by Fred Decker
A key pressure point for many financial institutions has been digital payments. They’ve been flanked by payment-centric fintechs flush with venture capital on one side and on the other by the big banks with their deep pockets (and equally deep reserves of IT talent).
That’s made digital payments, and digital payment trends, an area of intense study for banks and credit unions. It became an even stronger focus as the pandemic shifted consumer behavior away from in-person shopping and banking in favor of digital solutions. As we approach the end of the pandemic’s second year, and look ahead to some form of normalcy on the horizon, it’s an opportune moment to review the 2021 payment trends that are most likely to affect you in the coming years.
Buy Now, Pay Later
Buy now, pay later (BNPL) offers have been a part of the retail landscape for generations, but the rise of online shopping and digital payments has brought a gloss of novelty to this perennial payment option. Once stores offered it primarily through their in-house credit system (“Sign Up Today for an Account and Get 6 Months Interest-Free!”), but digital BNPL happens almost seamlessly at checkout.
Typically, when a buyer begins the checkout process at a given website or physical store, they’ll be offered the option of paying their purchase in full or over time (i.e., BNPL). Depending on the provider, they may also be prompted to fill out a very brief questionnaire. The BNPL provider carries out a “soft pull” on the buyer’s credit and either approve it or not. Depending on the underlying provider’s business model, purchases may be broken up over a limited number of smaller payments or simply treated as a line of credit.
BNPL drives sales for merchants and it’s convenient for consumers, though — as with more-traditional offerings — many don’t understand the terms and conditions and can experience unexpected fees or damaged credit as a result. For financial institutions, it’s a powerful way to support your business clients, as long as your underlying digital platform has the capacity to add BNPL services or the flexible APIs needed to work with third-party BNPL providers.
Subscription Payment Options for Routine Purchases
In a closely related example of the adage that “everything old is new again,” subscriptions are making a comeback. Any item consumers (or businesses) purchase on a regular basis — from pet food to coffee to cleaning supplies — is a candidate.
Purchasers are given the option of subscribing, rather than making a one-time purchase, at checkout. If they opt-in, they’ll receive their chosen quantity of that item at a set interval — usually at a discount — with payments being charged to their payment method of choice. Typically, a subscription can be canceled or put on hold with minimal fuss. Again, it’s a convenience for the buyer and a traffic-builder for the merchant. That’s a win-win if your institution can support the transaction.
Mobile Point of Sale
With the COVID pandemic limiting access to public spaces in 2020 and 2021, delivery services boomed. While some of us couldn’t wait to get back into shops and restaurants, the convenience of delivery proved to be alluring: In a 2021 Ipsos poll, almost 40% of respondents said they’d continue using delivery services.
Restaurant delivery, grocery delivery and even curbside pickup options added to the burgeoning “gig economy” mean that there’s also an unprecedented demand for mobile POS services (mPOS) to capture the resulting payments.
Whether they’re handled through the delivery service’s app, the mobile version of a commercial payment terminal or a dongle attached to an internet-connected device, your business users will need someone to provide back-end payment services to support this trend. If your digital platform can’t support them, they’ll find an institution that can.
Mobile Wallets and Contactless Payment
Most of us haven’t stopped carrying a regular wallet yet, but contactless payment options — and with them, digital wallets — are on the rise. Tap-to-pay was already on the rise pre-pandemic, simply on the grounds of convenience: Tapping a card is easier than inserting it and entering a PIN; and waving a phone toward the POS terminal (or mPOS device) is easier yet. The germ-phobia and contact avoidance resulting from COVID only reinforced that trend.
Mobile wallets enable consumers to combine multiple payment methods in one place and use them for online or real-world shopping. According to recent research from McKinsey, 15% of digital wallet users routinely leave their physical wallets at home, and another 11% leave it at home unless they specifically plan to make purchases their digital wallet won’t accommodate.
The payment services your institution provides to its business clients will need to adapt to this trend sooner rather than later, with support for digital wallets and payment by phone or other near-field communication (NFC) devices.
Doubling Down on Security
The first four of these trends are positive, holding out the promise of new ways for consumers and businesses to interact (and, at least potentially, new revenue streams for financial institutions).
