This week we will share the first part of our 2 parts article in which we will have a closer look into Fintech trends in payments, i.e.:
The adoption of ISO 20022,
Explosive growth in non-cash transactions,
Real-time payments,
Distributed ledger technology, and
Digital identity and cybersecurity.
The Future of Payments
Payments, or the transfer of money from A to B, are a cornerstone of the financial industry. There have been few innovations in that area for many decades. Over the last 10 to 15 years, this has changed.
Have you heard of Elon Musk? Most likely, you do. Prior to transforming the electric vehicle industry, Elon Musk founded PayPal, the world's most well-known Fintech company. PayPal pioneered electronic payment alternatives to traditional paper methods such as checks and money orders and experienced tremendous growth. This led to the growth of many other alternative payments start-ups. Examples of Fintech payments companies that have grown from start-ups to global players are Block (formerly Square), Checkout, Stripe, Ripple, and Rapyd.
In today's Fintech industry, Payments are a major sector and a key pillar.
Payments has evolved dramatically in recent years due to new technologies, user preferences, and necessity, and the Total Addressable Market ("TAM") for payments is enormous. Still, more innovation trends are expected to shape payments in the future.
A number of innovations are now part of our daily lives, including contactless payments, QR code payments, digital wallets, account-to-account payments, and payment functions in super apps like WeChat and Line. Moreover, all bank executives agree that the payments industry will undergo significant changes.
In this article, we will take a look at the trends and drivers in the payments industry.
Adoption of ISO 20022
ISO 20022 is a key modernization initiative in payments and many institutions have spent years preparing for that migration. ISO 20022, first introduced in 2004, is a flexible standard for financial messages that enables interoperability between financial institutions, market infrastructures and banks' customers. ISO 20022 introduced many new data fields for the transmission of payments, with some mandatory data fields and several others optional.
So why are changes to data fields so crucial? According to a PWC research report, 90% of banks’ useful data comes from payments. Payments data is of paramount importance as it identifies trends and patterns that can impact business decisions. Banks will be able to access the right data in real time with the migration to ISO 20022.
Payment instructions with an ISO 20022 messaging standard will enhance data to allow a better and more detailed understanding of every transaction. This is because banks will receive rich, structured and appropriate data regarding the originator, beneficiary and payment purpose. The structured details for both sender and beneficiary will unlock improvements to AML and KYC practices, which should in turn enable more efficient and error-free screening processes. It is expected that ISO 20022 will improve operational resiliency in payments and enhance straight-through processing.
Therefore, ISO 20022 can provide rich and detailed data and allow all participants across the value chain to gain access to the same data, enhancing transparency, efficiency, and interoperability. As data is the new oil, ISO 20022 will play a critical role in the evolution of payments.
Explosive Growth of Non-Cash Transactions
During the pandemic, e-commerce and mobile commerce have become mainstream, and customers are also adopting next-generation payment methods, such as digital wallets and mobile payments. Therefore, non-cash transaction volumes are on the rise worldwide, while traditional payments instruments are stagnating or declining. With their easy, convenient, and fast payment features, digital wallets will continue to grow. Capgemini predicts that 4.8 billion mobile wallets will be in use by 2025, up from 2.8 billion in 2020.
As of 2021, digital wallets dominate e-commerce payments in APAC, representing 68.5% of regional e-commerce transaction value (Global Payments Report 2022 by Worldpay). The share of transaction value will rise to over 72% in 2025, largely due to Alipay and WeChatPay. Other regional digital wallets in Asia include GCash, GrabPay, LinePay, OVO, and Paytm.
A study conducted in 2021 showed that digital wallet use differed substantially between countries, with China using them for 83% of e-commerce value, India 45.4%, Indonesia 38.8%, and the Philippines 30%.
Especially in South East Asia, digital wallets are expected to grow rapidly due to relatively low credit card penetration and a fragmented and localised payment landscape. South East Asia differs greatly from Mainland China in this regard, where there is a centralised payments infrastructure and two digital wallets dominate - Alipay and WeChatPay.
Besides digital wallets, Buy-Now-Pay-Later (“BNPL”) begins to gain traction in APAC, with its projected share of e-commerce transactions increasing to 1.8% in 2025, up from 0.6% in 2021.
Please stay tuned for the next newsletter, in which we will talk about real-time payments, distributed ledge technology, and digital identity and cybersecurity.
QIDS Venture Partners is dedicated to supporting and catalysing the developments in Fintech by sharing with our audience Fintech trends and interesting Fintech business ideas. You may forward this article to other investors who are interested in Fintech as well. If you need more information or would like to arrange a meeting with us, please feel free to contact our Managing Partner Edward Shen via LinkedIn or email.
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