Today, digital wallets are commonplace, and payment solutions continue to evolve with security advancements changing how people interact with banks and money. Payment industry trends cover everything from digital wallets and payment processors to independent sales organizations and increased ACH transactions. Here are payment industry trends and how they can affect your business.
What is the payments ecosystem?
The payments ecosystem refers to the network of organizations, technologies, and processes that facilitate and process financial transactions. It encompasses various stakeholders, including financial institutions, payment service providers, merchants, consumers, and regulatory bodies.
Like a physical ecosystem, the payment ecosystem refers to the interaction and symbiosis of various parts to facilitate the payments system. Evolving technologies in any area, such as payment services or processing standards, will ripple through all parts of the payment ecosystem. This affects individuals, banks, merchants, and the wider economy across diverse payment types.
While the payments ecosystem involves a complex network of participants, technologies, and processes working together, it is ultimately growing toward increasingly secure, efficient, and convenient financial transactions.
How does the payments-processing cycle work?
The payments-processing cycle ranges from the authorization process to the settlement process. There are three main steps in the payment process:
- Validation: the merchant’s bank contacts the customer’s card issuer or bank for purchase validation
- Reservation: the customer has sufficient funds and the payment is approved
- Finalization: shipment confirmation or delivery of digital goods, the funds are transferred to the merchant’s bank
A more detailed version of this same process can include:
- Payment initiation from the customer at a physical store or online
- Authorization from the issuing bank to make the payment
- Clearing, which happens after the payment network or clearing house receives authorization
- Settlement, or transferring funds from the customer’s bank to the merchant’s bank
- Reconciliation includes confirming accurate transaction amounts and reference numbers between the customer’s and merchant’s banks
- Reporting, generated by financial institutions or card issuers on all transactions for a set period, that customers and merchants will see on monthly statements
- Customer updates from the card issuer or the merchant to inform the customer of order status
Who are the payments industry’s key players?
There are a number of key players in the payment industry. Here’s who is involved in transactions:
Issuers include banks and financial institutions that issue credit and debit cards as payment methods.
In the payment industry, an acquirer or acquiring bank is a financial institution that partners with merchants to enable them to accept electronic payments, typically payment card transactions.
Acquirers provide the necessary infrastructure to process card transactions, including point-of-sale terminals and payment gateways.
3. Credit card networks
Credit card networks are the communication system between issuing banks and businesses whose role is to process credit card transactions and protect sensitive data. Credit card networks authorize and process credit card transactions, set the transaction terms, and move payments between customers and businesses via their banks.
4. Payment Processors
Payment processors facilitate technical and operational aspects of payment transactions. This includes routing transaction data between merchants, acquiring banks, and payment networks.
5. Payment Gateways
A payment gateway is the virtual point of entry for a payment. It’s equivalent to a physical credit and debit card reader but used for online transactions.
6. Merchant Services Providers
A merchant services provider is a type of financial software partner that allows merchants to accept and process payments. It connects banks, customers, and merchants when processing debit and credit card transactions.
7. Independent sales organizations (ISOs)
An independent sales organization (ISO) is a specialized third-party company that manages credit card processing services outside a bank or other financial institution.
8. Payment facilitators (PayFacs)
PayFacs allow merchants to set up electronic payment and processing services to accept electronic payments online or in person.
10 payment industry trends
Industry trends show unique facets of growth opportunities.
1. Surge of digital wallets
Digital wallets are an easy way to store credit or debit cards, rewards cards, and airline tickets on a smartphone or wallet. Digital wallets offer convenience, speed, and increased security. According to World Bank research from 2022, two-thirds of adults now make or receive digital payments. Other research suggests that digital wallets could rise by 88% in 2026.
2. Increase in contactless payment adoption
Contactless payment is already on the rise. While the pandemic accelerated adoption, contactless payments continue to grow, with some industry experts predicting that total contactless payments will hit $5.4 billion by 2030, up from $1.1 billion in 2022.
3. Rise of new fintech players
The Boston Consulting Group projects fintech to be a $1.5 trillion industry by 2030. Digital wallets are an example of fintech crossing into widespread adoption. Fintech companies offer apps and services like mobile payments, mobile banking, peer-to-peer lending with more favorable interest rates, automated investing, personal budgeting, and integrators to automate business accounting.
4. Increased cross-border payments
With the increase in global interconnection, cross-border payments are on the rise. J.P. Morgan has identified three trends affecting cross-border payments, including new payments and new tech to facilitate those payments while also acknowledging new risks. New payments already in various phases of adoption include artificial intelligence (AI), blockchain, Big Data, and application programming interfaces (APIs).
5. Widespread adoption of cryptocurrency
The widespread adoption of cryptocurrency is changing the global financial landscape and how people send and receive money. Industry experts predict mainstream adoption within 10 years or substantial rises by 2030. Major banks like Ally Bank, Bank of America, and Goldman Sachs have already adopted crypto.
6. Upsurge in ACH transaction activity
Automated Clearing House (ACH) transaction activity has existed since the late 1960s, but the upsurge in ACH transactions also shifts how people move money. The ACH Network processed $76.7 trillion across 30 billion payments in 2022. That’s a 5.6% and 3% increase, respectively, compared to what the network handled in 2021.
7. Growing need for real-time payments
With instant transfers and payment apps like Venmo and PayPal that allow instant peer-to-peer transfers, consumers are increasingly demanding real-time payments. The market size of real-time payments in 2022 was $17.56 billion. Researchers anticipate the payments will grow globally by nearly 35% by 2030.
8. Increasing popularity of the Internet of Things
The Internet of Things (IoT) includes physical objects with sensors, processing ability, software, and other technologies to exchange data with other devices and systems. IoT payments are triggered by devices with a certain degree of autonomy based on the data they collect and analyze. These automated transactions could revolutionize payment systems in the coming years.
9. Security advancements
Reports from the Association of Certified Fraud Examiners show that companies around the world lose $3.5 trillion to fraud each year. Security advancements like point-to-point encryption (P2PE) payment technology, location-based authentication, digital wallets, and interactive cards mean enhanced security and a changing payment landscape.
10. New hardware and retail solutions
Point-of-sale (POS) store registers, smart terminals, mobile card readers, and self-serve kiosks are all changes in hardware and retail solutions that have changed payment landscapes in recent years. These retail solutions can mean increased security, less employee interaction, and faster checkout times across industries.
Capitalizing on payment industry trends
Payment industry trends make it faster, cheaper, and safer to transfer money, make payments, and do business in a growing global economy. Industry trends present opportunities to invest in future economic solutions and adopt new solutions for businesses of all sizes. Expect to see greater innovation to adapt to new challenges as the way people move and store money continues to rapidly evolve in the coming years.
How is contactless payment revolutionizing transactions?
Contactless payments aren’t just making checkout times faster. They also offer increased consumer data insights, opportunities to cross-sell or upsell products with online convenience, and ease of scheduling subscriptions or recurring payments.
Will these trends make traditional wallets and physical cards obsolete?
While digital wallets and other emerging payment industry trends are experiencing rapid adoption, it’s unlikely that traditional wallets and cards will become obsolete, although more consumers may choose to store credit cards in digital wallets.
Are there any potential risks related to these payment industry trends?
Potential risks to payment industry trends include new security or hacking threats. Companies could potentially face new types of fraud, cyberattacks, compliance issues, or operational failures.