Unfortunately, the hard reality is that for all their promise, every novel service or payment option represents yet another potential attack surface for criminals. Over the past decade, crime rings have shown increasing degrees of technical sophistication, and financial institutions increasingly bear the brunt of their unwanted attention. It’s an especially grave concern for smaller financial institutions, which don’t have the big banks’ resources to throw at the problem and, as a result, represent an invitingly soft target for hackers.
It’s difficult to secure your existing structure from attack. It is harder still to sustain a reliable security environment as you roll out new features to your users and build relationships with new partners. If your digital platform consists primarily of legacy code that was never meant to deal with modern threats, that’s especially so. By way of contrast, an up-to-date digital platform, like Lumin’s, “bakes in” security at every stage of production and implementation.
Three Payment Trends To Watch in 2022 and Beyond
This is only a brief sample of current trends, and there are several others that didn’t make this list. Three, in particular, are worth keeping an eye on in 2022 and beyond.
Consumer P2P Payments
The impact of COVID on financial trends isn’t easy or straightforward to parse. One outlier in 2021 was consumer peer-to-peer payments, which subsided sharply because of the pandemic. P2P was clearly a “next big thing” in the making before the disruptions of 2020 and 2021, and it’s likely to bounce back as normal social interactions (and therefore, bill-splitting opportunities) re-establish themselves over the coming years.
Cryptocurrency in Payments
Cryptocurrencies such as Bitcoin and Ethereum have attracted a lot of attention within the financial industry for their novelty and promise, just as Tesla has within the auto-making world. For most financial institutions, the question isn’t whether you’ll be dealing with these novel financial instruments, it’s how.
Despite all the buzz surrounding crypto, it’s not likely to play a high-impact role in purchases (for now). As the Brookings Institution points out, high fees and slow processing times currently make it unsuitable for casual use as a purchasing method. Its value is also highly variable, making it risky for both buyer and seller. The early adopter who paid for pizza with bitcoins in 2010 is a well-known cautionary tale: The coins spent on those pies would be worth hundreds of millions now.
That being said, the same McKinsey study cited earlier found that about 20% of crypto owners did use it for purchases, often describing it as desirable for less-complicated international transfers or for anonymity. If your target demographic includes high-net-worth individuals, crypto may be part of your future sooner rather than later.
Innovation in B2B Payments
The past few years have seen a large — and deserved — emphasis on consumer payments and on reducing friction and frustration on that front. Now, attention is shifting to improving convenience and reducing friction in B2B payments as well.
This didn’t make the cut as one of the five highlighted trends, mostly because it’s still too early and businesses haven’t yet zeroed in on a set of shared goals. Consider the speed of payment, for example: In the consumer space that’s an unquestioned goal for all parties, but in the B2B world it’s less clear-cut. While vendors (especially small ones and independents) would love for payments to be processed at consumer speed, payables departments still value the option of paying on a net-10 or net-30 basis.
The pandemic forced innovation within businesses and their accounting departments as lockdowns made conventional processing of invoices and issuing of checks problematic. The evolution of alternative payment methods, and the necessary systems to support them, is going on in real-time right now.
This presents an opportunity for financial institutions to be a proactive part of the conversation, rather than reacting to the needs of your business clients after the fact. Talk to them (and the enterprises you do business with) to find out what they’ll need from you as business payments evolve. If you’re able to offer them more flexibility and support than the peer competitors in your market, it’s an opportunity to drive both retention and acquisition.
In the financial industry, like any other, trends come and go. Some institutions will flourish, others will survive, and the rest will succumb to mergers and acquisitions. Your success will depend on a number of factors including the quality of your institution’s people and the depth of its pockets, and increasingly on the quality of your digital platform.
Spotting key trends and strategizing to capitalize on them are important skill sets, but you’ll struggle with implementation if your institution is hobbled by high-maintenance legacy software.
Contact Lumin Digital today to request a personalized demonstration and learn how our modern, nimble, cloud-native and security-conscious platform can equip you for success in 2022 and beyond.
The Ascent – How Does Buy Now, Pay Later Work?
Banking Dive – Can Banks Win in the Booming Buy-Now-Pay-Later Space?
Amazon – Subscribe & Save
McKinsey & Company – New Trends in U.S. Consumer Digital Payments
Carnegie Endowment for International Peace – Timeline of Cyber Incidents Involving Financial Institutions
American Banker – ‘It’s Very Scary’: Small Banks Quietly Hit by Ransomware Attacks
Brookings Institution – Five Myths About Cryptocurrency