Digital Payments: Five Predictions For 2022

The global payments landscape is undergoing significant change. The increased digitisation of society has changed the way in which we transact, shifting us away from cash and towards the realm of digital payments, digital currencies and digital wallets. We expect this transition to gain further momentum moving forward. Here, we share five of our predictions on how the payments space will develop this year.

1. Digital transactions volumes will hit new highs

The long-term proliferation of the internet has caused a boom in digital commerce. This has shifted transactions conducted by consumers and businesses for products and services online and reduced the need for cash. It has also driven innovation in how these online transactions occur with many consumers shunning traditional card payments in place of online payment processors such as PayPal or Buy Now, Pay Later sectors, a sector that has thrived in recent years given the low interest rate environment.

This increase in digital commerce has more recently been intertwined by the rapid adoption of smartphones. Bricks and mortar business acceptance of contactless payments, and increasingly, consumer adoption of alternative payment methods such as digital wallets (smartphone apps that allow users to make point-of-sale ‘POS’ purchases) is causing a decline in the use of cash. In many emerging markets, digital wallets have already eclipsed cash, and created entirely new digital payment ecosystems.

We believe these trends will drive digital transactions volumes to new highs in 2022. Digital commerce and Mobile POS Payments transaction values are expected to grow from $5.5bn in 2020 to $10.5bn in 2025 globally, a CAGR of 14%[1].

One company well placed to take advantage of this trend is payments fintech Fiserv. A dominant player in the market, its diversified product portfolio and technological innovation is driving a growing and diverse customer base. Its payment technology enables clients to reduce operation costs and offer modernisation, scale and transparency to their payments operations. Fiserv earnings have beaten analyst expectations in each of the last four quarters and are currently expected to grow around 10%.[2]

2. Cryptocurrency remittances will gain market share

We believe there will be strong growth in the market for cryptocurrency remittances. As these curtail the high cross-border transaction costs and reduce the settlement times associated with traditional banks, it is easy to see why demand for such services could grow and many crypto exchanges have begun offering remittances for overseas workers and their families.

Take El Savlador, they received over $6bn USD in remittances in 2020[3] and remain a large pay-in country, they also recently made Bitcoin legal tender creating huge potential applications for crypto remittances.

Ultimately the success of such remittances will depend on the regulatory environment which varies enormously from country to country. For example, if we consider the top remittance receiving countries, cryptocurrency remittances have been banned by the central banks of China and India, but in the Philippines and Pakistan, the stance by authorities is more neutral – and in Ukraine this is positive with several Government bodies actively regulating the space.

3. The creator economy will drive payment processing innovation

We live in an era where individuals can go from rags to riches just by starting a YouTube channel, where it is not uncommon to read about children becoming multi-millionaires by reviewing toys or live streaming video gameplay. The explosive growth in digital platforms has enabled creatives to monetise their work and cater for a truly global audience and we believe there will be a host of opportunities for payment processing solutions in the creator economy.

Fuelled by remote working trends owing to the pandemic, the creator economy is now estimated to be worth around $100bn globally and growth shows little signs of abatement. The influencer marketing market size alone was expected to be in the region of $13.8bn[4] last year. This creates an opportunity for cross-border payments as people consume and support content financially regardless of where in the world it is created.

Payment processors are already benefitting from this trend. For example, Payments Service & Solutions Provider Payoneer provide payment solutions for online course provider Udemy and Patreon, a platform that provides business tools for content creators. Paypal work with e-commerce platform Etsy, video-focused social network TikTok and streaming service Twitch.

There is also real scope for innovation where payment processors could help content producers with complex cultural and language differences, as well as building networks across vast amounts of countries to offer the fastest payment speeds – something crucial in the rapidly consumed world of digital content.

4. The rise of Central Bank Digital Currencies (CBDCs)

The widespread adoption of cryptocurrencies has caused concern for many central banks as it has the potential to disrupt the monetary transmission mechanism and could cause systemic instability. Indeed, Bitcoin marketing frequently references the cryptocurrency as a store of value and infers the devaluation of fiat currencies such as the dollar. As a result, 86%[5] of the world’s central banks are looking at implementing digital fiat currencies. These are a virtual form of a country’s fiat money – allowing households and businesses to directly make electronic payments using money issued by central banks.

