Fintech and the Future of Digital Payments

Gone are the days of banking in-person or enduring lengthy phone waits for simple inquiries. Thanks to Fintech, banking, and financial transactions have evolved. Yet, this emerging technology still requires careful adoption, nurturing, and support from regulators and established financial institutions. Fintech offers a powerful tool to minimize bureaucracy and optimize processes. As technology continues to evolve, we can leverage innovative solutions for everyday challenges.?

For example, financial institutions can use Fintech to offer more efficient services with fewer resources. With online banking services, customers can now securely and promptly transfer money without the need to visit a physical branch, reducing paperwork and enhancing processing times. Such convenience aligns with our expectations of modern banking. In this blog, I will discuss the impact of Fintech on traditional financial institutions, the emergence of new players in the market, and the potential growth prospects of the digital payments industry.

Fintech Revolution in Financial Institutions?

Here are some details to consider.

• Digital-First Customer Experience

Fintech companies are offering digital-first banking experiences, which are much more convenient than traditional in-person banking. Mobile apps, digital wallets, and other online banking tools allow customers to easily check their balances, transfer funds and perform other financial transactions on the go.

• Automation

Companies are using automation to streamline financial processes and reduce costs. By automating tasks like loan underwriting, compliance checks, and fraud detection, Fintech companies can process transactions more quickly and efficiently than traditional financial institutions.

• Open Banking

Fintech companies are leveraging open banking APIs to access customer data from traditional financial institutions and create new financial products and services. By creating an open banking ecosystem, companies can offer more comprehensive financial solutions that combine services from multiple providers.

Market Analysis

Financial technology, also known as fintech, is a technology that enhances or automates financial services and processes. Business owners, companies, and consumers can manage their finances using a computer or smartphone with the help of specialized software and algorithms. In addition to automating insurance, investments, trading, risk management, and banking services, it can also provide insight into finances.

During the forecast period of 2023-2028, the global fintech market is projected to grow at a CAGR of 16.8%, reaching over USD 492.81 billion.??

[https://www.expertmarketresearch.com/reports/fintech-market]

The Ongoing Role of Digital Payments

The banking and card industry has been disrupted by the ongoing digital revolution, which means that financial institutions are no longer required to carry out financial transactions. Fintech companies have taken advantage of enabling regulations to introduce digital payments, resulting in a significant reduction in the FIs' share of the transaction market.?

It is estimated that by the end of 2023, such unique business models could affect up to 80% of existing banking revenue globally, while the digital payments market is projected to reach $7.6 trillion by 2024 worldwide, with an average CAGR of 13.7% between 2023 and 2036.

[https://www.mordorintelligence.com/industry-reports/digital-payments-market]

In such a situation, the immediate objective for both banks and card companies is to stay relevant in this new ecosystem. In the longer term, the objective is to thrive in the changed landscape by exploring opportunities and reimagining their value propositions. For this, a comprehensive look at the challenges and opportunities that lie ahead for the Fis is required, and how by leveraging digital technologies, they can reinvent themselves from close-looped institutions to open, collaborative, and customer experience-driven enterprises.

Drivers for Digital Payments Globally

Globally the orientation and adoption of digital payment solutions have resulted from various needs yet, on a broad basis the digital payments ecosystem is being driven by three broad factors:

• Technological?
• Customer demand
• Regulatory

1. Technological?

• Mobile devices, and digital technologies

According to industry estimates, the use of mobile devices and the internet is expected to reach 3 billion worldwide, covering 65 % of the world’s adult population by 2025. [https://www.marketresearchfuture.com/reports/e-wallet-market-4633]

The widespread use of smartphones and other mobile devices has enabled consumers to make payments through mobile wallets and other payment apps. Also, the adoption of contactless payment technology, such as NFC and QR codes, has made transactions faster, more secure, and more convenient.

• Mobile wallets/ e-wallets

In the digital payments market, mobile wallets play an important role. Globally, 20.7 billion consumers will use mobile wallets to make purchases, up nearly 30% from 1.6 billion in 2023. In 2023, the e-wallet market is expected to be worth approximately $2100 billion with a 15 % CAGR. [https://www.marketresearchfuture.com/reports/e-wallet-market-4633]

2. Customer demand

• Real-time payments

Real-time payments have the potential to revolutionize cross-border payments by enabling instant and low-cost transfers across different currencies. This can be easily integrated into business systems using APIs, allowing for seamless and efficient payment processing.

This can provide real-time tracking and confirmation of transactions, making it easier for businesses and consumers to monitor their payments.

