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          The Future of Payments: When Transactions Become Experiences

          It shouldn’t come as a surprise that digital payments transaction volumes are expected to grow at a CAGR of 12.8% until 2026.[1] You only have to look around to see how cash transactions are becoming less common as digitisation envelops our daily lives. The chart below shows not only the powerful growth rate of digital payments transactions globally over the last few years but also how this is expected to evolve going forward.

          Total Digital Payments Transaction Values Worldwide 2017-2026

          Innovative technologies across internet, ecommerce and smartphones have driven this unprecedented growth. And while the coronavirus pandemic certainly catalysed the cross-generational shift toward digital payments, including the adoption of mobile Point-of-Sale (PoS) and digital commerce, the digital payments story is about much more than just reducing friction between merchants and consumers. It is increasingly about next-generation platforms that are driving more personalised ecommerce experiences, lifestyle-embedded payments and end-to-end integration across different payment services.

          We would argue that the innovation that underpins the long-term secular growth drivers for this theme and the formation of tomorrow’s digital payments infrastructure is only just now getting put in place. While next-generation payments currently represent just a small share of existing payments, we predict this will change and supercharge non-cash payment transaction growth in the years to come across retail settings.

          Let’s take a look at some examples of next-generation payments.

           

          Buy Now Pay Later

          We used to have two options for making non-cash payments: debit and credit. The evolution of Buy Now Pay Later (BNPL) services have put a third option on the table by empowering consumers with short-term, interest-free financing to purchase goods and services. The difference being, paying for these later, typically by way of an instalment plan. BNPL services have been making inroads since the mid-2010s, but it was especially during the pandemic that BNPL offerings asserted their presence, taking off and proving particularly popular with younger generations such as Gen Z. This digitally native cohort has continued to show a clear preference for the transparency, flexibility and ease that underpins BNPL services.

          We now have over 150 BNPL providers around the world.[2] In Europe, CAGR for the BNPL market is expected to almost double between 2020 and 2024.[3] The market is expected to comprise 13.6% of all ecommerce expenditure by the same date.[4] The growth of BNPL has not gone unnoticed either and indeed the largest tech company in the world by market cap at the time of writing, Apple, recently announced that it was developing a service together with Goldman Sachs to enable customers to make Apple Pay payments in instalments.[5] Apple’s ecosystem especially has the potential to expand the accessibility of BNPL services to its global userbase. Apple announced that it will allow customers to split the cost of their purchases into instalments for a period of six weeks with no fees or interest charged.

          But it’s not just consumers who are the net beneficiaries of BNPL. Merchants too have benefitted from BNPL thanks to the accessibility to new customer segments and markets. With customer bases expanding, checkout conversion at merchants has risen and customer loyalty has strengthened as these flexible shopping experiences have provided customers with a greater diversity of payment options.

          We believe that the success of BNPL illustrates how new payment methods have the potential to challenge and disrupt traditional payment methods by delivering new and more flexible options. We believe other payment methods hold promise too such as invisible, biometric and cryptocurrency payments, but these are earlier on in their adoption cycle.

          QR code payment at Amazon Go

          Invisible payments

          If you think about how our lives have been made more convenient by technologies such as Uber for hailing taxis, Deliveroo for ordering food or Spotify for listening to music, we often forget to appreciate that an entire payment process is happening in the background.

          Whilst credit cards, phones and smart watches have replaced cash for transactions, imagine what would happen when payment automation becomes more real and when we start to shun wearables and physical interaction altogether? Enter invisible payments, the concept that consumers are able to walk into a shop, grab their goods and simply walk out with payment handled effortlessly behind the scenes.

          It’s the height of convenience. It’s already happening with Amazon Go in the US and the UK and with Bingobox in China. According to a 2021 Capgemini survey, less than 10% of customers currently use this method but around half of those surveyed planned to use this method in the next 1-2 years.[6] Amazon market their service with the slogan “take it away and get back to your day” which of course hints at a shopping experience that is totally hassle free.

          Recently, we also saw Mercedes-Benz announce its “Fuel & Pay” service.[7] The service fully digitises everything at the service station except the fueling of the vehicle itself. As soon as the driver sits back behind the wheel, the car displays a confirmation of the amount charged as well as the quantity, fuel type and price per litre. It opens up the possibility of a frictionless drive-through experience. In the future, it might even be possible to order and pay for drive-through coffee, refreshments and food directly from the car itself, leaving only the non-digital step of receiving the paid-for items through the car window. Mercedes Benz’s digital ePayment platform also supports in-car payments as well as payment processing via its app and web shop. This represents a truly frictionless in-car experience.

