The payment revolution has already begun, with the likes of cryptocurrency, mobile wallets, and other payment methods that have begun to gain popularity compared to their traditional counterparts. The payment industry, which has a long tradition of allowing fund transfers and centralized control through financial institutions, is due for a change. With rising inflation, consumers today are highly focused on finding value due to the shrinking middle class and with the high cost of accessing their funds; have the fuel for a payment revolution. The pivot will come from the underbanked and unbanked groups, which in 2019, represented 25% of U.S. households. Both these groups are becoming increasingly vulnerable to financial exploitation by payday loan providers who charge exorbitant interest rates on short-term loans, resulting in a cycle of debt that traps people in poverty and poor health.
In recent years, we’ve seen many fintech startups emerge from the shadows of Silicon Valley to disrupt the banking world. These companies provide mobile apps and online tools to reduce friction and costs associated with transferring money between people and businesses. Non- traditional banks and unrelated industries have introduced their payment platforms, such as Apple Pay, Google Wallet, Samsung Pay, and PayPal, which have disrupted the payment industry by offering consumers a way to pay using their smartphones and allow merchants to accept payments from customers who don’t have bank accounts.
The emergence of these new fintech players such as Zippy Cash, Koho, Lulu, PayTM, Wise, Zelle, Cashapp, Paypal and Venmo, to name a few, help provide the underbanked and unbanked consumers with cost-effective access to funds. In their marketing material, they all promise low transfer fees, and, in the U.S., many offer access to a credit card. The emergence of new financial services companies has also led to a surge in interest from investors looking to back up innovative startups, making raising capital from is easier than ever. The growth is also fueled by the 42 billion USD in remittances sent home from the United States to Mexico. Other countries include India with 83 billion, China with 59 billion and the Philippines with 35 billion. An additional four trends are impacting the future of consumer payments and the banking industry, namely:
Trend #1 – Super Apps: A super app is an amalgamation of apps possessing multiple features and capabilities into a single mobile application, providing an enhanced user experience. Within financial and banking services, the powers of a super app are endless, from expanding services to creating more revenue. This trend is emerging out of the East with players like WeChat and Alipay but also has growing significance in North America with the growth of immigration.
Trend #2 – Buy now, pay later (BNPL): The BNPL is an innovative POS payment model that has gained popularity during the pandemic. Instead of a customer paying for a product all at once, payments are divided into equal instalments payed over time without additional interest or fees. In the U.S., more than 16 million people have used Afterpay, and Canadian company PayBright has approved more than $1.5 billion in purchases since its launch in 2017. This model appeals more to a younger demographic.
Trend #3 – Immigration boom: The post-pandemic economic recovery in North America will depend on population and labor force growth. To remain competitive on the world stage, governments invite millions of immigrants, which account for 36% of the new population. Most immigrants arrive with higher education levels and a drive to succeed. Local strife, such as the war in Ukraine, will only accelerate the rate of immigration.
Trend #4 – Increasing income disparity: Factors such as gender, race, education level, place of birth, age bracket, and the rise of automation, are all playing a role in the widening gap between the world’s wealthiest and poorest. As income disparity increases, it will continue to impact what essential and non-essential products and services most people can afford. The recent inflation with the threat of a recession will only accelerate the disparity between these various income groups.
No matter how dry the powder is, it only takes a spark to start an explosion. The growth of alternative payment platforms may be that spark to create a payment revolution. In response, leading financial institutions such as Bank of America have partnered with Zelle, and in Canada, RBC with Extend have anticipated and managed the impact of the payment revolution. The question for most financial institutions is, are you ready and prepared to be disrupted?