3. Regulatory drivers

Regulation has encouraged innovation by providing a framework for digital payments to operate within. By establishing rules and standards for digital payments, regulation has enabled new payment solutions and technologies to be developed. This has increased financial inclusion by requiring digital payment providers to provide services to underserved communities. By promoting financial inclusion, regulation has enabled more people to access digital payments and the benefits they offer.

Challenges for Banks

• Risk of commoditization

As the digital payments industry becomes more standardized, payment providers may find it more challenging to differentiate themselves from their competitors. This can lead to commoditization, as payment providers offer similar products and services that are difficult to distinguish from each other.

• Loss of Customer Insight

Third-party payment providers often handle the payment process, which can result in a lack of direct interaction between the merchant and the customer. This lack of interaction can make it challenging for merchants to gain insights into their customers' behavior and preferences. Thus, banks are increasingly under the threat of becoming just utility services used by third-party players.

• Lower revenue due to reduced branch-based payments

The reduction in branch-based payment volume is leading to lower revenue for banks and financial institutions. Customers are increasingly using online banking platforms to manage their finances, reducing the need for branch-based transactions. This shift towards online banking is leading to a decrease in revenue for banks that rely on branch-based transactions.

Banks and financial institutions that rely on traditional payment methods need to invest in digital transformation to remain competitive in the digital payments landscape. This can be a costly process, and failure to adapt can lead to a further decrease in revenue.

Necessary Solutions for Banks

Banks can thrive by offering a frictionless payment experience in digital payments, which can lead to increased customer satisfaction, loyalty, and revenue.?

1. Frictionless payment experience

Banks can reduce friction in the digital payment experience by offering a streamlined onboarding process that is easy and convenient for customers. This can include offering mobile account opening and identity verification, as well as integrating with third-party identity providers.

Moreover, banks can offer personalized payment experiences by leveraging customer data to offer tailored recommendations and promotions. This can enhance the overall customer experience and increase loyalty. Apple card, launched by Apple is a credit card that has seamlessly integrated a physical payment method with a digital payment application (Apple pay).

2. Use data analytics to drive growth

Banks can use data analytics to overcome challenges in digital payments by leveraging data to gain insights into customer behavior, improve the payment experience, and enhance security.

• Personalization

Data analytics can be used to personalize the payment experience by leveraging customer data to offer tailored recommendations and promotions. This can enhance the overall customer experience and increase loyalty.

• Payment optimization

By analyzing payment data, banks can identify trends and patterns in customer behavior, such as preferred payment methods and transaction frequency. This can enable banks to optimize their payment processing systems to better meet customer needs.

Shaping the Future

The payments landscape is being transformed by both incumbent and FinTech players, who are introducing new innovations, elevating customer expectations, and heightening competition worldwide. To provide value to customers, these players must contemplate the future of digital payments and determine their position in the evolving payments value chain.

• The payments value chain

When it comes to shopping and paying bills in today's digital age, there is a lot happening behind the scenes. Even though a smartphone user may rely on a one-touch payment app, the payment value chain beneath that simple interface is complex and dynamic. Here are the key players in the payments value chain:

? Customer

The person who initiates the payment is the end-user or sender.

? Merchant

The entity that receives the payment from the customer is the merchant, who pays fees to the acquirer in exchange for its services.

? Issuer

Typically a bank or financial institution, the issuer issues payment solutions to the customer, provides underwriting for the credit issue and holds overall responsibility for end-user acquisition and engagement.

? Acquirer

The acquirer, which is usually a financial institution or aggregator, acquires merchants, provides them with the means to accept digital payments and underwrites credit solutions.

• Network provider

The network provider connects all parties in the network, offers clearing and settlement functions, and manages risk in exchange for fees from both the issuer and the acquirer.

A New Ecosystem

Formulating strategies that possess both foresight and flexibility can be a challenging task, particularly in a time of disruption and an ever-changing payments industry. To overcome this challenge, companies must first gain a comprehensive understanding of their position in the payments value chain and then visualize how these roles will transform with technological advancements in the future.

No matter what future scenario plays out, several constants will likely remain in the new payments ecosystem. Initially, businesses will experience a surge in the use of e-payment technologies by customers, leading to the emergence of fresh networks and ecosystems. The adoption of these technologies will extend beyond the mere buying or selling of goods to include the provision of value-added services such as spend tracking and offline loyalty programs.

Finally, it is anticipated that the payments industry will become more secure and less risky for businesses. The advanced security features provided by e-wallets, for instance, may enable companies to lower their compliance costs. Additionally, the incorporation of fresh sources of credit data will enable issuers to not only improve their risk assessment capabilities but also expand their customer base with profitability.

For any further details, connect with Gyan Consulting.