From the incessant disruption that has taken over financial services, the disruption of payments is perhaps the most immediate one to impact customers everywhere. In this episode, Futurist Chris Crespo explains how payments will change consumers purchasing behaviours; from freeing us from our wallets, to providing us with a whole new range of payment related services right at the point of sale. The future of payments is ultra convenient and perhaps even dangerous.
The following is a transcript of the video above
There is a ton of transformation taking place across the value chain in financial services, but payments is perhaps the most visible trend for most banking consumers like you and me.
Payments has always been considered a low hanging fruit ripe for disruption. In fact many Fintechs and technology companies have made challenger moves into the industry through payments, using it as a landing pad from where to expand into other areas of finance. Consdier Apple PAy , Amazon Pay and Google Pay, all systems developed by tech giants to get into the payment game. But examples can be as old as PayPal which launched back in 1998 as an electronic alternative to traditional paper payment methods such as checks and money orders. Since then the industry has made gigantic leaps forward in terms of ease and convenience.
In this episode we are going to paint a picture of what payments may look like in 2025 and beyond. The first thing that we have to recognise here is that the trend is very clear.
There is an accelerated uptake of cashless payments. In the west this has been led by credit and debit card payments, but in subsaharan Africa where less than 5% of consumers have credit cards, or in Aisa where card penetration is below 10% in markets like THailand, Indonesia India, Vietnam, and the Philippines the trend is down to the real disruptor, mobile payments.
Now, saying that payments will be digital is old news. The acceleration towards digital payments especially during the last year has been very noticeable and it’s no surprise to anyone to say that digital payments either online or through devices like phones and wearables, will become the norm. The projections for the uptake of digital payments into 2025 that we’ve reviewed for this episode vary slightly between sources, but they all coincide in that they are all exponential.
Admittedly 2020 shows an inflection on the trend, which is clearly the result of the pandemic, nevertheless further projections show that the trend will continue its exponential trajectory. In fact the pandemic caused a spike in online transactions which in turn propelled a number of payment startups into a meteoric rise in valuation.
Payment companies like Stripe and Plaid in the US. nearly tripled in valuation in the past year. And UK company Wise more than doubled its value over the past 12 months. So it seems fair to say that customers may look forward to a future where they they will enjoy a bit of extra space in their pockets as physical wallets become obsolete.
But why have digital payments and specifically mobile payments taken off? Well the first reason is obviously convenience. Mobile payments have removed an awful lot of friction from the payment process.
If you want to pay with cash, you need to reach into your pocket, find the cash, count it, hand it over, wait for the recipient to count and verify it, wait for your change, confirm that you have the right change and put it back into your pocket. 8 steps that have been replaced with only 3, take phone out, scan or touch, put phone away.
But there is a more subtle accelerant to the uptake of mobile payments, because mobile payments don’t only remove friction, they also get rid of pain. Researchers from the Frankfurt School of Finance and Management in Germany showed that consumers experience a type of negative emotion known as the pain of paying , when they pay for anything they buy. When we pay for something, our brain perceives this as a loss.
What these researchers found is that the multi-functionality of the mobile devices like phones and wearables, enables payments to become invisible.
This means the payment can be nicely tucked away in the background out of view in a place where it will not elicit any feelings of pain from the transaction. Put it simply, the more a purchase hurts, the less willing we are to make that purchase. It is therefore no surprise that some of the largest payment companies are heavily investing in technology that can make payments invisible, and painless.
Alongside the removal of friction and pain form the payment experience, a number of trends are developing both on the front end – the part of the process that we experience when we pay, and the back-end, which is where all the magic that makes money travel from our accounts, to the merchant’s account takes place.
For the purpose of this today’s episode we will focus exclusively on the trends that are transforming the front end of the payment experience. The first trend we are going to talk about today is payments everywhere or embedded payments. Embedded payments refers to the ability to make payments an integral and often invisible part of the customer journey when buying a product or a service. It is often the first step in a larger trend sweeping through financial services known as embedded finance.
Embedded finance is a huge subject and we will cover it extensively in a future episode but for now let’s focus on how this is already impacting payments. The whole idea behind embedded payments is that it makes little sense to get the customer to repeat a payment protocol, that triangulates their bank into a transaction, specially when making online or mobile purchases. Instead by embedding the payment process into the purchasing process the whole thing becomes more seamless and convenient. Through embedded payments, customers need to complete a one time only payment process which links their bank account to the merchant, and boom, the customer is now free to transact with that company without friction and often without even realising that the payment has taken place.
We already have plenty of examples of this. Think of companies like Uber or Lyft, once your account is linked to their app, the payment for your ride will happen automatically and invisibly on the background at the end of your ride, without you having to do anything.