The People’s Bank Of China launched the digital yuan (e-CNY) in November 2020 although a research group was first set up to study CBDCs as early as 2014. The digital currency is designed to compete with digital currencies such as cryptocurrencies and other CBDCs, as well as ensuring the renminbi remains the dominant currency in China.

The digital yuan and it is expected to generate large transactions volumes for the 2022 Winter Olympics and more recently China’s largest mobile payment and messaging app WeChat announced it would allow its users to make payments using the CBDC.

Elsewhere, The Monetary Authority of Singapore (MAS) and the Banque de France have tested the integration of CBDC for interbank settlements, creating a potential application for wholesale CBDCs. South Africa, India, Pakistan, South Korea and Thailand have plans to launch their own official digital currencies soon. You also have other exciting developments in the space including the digital-euro, e-krona and even Britcoin.

So, whilst we do not anticipate the widespread implementation of CBDCs over the short term, it remains an exciting space and we only expect more countries to explore the possibility of their role in the future payments economy.

5. A healthy IPO and M&A pipeline

We believe the pool of potential initial public offerings (IPO) will remain strong and the digital payments space is likely to see a healthy supply of highly innovative new entrants to the market. Ebanx are rumoured to have filed for an IPO. The Brazilian fintech provides a payment gateway that allows people to make online purchases even if they do not have credit or debit cards. This is important in Latin America and the Caribbean where nearly half the population is unbanked or otherwise lack access to traditional banks. Revolut is also widely regarded as a likely IPO for the year. Other potential candidates include checkout.com, Flutterwave, NIUM, PLAID, Stripe, WorldRemit and Zopa.

We also expect to see consolidation in an industry that is highly fragmented through ongoing merger and acquisitions activity. Innovative start-ups will be able to scale operations and existing participants will be able to diversify product portfolios and expand geographic reach.

A recent example of this was Afterpay being acquired by Block (formerly Square). Afterpay was founded in 2014 and was Australia’s largest ‘buy now, pay later’ company, enabling its 16 million users to pay for goods and services in instalments. This sector has thrived in the low interest rate environment globally although more recently performance has lagged on regulatory concerns relating to consumer credit particularly in Australia. Block provides mobile payment solutions and develops point-of-sale software, it receives the highest revenue purity score of 5 from our research partners Euromonitor. The deal will be Block’s biggest to date and according to Reuters is the largest sum paid for an Australian firm.

M&A activity is particularly relevant for incumbent players who are looking to modernise outdated legacy systems and offer clients cost-effective and personalized experiences. The payments space has historically been dominated by card payment network providers such as Visa and Mastercard – and acquisitions are one way these will look to cement their dominance in the market.

For example, Visa plans to acquire Tink for $2.2bn[6], a Swedish open banking platform that allows financial institutions, merchants and fintechs to use an application programming interface (API) construct open-banking tools such as financial management tools and account verification.

So there we have five of our predictions for 2022. The transition to the future digital payments economy is dynamic in nature and one where previously improbable concepts and ideas are now disrupting the status quo. Whilst our predictions may or may not play out over the coming year, you can count on the payments space remaining rich in opportunity and anything but quiet!

Related ETF

PMNT: Rize Digital Payments Economy UCITS ETF

References:

[1] CAGR: Compound Annual Growth Rate / average growth rate per year. Source: Statista Digital Market Outlook 2021

[2] Fiserv, ‘Fiserv Reports Third Quarter 2021 Results’, October 27, 2021. Available at: https://newsroom.fiserv.com/news-releases/news-release-details/fiserv-reports-third-quarter-2021-results

[3] Australian Institute of International Affairs, ‘2021 in Review: El Salvador’s Bitcoin Experiment, Australian Institute of International Affairs’, 27 December 2021. Available at https://www.internationalaffairs.org.au/australianoutlook/el-salvadors-bitcoin-experiment/

[4] Statista, ‘Worldwide; Influencer Marketing Hub’, February 2021. Available at: https://www.statista.com/statistics/1092819/global-influencer-market-size/

[5] Bank for International Settlements (BIS), ‘BIS Papers No. 114 – Ready, steady, go? – Results of the third BIS survey on central bank digital currency’, January 2021. Available at https://www.bis.org/publ/bppdf/bispap114.pdf

[6] Visa, ‘Visa To Acquire European Open Banking Platform Tink’, 24 February 2021. Available at: https://www.visa.co.uk/about-visa/newsroom/press-releases.3112117.html