Richard Smith, Chief Executive Officer & Co-Founder, Payen
Online payments are critical to the advancement of developing regions and the global economy. And as an industry, the importance of global payments has only increased for local and national governments amidst a period of geopolitical disruption and the end of low inflation and interest rates.
Essential for advancing the digital economy and promoting inclusion, the payments industry helps to nurture competition and enables businesses to use e-commerce, which in turn helps to promote economic growth.
Geopolitical influences, macroeconomic conditions, the continued growth of ecommerce, technological progress, and corporate social responsibility (CSR) are all paving the way for unexpected changes in the payments environment. Business success now depends on gaining a better understanding of these five factors and what they mean for regional activity.
Geopolitical influences
Local, regional and national networks are increasingly becoming custodians of central infrastructure. With unstable global geopolitical environments driving the need for local and regional payment solutions in many parts of the world, more countries are investing in modern payment systems.
Instant-payment solutions were once homogenised across the globe. But with a growing number of businesses and consumers advocating for domestic payment systems and services, it’s likely we’ll soon see the related regulations and requirements behind them placed under the microscope. Providers offering simple and efficient out-of-the-box payments solutions for services like security and Know Your Customer (KYC) – helping to streamline cross-border payments – will be poised to capitalise.
New domestic networks developed to support regional goals have reduced reliance on international providers. Now, online applications of point of sale (POS) systems and local payment solutions are being deployed by countries using fiscal and business models and access rules that bypass international solutions. This fostering of local e-commerce that allows individuals and businesses to receive affordable financial products and services has significantly improved financial inclusion.
Sanctions arising from world events also affect international trade and treasury payments, reshaping geographical zones and segments and fortifying regional relationships. Even so, some things aren’t changing. Offshoring remains a trend – the process of bringing manufacturing and the supply chain to home soil from a foreign country – and nearshoring, the same exercise at a more domestic level.
Nevertheless, global supply chain issues remain. Sectors including electronics, automotive and healthcare are still experiencing disruption, causing suppliers to diversify as businesses seek to overcome their reliance on a small pool of third parties, production delays, high transport costs and logistic disruptions. However, the level to which this alters trade corridors will only be fully revealed in the coming years.
Macroeconomic conditions
In light of the highest levels of inflation seen worldwide in decades, business models are being reassessed by financial services and payment providers. From a payments perspective, this has created opportunities for organisations like banks that hold deposits.
As a response to inflation, many central banks changed their policies, leading to higher net interest margins and interest rates. Combined, these factors influence how people and businesses manage their cash and financial strategies and encourage the transfer of balances into deposit accounts with higher rates and away from their transaction counterparts.
In tandem, economic growth concerns, and unexpected events, like the rise in global energy prices, are increasing the prospect of a recession. The likelihood of which will vary from region to region and affect household and business spending and investment, altering the dynamics of the payment ecosystem, including the supply and demand side of the equation.
Payment providers are still adjusting to the high interest rate environment and the arrival of untested payment products such as buy now, pay later (BNPL). With liquidity often going to account-holding organisations, traditional banks and card issuers are in a favourable position for this landscape.
Enhancing the e-commerce experience
Powering the high valuations of fintechs and startups is the forecasted increase in revenue from developing customer relationships. Today’s payment providers are fused into the customer experience, having evolved beyond simply offering one-off money movement or financial transactions.
E-commerce transcends borders. It’s a chance for merchants to reach new territories and cut their dependency on stagnant markets, particularly during times of economic downturn. Digital payment providers allow small businesses to offer seamless shopping experiences and contribute to the economy. This then creates a positive domestic impact, producing jobs and generating local taxes.
The impacts online payments have on the economy go further than reaching across borders. It also increases competition, improves productivity via better supply chain management, and promotes greater information and communication technology adoption.
But perhaps the most promising growth area is the integration of financial products into the non-financial environment. Data is the new oil, in that it has become a truly vital commodity, so those who can monetise data via their service will gain a greater market share.
Technological progress
Originating from the pandemic, which acted as a catalyst, the pace of innovation continues to snowball. Improvements to financial and enterprise networks and payment systems are now common, leading companies to introduce structural rather than piecemeal improvements to infrastructure.
Exemplifying this are the tenacious improvements banks are making to their payment infrastructure and systems. These changes are providing real-time data insights accelerated by demand for instant payments, open banking and cloud technology.
The next S-curve for model risk management (MRM) includes strategies to meet new standards and changing business needs. Global shifts indicate many countries are entering the next growth phase for instant payment transactions, with the global volume expected to rise by up to 60%.
The continued growth of embedded payments means that digital citizens will expect the
provision of personalised services and easy to access payment information through APIs. Under pressure to deliver the experience sought after by consumers and businesses, payments providers will be compelled to reinvigorate their payment infrastructure.
Together, these components are changing the relationship between payments and traditional providers as more players migrate to software as a service (SaaS) models.
Corporate Social Responsibility
McKinsey’s annual survey of global banks revealed the expectations of governments, investors, regulators and consumers to address climate risks and sustainability issues. And at COP27 the focus was on bringing together national and local governments, cities and businesses to advance sustainable innovation with corporate social responsibility in mind.
As such, social responsibility has an impact on shaping the payments landscape, given the importance of data privacy’s role in financial inclusion.
Environmental, social, and governance (ESG) is also influencing domestic payment services. Formerly, international providers ruled the roost. Now, payment companies contribute to the stability, security and compliance of economic systems. Similarly, banks are acting as gatekeepers against fraud, KYC and anti-money laundering – key drivers of industry investment.
Access to financial inclusion and an emphasis on customer protection is also rising up the agenda of payments providers as they enter emerging markets. Digital wallets and payments have helped bring financial services to the underserved in cash-based economies. As such, as consumer demand increases in developed markets, the part played by payments in emerging markets, such as cannabidiol (CBD) and online gaming, will be increasingly scrutinised.
Global payments landscape opportunities
Intrinsic to global commerce and the digital economy, the global payments industry is currently valued at $2.1 trillion, and by 2026 is expected to grow by almost 50% to $3.1 trillion.
In an increasingly complex environment that is seeing significant shifts, players in the payments industry who can shape local and global operating models with consideration to the five factors while displaying a dedication to social responsibility will be well placed to take advantage of the new ecosystem.