          Percentage of Customers Using BNPL and Invisible Payments

          Building new infrastructure atop existing infrastructure

          The beauty of innovation in next-generation payments is also the ripple-effect on companies across the value chain of payments. You’ve probably already heard of Sweden-based Klarna, a poster-child for BNPL services which has enjoyed tremendous growth since its founding in 2005.

          In 2020, Klarna partnered with US-based payment processing company, Marqeta, a company which operates an API-based platform that issues cards in both physical and virtual form. Their technology enables shoppers to choose their payment modes and ultimately provides Klarna with control over the entire transaction flow, all the way from the issuance of the card to transaction authorisation including with real-time funding.

          This partnership has allowed Klarna to expand into the US and Australia by offering merchants a range of services including ghost card issuance, transaction authorisation and just-in-time funding, a method of automatically funding an account in real-time during the transaction process instead of preloading funds prior to purchase.[8]

          Klarna and Marqeta working together is an example of two payments companies coming together to build on top of each other’s infrastructure. Thanks to this collaboration, Klarna has gained over 575,000 Australian customer accounts and is now offering its service to over 400 retailers.[9] Klarna and Marqeta have since also developed a new Klarna Card which can be used to pay for goods anywhere in the US.[10] The card provides US consumers with a bi-weekly repayment schedule that allows them to stay on top of their payment schedules.

           

          Conclusion

          As consumers embrace next-generation payments, we believe that digital transactions will ultimately take the shape of digital experiences. This is why the (currently) low share of consumers using emerging next-generation payments methods is expected to rise drastically over the next two years. We discussed how this is the case with BNPL and invisible payments but other payment models such as biometric and cryptocurrency payments are also expected to grow. According to Capgemini, in both cases, these latter modes are used by less than 10% of consumers currently but as individuals seek a more fulfilling payments experience this is expected to grow to roughly 50% within the next two years.[11] We expect biometrics in particular to become more widespread having the additional benefit of addressing security concerns.

          The unprecedented growth we have seen in the digital payments economy has been driven by the global boom in ecommerce. Key to this has been convenience and the personalised shopping experiences offered to consumers. These benefits have so far been enjoyed primarily in the digital realm but are now beginning to infuse into the physical world too. The successful payments firms of the future will embrace these dynamics whilst leveraging platform capabilities and shared infrastructure. These names will deliver a superior payments experience that is invisible, more practical and seamless and therefore capture the changing consumer engagement that has made its mark in the digital space in the last two decades.

           

          Related ETF

          PMNTRize Digital Payments Economy UCITS ETF

           

          References

          [1] Statista, Digital Payments Worldwide, June 2022. Available at: https://www.statista.com/outlook/dmo/fintech/digital-payments/worldwide

          [2] FXC Intelligence, June 2022. Available at: https://www.fxcintel.com/research/reports/the-state-and-future-of-bnpl-buy-now-pay-laters-place-in-payments

          [3] Ibid

          [4] Ibid

          [5] Reuters, July 2021. Available at : https://www.reuters.com/technology/apple-goldman-sachs-planning-buy-now-pay-later-service-bloomberg-news-2021-07-13/

          [6] World Payments Report 2021 Voice of Customer survey, N=6, 300, Capgemini Financial Services Analysis, 2021.

          [7] Mercedes Benz, March 2021. Available at : https://group-media.mercedes-benz.com/marsMediaSite/en/instance/ko/New-Mercedes-me-Fuel–Pay-service-enables-contactless-and-convenient-payment-right-at-the-pump.xhtml?oid=49221291

          [8] Marqeta. Available at: https://www.marqeta.com/docs/developer-guides/about-jit-funding

          [9] Savings.com, January 2021. Available at: https://www.savings.com.au/buy-now-pay-later/buy-now-pay-later-platform-klarna-surpasses-500-000-customers

          [10] Marqeta, June 2022. Available at : https://www.marqeta.com/blog/2022/06/02/klarna-card

          [11] World Payments Report 2021 Voice of Customer survey, N=6, 300, Capgemini Financial Services Analysis, 2021.

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