Starbucks customers can enjoy a similar experience through the Starbucks app which lets customers order drinks and pastries from their phone, just by confirming their purchase at a tap of their phones
The most extreme example of embedded and invisible payments perhaps comes in the shape of Amazon Go, the Amazon convenience stores that have been popping up all over the US since 2018. Amazon Go uses a technology called “just walk out” which enables customers to just pick things from the shelf and walk out of the store.
A clever systems of sensors and cameras tracks exactly what the customer has taken from the shelf and the amazon go app makes an automated and invisible payment as soon as the customer leaves the store. Similar offerings are starting to pop up in Denmark via the Scan and Go app from supermarket chain Netto. The Scan and Go app enables customers to self scan their purchases, bag them as they go along and then simply self checkout when they are done.
The payment is performed via smart phone authentication, this can be through a passcode, your fingerprint or face-scan, and the app produces a QR code that allows you to leave the store, without checkouts and without the need to unload your trolly, scan every item and then bag your purchases.
A less prevalent trend that is fast gaining popularity is the use of embedded payments in smart cars, many of which now have integrated payment systems that allow drivers to pay for gas, parking, and road tax without touching anything.
This requires that the car is able to connect to the internet, but with the raise of the internet of things and the availability of 5G networks, automatic, self executing payments between our devices and the companies we choose to transact with, will become an everyday thing as the decade advances
The second trend we are going to talk about today is that of embedded lending.
Embedded lending is another step in the lager embedded finance trend. The reason we are discussing it within the context of this episode is that certain applications of embedded lending, are impacting the way in which people pay for products and services at the point of sale.
In the past if you wanted to deffer payments for large consumer items, like a new fridge or a new Tv you could seek special offers from stores or credit card providers that from time to time would offer 12 months 0% interest APR introductory fees for new account holders.
You could also apply for an unsecured personal loan but the complexity and length of the process was rarely worth the hassle. Embedded lending and specifically Buy now pay Later (BNPL) gives you access to an immediate “loan”for deferred payments right at the point of sale, and with as little effort as using an app to checkout and pay for your goods.
A very Nordic example comes from Swedish BNPL company Klarna which lets a customer split a purchase into several smaller monthly payments or postpone it by 30 days.
These type of solutions, especially when embedded at the POS are extremely low friction and convenient. Klarna has gained notoriety not only for its Smooth payments campaign involving rap superstar and gangster bad boy Snoop Dog, but also because of the really extensive network of more than 300,000 affiliated merchants in 17 countries who now offer point of sale BNPL through Klarna.
Visa is working on a number of projects to allow card issuing banks to offer installment-style options directly at the point of sale, given Visa’s enormous global network and brand , if executed well, this strategy could represent a serious threat to fintech startups and scaleups trying to establish themselves in the POS embedded lending space.
Paypal is another company that has entered the BNPL space. While Paypal has for a long time offered credit products to its customers, it has now also expanded into the ‘pay in 4’ category, which allows customers to pay in 4 instalments.
There is still a lot of unclarity around how BNPL providers will be regulated. Critics say that by making the extension of credit so frictionless right at the zero moment of truth, which is when the customer makes the decision to buy or not to buy, customers may be incentivised to take up financial commitments that they are not able to keep.
While most BNPL offers charge 0% interest during the agreed financing period, part of their business model is built around the knowledge that a predictable proportion of customers will not be able to fully pay their dues at the end of the term and will therefore end up falling into interest credit which in some markets can be as high as 19% APR
An additional concern has been identified by millennials and Gen Z customers in the British market, some of whom have been denied mortgages simply for being regular users of Buy Now pay later.
According to Refinery 29, a twenty-six-year-old publishing employee with a £32,000 yearly salary was declined a mortgage by HSBC and Barclays citing that her use of Klarna had reflected negatively in her affordability assessment.
Clearly there are a number of things to figure out as these new type of payment options become more widely available. From regulation protecting consumers from the honey trap of 0% interest BNPL offers, to the way in which these services may impact consumer credit scores.
In spite of all the innovation, payment revenues are dwinling, this is partly because the influx of new challengers and competitors has triggered a race to the bottom, but what skeptics miss about the payments business model, is that the key asset in all of this is data.
Payments generate roughly 90% of banks’ useful customer data. And this includes information about who is buying what, when and how much. Payment companies with strong AI and data analytic capabilities will be able to monetise that data. One way to do this will be by developing models to understand customer decision making patterns with a fine degree of predictability.
The more interesting application however will be when these advanced data models are used to prescribe customer’s next purchasing decision with high probability.
How payment companies and banks will monetise these prescriptive super powers, is perhaps a topic for another video.