Like many other industries, 2020 has been an incredible year for payments. While those with exposure to e-commerce have seen volumes soar, those tied to the physical economy and cross-border transactions have had a tougher time. With struggle comes adaptation, however, and this year will undoubtedly shape the nature of the industry for decades to come. While it is impossible to predict the exact long-term impact that the year’s events will have on payments, it is likely to be a catalyst for two key trends.
First, efficiency will be key. Whether it’s defined by return on equity or unit cost economics, businesses big and small are being reassessed for how well they contribute to cashflow. Second, a new wave of disintermediation is coming. New means of making payments have the potential to upend the how of payments in a way not seen since the arrival of the card rails.
In 2020, businesses that make money survive. Those that don’t, don’t. This had led to an urgent refocus on profitability over growth across payments fintechs. Fintech firms that rely on interchange fees for a large portion of their revenue have suffered through 2020 as personal spending dropped, while those that have more diverse or revenue that is less reliant on consumption were still able to profit, according to research by FXCIntelligence. The result is that fintechs have had to rethink their product – and in some cases, platform – structure in terms of revenue generation.
For incumbent banks, the threat to payments revenue has been known for some time, but 2020 has refocused executives. Those that have already begun to modernise their payments services have reaped the rewards while those who had simply been exploring through accelerators and Proof of Concepts are aggressively trying to find solutions. It’s worth noting that in strained economic times, especially where interest rates remain historically low, banks’ search for return on equity means innovation centres that do not impact the bottom line may be under threat. Turning innovation efforts into efficiency gains is a must for banks going into 2021.
Next wave of disintermediation
A few years ago, payments and payments processing was considered by some to be a relatively dull industry: modest profits and modest growth. This couldn’t be further from the truth now. The first new payment rails in a generation and the advent of Central Bank Digital Currencies (CBDCs) are bringing real change to the way payments get made, both for consumers and for businesses.
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