Financial institutions hoping to remain relevant must adapt to marketplace changes quickly, an IDC InfoBrief sponsored by Episode Six suggests.
Episode Six is a technology company that enables financial institutions and fintechs to build new digital journeys that leverage real-time payment and value transfer—with any network, any system, any currency, anywhere globally.
Like most of the industry, Episode Six CEO John Mitchell knows players must adapt to new technologies as they contend with customer expectations for speed, convenience, security, and the desire to pay in more ways than before. This report suggests how significant these pressures will be in the coming years.
“(Some) FSIs are running decades-old technologies built on requirements for needs other than those of today,” Mitchell said. “Fintechs are attacking a need which displaces them in the equation.”
Non-FIs to handle 74% of global consumer payments by 2030
By 2030, an estimated 74% of global consumer payments will be handled by non-financial services institutions. Traditional players can carve out their share, but they need to revisit their role in the future system.
The number of payments processed by financial services institutions is growing at a six% clip, but that is less than half the 16% rate for non-financial services institutions. If those rates hold through 2030, $102.29 trillion will be processed by financial services institutions and $354.6 trillion by non-financial services institutions. Digital payments in 2030 will be 3.4 times their 2020 size, or $476.1 trillion.
Mitchell said a key driver of this growth is the shift in technologies that changed the lifestyles of Generation Z and Millennials.
“If we look at IoT, if we look at the Metaverse, we’ll see a need for different methodologies around payments and the ability to pay with different types of value units,” Mitchell said.
“That will lead to what we see here and what we’re talking about in terms of the 74%. Because of technology, open banking, and the rise of fintechs, the ability for brands to embed finance into their propositions is becoming easier. It’s becoming more important to these companies as they try to garner share and provide more of an everyday lifestyle and financial services need to their customer base.”
As customers’ needs change, they require more and newer technologies. It pressures industry players to become well-versed in a broader range of solutions. Those needs cannot typically be met in-house. Partnerships are required.
“I don’t know how many Generation Z has even been in a bank branch,” Mitchell said. “So these older styles of conducting finance aren’t valid anymore. They’re not going to work.”
Will contactless be king?
The report identifies six major trends currently shaping the payments landscape. The desire for and convenience of real-time payments is driving innovation. The availability of on-demand services raises the level of consumer expectation. Due to better processing technologies, hassle-free, contactless, and instant, more assistance will be delivered before, during, and after payment authorization. By 2030, 95% of physical, non-cash payments will be contactless.
Will cash be dead in our lifetime?
“Contactless will replace cash, but I think some of that is related to contactless versus handing somebody a piece of plastic,” Mitchell said. “Cash is still a big part of what we see everywhere, so I don’t see it ultimately going away unless it’s just not allowed anymore because CBDCs are the currency.
“Contactless is taking over, and we see it worldwide. In parts of Asia, most of the transactions are contactless.”
Is the needed technology to support the contactless migration already in place? Mitchell doesn’t think so. A wholesale infrastructure change is required. Otherwise, it will be several iterations of what we have today.
“Those institutions that accept this will make the necessary moves, and a lot of that is collaboration and convergence with fintechs,” Mitchell said. “Existing technologies, for the most part, aren’t going to be able to satisfy the new ways to pay.”
Systems must accept more currency types
Consumers will also demand the ability to pay in more different currency units. By 2030, 60% of global consumers will have made a transaction using an asset class other than fiat currency. One such class generating discussion is rewards and loyalty points.
Mitchell said there are plenty of methods by which consumers can exchange rewards at the point of sale and elsewhere, but the experience is often clunky and requires multiple steps.
“They are not seamless transactions,” Mitchell said. “There are odd conversion rates. Create a mechanism so consumers can choose on-demand and use the value units they prefer.
“That’s huge, and it’s not rocket science, but it does, in most cases, require newer technologies than what is existing in the financial services world today. Many you see out there today are multiple systems pieced together to overcome constraints.”
Another unit is cryptocurrencies, whose role will be influenced by regulation, Mitchell said. It is starting to happen, and those regulations will influence the development of CBDCs.
The Metaverse will help crypto gain a more significant foothold, Mitchell suggested. As people migrate some of their daily routines to the Metaverse, they will begin to interact with its native currencies. The need for asset class-agnostic payment options will grow, whether they be with Bitcoin, Ethereum, or something else.
The answers to these questions will themselves bring opportunity.
“How are you going to make those purchases?” he asked. “What are you going to use for those purchases? How will that all play out over the rest of this decade? Certainly, in most financial institutions, the infrastructure today won’t facilitate any of that.”
The BNPL experience may change
Financial institutions also wonder how to regain the consumers they lost during the recent BNPL surge that caught most off-guard. New companies moved quickly, had great timing, and pulled customers away from the big players.
That could reverse itself in the mid-term, Mitchell suggested. Lenders are regulated, with the infrastructure to manage the entire process. As default rates establish, activity could shift back to financial institutions if they can adjust their technology to facilitate such payment types.
One way to predict how the future will look is to watch what is happening in Asia. Episode Six has a strong presence there. Mitchell said some processes common to places like Hong Kong are just beginning to reach the United States. The infrastructure is in place, so all it needs is a catalyst.
“Many people that I know in the United States did not use a QR code until they had to at a restaurant,” Mitchell said.
Part of providing quick payment decisions is conducting instantaneous KYC checks. The technology to support those real-time decisions is available. It must be enhanced beyond the 1990s-era philosophy underpinning many solutions to accommodate new forms of identification. That requires new technology.
Look east to see future
We can also look east for lessons on handling open banking, and what we find is a mixed bag, Mitchell said. Regulation, not market dynamics, or consumer need, drove the change, which led to some revisions. Some European financial institutions tried to adapt by adding more layers to old technology instead of developing a roadmap.
“In the US, hopefully, we’ll see something less regulation-driven and more market-driven because I think you will end up in a better place.”
By 2030, 90% of global, real-time payments will be linked to at least one other country’s network. That brings regulatory challenges around the physical settlement, Mitchell said. The idea of interoperability between networks is enormous, and companies are developing the technology to make it happen.
“I think most of the work will come around the settlement and the regulatory issues,” Mitchell concluded.