Payment Trends to Watch in 2023

If 2021 was focused on growth and scale, and 2022 saw cost-cutting and survival as key objectives, then 2023 is a year to aim for stability. A challenging macroeconomic climate is forcing payment issuers and acquirers to prioritize revenue growth and operating efficiency, seen as the top priority by 25% and 24% respectively of respondents. Improving sustainability was surprisingly low down as a business challenge: fewer than 25% of respondents put it in their top three. Focus on sustainability currently includes a shift to fully digital processes, eco-friendly cards, and carbon footprint calculators. Though many firms have been forced into mass redundancies, “finding and keeping people” is a priority for fewer than 10% of organizations.

Real-time Payments Nears Tipping Point Toward Mainstream Adoption

The increasing proliferation of real-time networks globally has brought real-time payments (RTP) to the fore, with 23% of respondents indicating it is their top priority in terms of product development and a further 26% including as second and third priority. India’s UPI network, launched in 2016, is now the most popular way users transact online and is processing more than 6.5 billion transactions a month. Brazil unveiled its real-time network, PIX, in November 2020 and has since registered more than 133 million users (62% of the country’s population) and reached monthly transaction volumes of over 2.5 billion. The success of India’s UPI and Brazil’s PIX puts pressure on the 2023 launches of FedNow in the US and P27 in the Nordic countries to accelerate mainstream adoption globally.

There is a lot expected of the long-awaited FedNow with the network set to launch in mid-2023 and will waive fees initially to help drive adoption, with the real-time payment rail aiming to differentiate itself from the bank owned RTP Network by reaching more broadly to small towns and banks. Similarly, South Africa’s top four banks are rolling out PayShap, a real-time digital payments service aimed at increasing financial inclusion to the underbanked segment.

Open Banking Payments Awaits ‘Hero’ Use Case to Drive Demand

January 13, 2023, marked five years since open banking was first introduced by the UK’s Competition and Markets Authority. The UK is now regularly seeing monthly API calls of over 1 billion and reaching a maturity whereby open banking rails are being increasingly used for more complex use cases, one example being payments.

Thirty-eight percent of respondents in Omdia’s survey of payments issuers/acquirers stated that they saw “new payment services” as one of their top three opportunities as a result of open banking. Europe and North America see the most potential in open banking payments with more than 40% of respondents agreeing it is in their top three opportunities.

Many of these payments are for funds transfers and wallet top-ups, but increasingly merchants are accepting it as an alternative method to card payments. J.P. Morgan, NatWest, and Bank of America have all now launched “pay by bank” products that utilize the open banking rails. NatWest’s Payit has already processed more than £1bn worth of transactions in the two years since launch.

2023 could be a tipping point for open banking payments in the UK and the US with “new payment services leveraging open banking APIs” being a top IT product investment priority for almost one in four (23%) UK respondents and one in five (20% US respondents, according to Omdia’s 2022/23 survey of payment issuers/acquirers. Variable recurring payments (VRP) are being labeled the breakthrough use case: VRP is a more modern, secure, and flexible way of collecting regular payments for businesses and consumers than the traditional but inefficient direct debit or ACH system. Given the popularity of subscriptions and preference for utility firms to collect regular payments, VRPs could be the hero use case, offering flexibility to customers, that accelerates adoption in the UK, the US and the rest of the world.

Security Is the Top Driver for Payment Infrastructure Investment

The increasing sophistication of fraud has prompted payment issuers/acquirers to prioritize investment in security/antifraud: nearly half of respondents said it is in their top three IT projects, and 32% of respondents are increasing their spend by 6% or more. There has also been a significant uplift in payment scams, where individuals are tricked into authorizing payments to criminals. This is also known as authorized push payment. This has prompted the payments industry to increase investments to reduce the risk of fraud, financial crime, and data loss.

Given this context, it is no surprise that financial institutions (FIs) are placing high strategic importance on security and fraud management. Furthermore, Omdia’s Payment Technology Spending Through 2026: Business Function forecasts strong growth in fraud management spending, with investment set to increase by a compound annual growth rate of 5.7% between 2021 and 2026.

In fighting fraud and financial crime, financial institutions face some specific challenges. First, there is the need to keep pace with new types of fraud and new patterns of fraud, as exemplified during the pandemic. Second, fraud prevention systems need to be more accurate to reduce high numbers of false positives. Therefore, banks need to ensure their systems can adapt quickly to detect and mitigate these new threats and avoid losses and friction with consumers.

Philip Benton is a principal fintech analyst at Omdia and writes analysis on the issues driving technological change in financial services. 

You can find more of Philip’s views on fintech via LinkedIn or follow him on Twitter @bentonfintech.