The new payments paradigm: how headwinds and consumer expectations are driving growth
A key theme in The New Growth Game, Boston Consulting Group (BCG)’s most recent Global Payments report, is the resilience of the sector in the face of considerable economic turbulence. According to the report, BCG’s 20th, revenues remain on track for sustained increases, underpinned by a dramatic cultural shift which has payments at its heart.
Much of this shift is driven by our ‘fifth appendage’ aka the smartphone.
Thanks to the mass adoption of these pocket-size computers, most people now have a single tool with which to facilitate all kinds of transactions securely and conveniently.
To find out more about the opportunities and challenges highlighted in the report, Marqeta spoke to one of its authors, Jean Clavel, who is a core member of BCG’s Financial Institutions and Technology Advantage practices based at the firm’s Paris offices.
He told us that despite the headwinds, the fundamentals of the industry remained strong. For example, the switch from cash to non-cash payments and online growth both continue apace.
Release the pressure: market shift brings relief to some
“The clients we speak to are sensing a bit of a contraction but instead of not investing or spending, they’re merely delaying decisions. And while we’ve said goodbye to the euphoria of past years, I think we will see stronger growth return next year,” he said, pointing out that many businesses were actually feeling upbeat about some of the readjustments that had taken place in the economy.
“When you look at a lot of the payment players and fintechs in recent years, valuations were excessive. And as a matter of fact, most of my clients, including fintechs, are kind of relieved that they're back to a more normal valuation because it has taken a lot of pressure off them,” he said.
Homing in on what had enabled businesses to survive, it became clear during the conversation that two key factors were at play, particularly for fintechs: agility and solid foundations.
Jean explained: “Lots of these players are digital natives and they’ve often explored two or three different business models, so they have this inbuilt agility that has enabled them to pivot quickly as circumstances have changed.
“Also, for the bigger players, because they are established, profitable and have strong relationships, they don’t necessarily have to be so agile, as they have the ability to finance new products or partly reorient some of their activities.”
Will data enable issuers to become the next Big Tech players?
Returning to the report, its section on how issuers can build advantage makes for fascinating reading. It describes how digital tools, e-commerce and consumer data could “vault issuers to the front of the payments value chain”. This, the report says, would allow issuers to play a more central role in servicing the needs of merchants and their customers.
As a result, BCG urges issuers to “rethink merchant engagement models and reimagine customer journeys and loyalty programmes”, while taking “proactive measures to shore up their core risk management, collections, fraud, and underwriting businesses.”
Thanks to data and insights capabilities, Jean felt there was a broad consensus among payments experts that issuers had the potential to become the next Googles of this world if certain challenges were overcome.
“The potential is there, but implementation to really access and leverage data in a GDPR compliant way is still very challenging. In many geographies the key issuers remain banks. And so banks have a wealth of data that is just outstanding. But many banks find internal data sharing challenging on a technical front and a GDPR front.
“Additionally, the monetisation model is not 100% clear yet. A lot of issuers and payment players are investing quite a lot to develop that model and monetise it in a compliant way. The question is whether it's going to be coming in two or three years or are we talking more longer-term than that?” he said.
Why issuers are key to delivering modern user experiences
The report also talks about two major shifts which issuers are very much driving. The first is buy-now-pay-later and the second is rewards and loyalty.
Buy-now-pay-later is enabling issuers to move beyond a transactional role with customers to “support multiple stages” of the payment journey. In terms of rewards and loyalty, consumers now expect a “richer” and “more personalised” experience after years of propositions “primarily focussed” on travel, entertainment and daily spend categories.
Helpfully, issuers are given a set of recommendations aimed at supporting future growth. Among these is the need to diversify revenue streams by “turning data into a superpower”.
As third-party cookies are phased out, issuers should “lean on” their rich data assets and share them with merchants in an anonymised, regulation-compliant manner. This would “open significant new revenue streams”.
Another recommendation for issuers is to become “two-sided retail consumer networks”. By turning their connection with consumers into an ecosystem that integrates merchants, issuers can serve as a “curation ground” for digital platforms and merchants, increasing customer engagement and loyalty.
How will 2023 shape the future of payments?
Looking forward to BCG’s 2023 Global Payments report, Jean said a number of themes were already beginning to emerge.
“I think from what we’re seeing so far, we’ll be returning to risk and compliance, which is on everybody’s mind following the market pressures we’ve seen this year. Another likely theme will be around value and this will involve looking at what innovations are really generating value for customers and merchants,” he said.
BCG’s Global Payments 2023 report will be launched this autumn. Rest assured, Marqeta will be paying close attention to its insights and recommendations.
To read BCG’s latest paper click here.
