no check at all – even with more regulatory scrutiny on the way – BNPL paves the way for a wide swath of customers to access flexible payment options. For many of these BNPL converts, the payment method allows them to keep a handle on smaller transactions, enabling greater control of their finances. Not to mention, BNPL only comes with late payment fees, but no interest rates, and the majority of the cost is borne by the merchant.
“Now, one might ask, Does it make sense for merchants?” Parmeggiani questioned. “I think the answer so far has been a resounding yes.” Compared to cards, recent research shows a 20-30% increase in conversion rates, and a 30-50% increase in average transaction size.
And this is not just popular among younger buyers or those with low credit scores. “We are seeing reports of greater than 50% of the [U.S.] adult population having used [BNPL] at least once,” Grotta added. Moreover, although 87% of Gen Z and Millennial respondents would prefer a BNPL solution to credit cards, up to 70% of all Americans indicated a preference for BNPL.
‘Next-gen’ bank payments critical for wallets and merchants
The tremendous growth of new payment methods such as digital wallets and BNPL dovetails with two major trends in payment efficiency and diversification: open banking and real-time push payments.
“Open banking is essentially the ability for permissioned third parties to access account data related to a bank account,” explained Parmeggiani. “Through open-banking APIs, third parties who are providing payment or risk services can make those services a lot more secure, less open to fraud, and increase the success rate of those payments by looking at the availability of funds.”
Real-time push payments are becoming key alternatives that operate alongside traditional payment rails like ACH (which is already made more robust and transparent through open banking). In addition to the benefits of real-time settlement and confirmation, real-time payments offer merchants payment irrevocability with limited chargeback risk because the merchants’ own refund and dispute policies govern the relationship.
Open banking and real-time push payments bring both convenience for consumers and incredible cost-effectiveness for merchants when compared to traditional card transactions. “The cost is on a fixed basis rather than ad valorem, [i.e. proportional to the value],” Parmeggiani clarified. “But other than the cost, we’re now able to offer bank payments in a way that is secure, instantaneous, and very, very user friendly.”
With the rising stars of digital wallets, BNPL, and ‘next-gen’ bank payments, the future of payments might seem bright and clear. However, as Grotta noted, “We here in the U.S. are still a little bit attached to our cards.” One might ask, Are the promised benefits of new payment methods enough to draw in U.S. consumers?
“The entire ecosystem evolves to cater to consumer needs,” answered Parmeggiani. And in this case, when merchants offer improved experiences to their customers, they are also saving money by reinvesting former credit card interchange fees into their own personalized loyalty and reward programs.
Parmeggiani concluded: “We at GoCardless always work with our merchants to reinvest that pot of gold into experiences that are tailored to their success and the success of consumers on their websites and retail stores. That, for us, is really the key point to drive home.”