Evolving customer expectations alongside technological advances are driving innovation that prioritizes speed, near to real-time payments, frictionless transactions, and decentralized models. Compounded by the pandemic, the significant growth of digital commerce has led to record payment volumes in most markets. At the same time, market competition is driving fee decreases, a challenge to traditional players to maintain the same levels of profitability using existing payment infrastructure. Against this backdrop, payments are part of financial services that have undergone rapid and transformational change over recent years.

Take a look at five of the main drivers of change to the way payments to work and to the broader payments ecosystem.

1. Moving to a cashless world

Consumers’ shift to digital channels is driving demand for seamless fulfillment and instant gratification. A recent Capgemini World Payments Report survey found an increase of 24% to 46% of respondents who had e-commerce accounting for more than half of their monthly spending from before the pandemic to now.

With 91% of the global population expected to own a smartphone by 2026, according to Statista, these customers are unlikely to return to the way things were done before, now having experienced the speed and convenience of digital payments and greater services.

2. Faster payments

Demand for instant transactions is driving change in cross-border payments, international remittances, and e-commerce. Previously, mirroring the instantaneousness of a cash transaction via electronic means had been an ongoing technical challenge. Now, real-time clearing and settlement facilities in many markets make processing payments almost instantly possible.

Frustration with the latency and cost of the traditional banking model has led to the emergence of alternative options. Innovative solutions such as the P27 initiative in the Nordic region show how fintech can blend with conventional systems to provide better payments infrastructure for all.

3. Embedded finance

Embedded finance, where financial products are added to the transactional flow in non-financial platforms, has been a much-discussed topic in financial services for the last couple of years. With consumers demanding ever more convenient, frictionless ways to make payments using various devices from wallets to wearables, embedded or contextual payment options are adding convenience and speed to the payments process.

On the merchant side of things, meanwhile, embedded finance helps them to better understand the best payment terms to offer customers, provide seamless checkout, request payment, and offer financing such as buy now pay later (BNPL), all within a single customer experience.

4. Leveraging payment data

The diverse range of digital touchpoints involved in a cashless payments ecosystem provides vast amounts of data. This is of significant value to banks and fintechs to grow client relationships based on analytics and insights. Companies that can unlock the true value of payment activity data by leveraging powerful AI and ML tools can offer more efficient, tailored products in a more secure, protected environment.

We can expect the full implementation of the messaging standard ISO20022 to be a potentially vital part of improving the amount and quality of payments data available in the industry. ISO20022, as the global standard for payment messaging, provides, for the first time, a shared language to be used for transactions made by anyone, anywhere.

5. Financial crime

Rapidly increased e-commerce provides an opening for fraudsters. The use of AI and ML allows payment companies to detect fraud earlier by learning the financial habits of clients so that unusual behavior is highlighted. Fraud prevention security measures, like voice-activated transactions, biometric authentication, and smart assistant payment verification, all have a part to play in securing the future of digital payments.

The primary dilemma in modern payments is the trade-off between customers (demanding easier in real-time transactions actioned across devices) and regulators (concerned about increased exposure to fraud). Payments companies, therefore, need to strike the right balance delivering new user-friendly processes that are highly secure and compliant.

What’s next in payments?

The payments ecosystem is a varied one with lots of layers and companies filling niche use cases. On the front, we are seeing more forms of instant payments and innovations such as digital wallets and embedded finance, and BNPL. Disruption of the payment industry is moving on from providing these user-friendly frontend mobile apps to improving backend processing and the infrastructure used to execute payments.

Overall, the journey towards more digital, open, and real-time operations mirrors the way society at large is increasingly living online. Many of the trends covered in this article may be set to converge in the emerging metaverse space, although the shape of that is some way from being determined. What will money look like in the metaverse? How will current payment rails integrate with a borderless ecosystem?