Between the COVID pandemic and the rise of the globe’s most influential consumers, Millennials and Gen-Z, industries across the economy are more dependent on digital payments than ever before. The emergence and growing popularity of card-not-present (CNP) transactions, buy-now-pay-later (BNPL) programs, and digital currency speak to this transformation—and these innovations are not going away any time soon. In fact, these flexible payment methods—and others—are expected to continue growing their shares of the payments market. In order to meet this growing demand, payment service providers must also adapt to these new payment patterns.
The impact of card-not-present transactions cannot be overstated: The use of digital wallets in North America alone is estimated to increase by 50 percent in the next five years. Where many commercial processes were slowed by the pandemic, this trend was only accelerated by the demand for remote transactions. Payment providers that offer a single, integrated platform allowing businesses to process these transactions seamlessly have been able to capitalize on the increasing popularity of digital wallets.
The pandemic has created critical momentum for digital payments, and as retailers offer customers more flexible payment options, payment processors should likewise look for opportunities to offer more comprehensive user-friendly capabilities. For example, PayPal has consistently distinguished itself among payment platforms by introducing new features and capabilities to its user-friendly interface. Through the app alone, users can send, receive, and track transactions all on one platform.
Companies like Prime Trust and Bakkt have also taken their platforms a step further by integrating digital currency infrastructure into their platform offerings—enabling users to track and spend their loyalty points in the form of digital currency via digital wallets. The sustained demand for card-not-present transactions and their integration with other new payment solutions underscores the need for payment providers to adapt to this trend.
Point-of-sale lending, also known as buy-now-pay-later, is another financing trend that has gained traction in tandem with the emergence of Gen Z as a major consumer demographic and the exponential growth of online shopping. In 2021, more than half of Americans reportedly used a buy-now-pay-later option at their chosen retailer. Payment providers can capitalize on this trend through strategic partnerships with retailers and BNPL servicers to offer a single, comprehensive platform to process these transactions. For example, Stripe recently announced a new partnership with Klarna to give users more flexible payment options by integrating BNPL options into merchant platforms. Adyen and WorldPay have also announced partnerships with BNPL processors like Zip.
Traditional financial institutions are already feeling the impact of these partnerships. So far, fintech companies have been able to shift anywhere from 8 to 10 billion USD in annual revenues away from traditional banks—further highlighting the surging demand for buy-now-pay-later programs.
The growing popularity of cryptocurrency is another trend that payment providers should be watching. Crypto integration into existing platforms has so far manifested in a few ways. Not only do payment providers now process card-to-crypto transactions many are also acquiring crypto providers in order to facilitate purchasing of crypto assets.
Fintech companies aren’t the only ones looking to capitalize on crypto’s rising prominence. Traditional banks and credit card companies are also expanding their digital currency infrastructure in order to enter the market. For example, Visa recently partnered with 50 crypto platforms to allow cardholders to convert and spend cryptocurrencies at millions of retailers.
In spite of these efforts, however, there remains a significant unmet need for digital wallets that allow users to convert fiat currency into cryptocurrency. This has left an open lane for digital payment platforms to capitalize on this trend and meet this need via ACH. To expedite this process, companies like NYDIG have also been working with banks to enable crypto wallets within online banking—enabling consumers to buy, sell, and hold crypto while bypassing credit rails, or using ACH rails as an onramp to crypto. Both of these partnerships, and others like them, speak to the opportunity for payment providers to fill the large gap in, and capitalize on, this growing market.
In many ways, the COVID pandemic has merely accelerated preexisting trends in the payments space, including the adoption of card-not-present transactions, buy-now-pay-later options, and cryptocurrency. Unlike many industries, payment providers did not have to deal with the industry outlook changing overnight as a result of COVID. However, there are still many exciting opportunities to innovate and expand alongside these ongoing trends. As our industry continues to evolve, payment providers can drive innovation across industries by integrating new payment capabilities into their platforms and offering seamless payment experiences.
Balaji Devarasetty is Chief Technology Officer at Paya, a leading provider of integrated payments solutions.