By Michael Mueller, CEO, Form3
At the end of every year there’s a natural tendency within every industry to assess how far it has come in the past 12 months and where the next 12 might lead. However, 2021 was far from being a typical year, and there is a great deal of uncertainty as to what lies ahead for us in 2022. Making predictions is a risky business when there are so many unknown and unknowable factors involved. We are living through unprecedented times, and this is something that has been felt especially keenly in the financial sector as a whole, and in payments in particular.
At this stage, it should be emphasised that there isn’t one, homogenous payments market; it’s a complex ecosystem with many different interested parties and processes. But in general, payments is not an area where change happens very quickly. Many of the developing trends involve shifts that have been taking place over several years, and will take some time to be fully realised. As well as the COVID-19 pandemic, though, there have been some catalytic forces at work — many of them innovations driven by developments in fintech. As a result, 2022 will see progress that will ultimately benefit end users in many different ways. Here are five things that observers should keep an eye on in the year ahead.
Contactless payment limits and payment volumes to keep rising
The ‘death’ of cash has been a commonly-covered topic in the media for several years now, but the pandemic may prove to be one of the final nails in the coffin. An increasing number of retailers and hospitality venues won’t handle physical money due to transmission issues, as they don’t want to put their staff or customers at unnecessary risk. This is why we saw contactless payments limits increase more than once in the UK in the past few years.
While the sharp decline in the use of cash has been great news for card providers as transaction volumes have significantly increased, it should also be noted that the number of payments being made is rising exponentially. According to research by Capgemini, global economies have seen a compound annual growth rate for non-cash payments of more than 12% between 2016 and 2020, and this is expected to grow to more than 17% in the next 5 years. This is something you may have noticed when looking at your bank statements — they’re much longer than they used to be, generally speaking.
The phasing out of notes and coins is happening in a way that will be irreversible — like with many other trends in payments, progress might not happen overnight but things always move forwards and not backwards. The merchants that have taken the decision to reject cash will not go back. Similarly, contactless payment limits won’t suddenly be slashed once COVID-19 ceases to be a problem. So the use of contactless and mobile wallets is certainly going to continue to grow in 2022, and we’ll see more and more people leaving their physical wallets at home.
Increased demand for real-time payments
As the number of transactions we make increases rapidly, we need to provide consumers with a better way of keeping track of their money. While card networks operate on a real-time basis, where transactions made show up in your account instantly, this isn’t the case for all types of transaction. In a world where we can send a WhatsApp message to someone in a matter of milliseconds, people want to be able to do the same thing with money as well, especially where domestic payments are concerned.
The need to move to real-time payment processing should be a priority for banks. Upgrades will have to be made so banks can not only process payments in real-time, but so their systems operate on an ‘always-on’ principle as well, as customers will want to make transfers outside of standard office hours. However, there will need to be a certain amount of industry agreement for this change to happen, as a real-time payment system requires all banks to be reachable for it to work. So without a broad consensus across the industry, this particular trend could stall. But it is worth noting that central banks and clearing bodies globally are already upgrading their technology to respond to the significant demand for more real time settlement.
Payment initiation and authentication to improve
One of the key considerations in the effort to roll out real-time payments is security. Keeping payments safe is going to be one of the most significant points of debate in 2022 with payment processing times getting shorter, but many controls still needing to be in place. While it is comparatively simple to stop fraudulent parties initiating payments by using methods such as two-factor authentication, for example, it’s more difficult to stop fraudsters manipulating account numbers and details, with payments that have been made in good faith being redirected to the wrong accounts. In these cases it can be very difficult to recover funds, so there will have to be significant investment in technologies that allow the beneficiaries to be checked quickly in order to make sure the payments go to the right place and that there are no delays.
So in terms of payment security, authentication is not the biggest issue anymore — indeed, authentication is becoming more and more of an inconvenience. In response to this, in 2022 we will see a growth in more ingenious and safer ways in which payments can be initiated, and there will be an acceleration in the use of new biometrics for payment security, taking the inconvenience out of the process. Increasingly, payment initiation is something that will disappear as a customer experience, through methods such as face recognition. Payments will be initiated in a matter of moments, then real-time processing will effectively make the customer experience immediate.
Cross-border payments to be faster and cheaper
Cross-border payments are more complex than domestic transactions due to the number of different institutions involved and the greater regulatory scrutiny required. However, the underlying technology is becoming ever more efficient, and waiting times are much shorter than they used to be. Alongside the push for real-time payment processing for domestic transactions, there will be progress in cross-border payments in 2022 as well.
There are three reasons for this. Firstly, there is an increasing amount of competition in this area now, with fintech innovators such as Wise and Revolut driving improvements in services and lowering fees. Secondly, there will be increased consumer demand for cross-border payments — these types of payments are often made by travellers so with increased movement of people expected in 2022, as restrictions are relaxed, transaction volumes will increase. Finally, there is a concerted effort guided by the G20 to improve cross-border payments, as they are fundamental to boosting economic growth and global development. While the G20’s roadmap for making these types of transactions cheaper, faster and safe stretches out into the future well beyond 2022, we expect to see steady progress over the next 12 months.
Banks to invest in back-end technology
There are still systems being used in the financial services industry today that were built in the late 1990s. Because of the costs involved in developing and implementing proprietary technology across their entire business — as well as a high degree of risk — there has been a reluctance to modernise in many financial institutions.
But we’ve begun to see a shift in the past five years, with many banks taking a much more pragmatic approach. Rather than trying to build everything themselves, they focus on the components that differentiate them from competitors such as their front end and the customer journey. When it comes to the backend components that the customers don’t see, though, financial institutions are much more prepared to buy in technology rather than go to the time and expense of building it all themselves. In 2022, we’ll see more investment in technologies that enable banks to deal with things like real-time payment processing, beneficiary checks and biometric payment initiation and authentication. This will also allow them to allocate more resources to creating great customer experiences.
Paradigm shifts don’t really happen in payments; change in this industry is more of a gradual process. However, things are always moving forwards, and the changes we do see don’t get undone. So while 2022 might not see seismic changes in payments, there will certainly be developing trends that will ultimately be highly beneficial to end users. Some, such as investment in back-end technology will be laying the foundations for longer term advancement, while others like real-time payment processing and improved cross-border payments will be in response to more immediate consumer demand.