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After another year of disruption for the global payments industry, VIXIO takes a look at the trends that have shaped 2022, from the continued demise of cash to the rise of instant payments, open banking and the war on card fees.
Payment firms and policymakers used to talk openly about the need for a “war on cash” to help improve financial inclusion, transparency and efficiency.
For many developed markets, however, this is a war that has long been won. In these markets, regulators are now more likely to complain about financial inclusion issues due to a lack of accessible cash, rather than too much.
The accelerated digital trends witnessed during COVID-19 have not reversed and, in many parts of the world, cash continues to reduce as a proportion of overall payments.
In the UK, for instance, the use of cash has markedly declined in recent years. In 2012, cash represented around 55 percent of transactions, but in 2021 this figure dropped to just 15 percent, according to UK Finance.
Today, the battle for wallet space has moved into the digital arena. Whether through cards, open banking, instant payments, alternative credit products such as buy now, pay later (BNPL) or even crypto — it has never been so good in terms of payment options.
Although the market has been the driving force behind these changes (thanks in part to technological advances), regulators have also been front and centre, as they look to promote their competition and innovation policy objectives.
Instant payments
Payments modernisation has been a key theme across various jurisdictions in recent years. National roadmaps have been developed, which not only aim to bring payment regulations up to scratch but also promote the development of new infrastructure and overlays, such as instant payments.
Some of the latest countries to launch new instant payment services include South Africa, which announced plans in November to overhaul its 16-year-old legacy real-time clearing service with a new 24/7, low-cost service that is ISO 20022-compliant.
Meanwhile in May, Peru announced that it had migrated its interbank payments infrastructure to a new real-time service built and run by Mastercard.
At least 66 markets now have access to an instant payments system and these countries represent the equivalent of more than 90 percent of global GDP, according to VIXIO analysis.
In some developing markets, such as India and Thailand, instant payments have leapfrogged traditional card payments in just a few short years.
In Brazil, a new instant mobile payment service, Pix, exploded onto the scene in 2021, reaching almost 10bn transactions in its first year of operation — and this looks set to more than double in 2022.
In some cases, governments and regulators have directly intervened to promote the adoption of these services.
When Thailand’s PromptPay launched, the government instructed all welfare and government subsidies to be processed through the system, creating a mass rush of sign-ups to the new service from both businesses and consumers.
Similarly, Pix was mandated for every Brazilian bank and payment institution with more than 500,000 active customer accounts. Ensuring full reach of a new payment system(s) is often vital to early success.
Across the EU, the Single European Payments Area (SEPA) Instant Payments scheme went live in 2017. However, despite heavy investment across the bloc to build new infrastructure, instant payments have largely failed to become the "new normal" as predicted.
In October, the European Commission proposed new instant payments regulation that will make it mandatory for payment service providers (PSPs) that offer standard SEPA credit transfers to also offer instant payment versions. PSPs were also instructed that the price charged for instant payments cannot exceed the price charged for standard credit transfers.
Many markets are also revisiting the question of who should have access to these new payments infrastructures, expanding participation beyond traditional banks to a wider subset of fintechs.
In October, for example, Payments Canada announced that it has asked the government to complete a review of access requirements for its planned instant payment service and extend eligibility to non-banks, as part of 2023’s budget act.
In early 2023, the UAE is expected to launch its Instant Payment Platform, while in the US the long-awaited FedNow service is expected sometime between May and July. The market-led initiative P27, a multi-currency pan-Nordic instant payments service, is also expected to make further headway with a dozen Swedish banks currently testing the payments platform.
Open banking
Complementing the instant payments rollout, open banking has become another weapon in the regulator’s arsenal to promote competition and innovation.
An early example is the EU’s revised Payment Service Directive (PSD2), which allows consumers to give third parties permissioned access to their bank data, supporting a range of new payment and account services.
In one fell swoop, the EU effectively opened up the provision of payment services to neo-banks, fintechs, retailers and others.
By creating a new payment initiator licence, regulators were also setting their sights on promoting alternatives to card-based payments.
These shifts are not limited to the EU. Open banking regulations have been expanding across the globe in recent years.
In October, a new Fintech Law passed through the Senate in Chile, with the country now poised to join regional neighbours Brazil, Colombia and Mexico in implementing open banking.
During the same month, Australia introduced draft legislation to its Consumer Data Right (CDR), the framework for open banking in the country, which would effectively enable payment initiation along with other action-based services.
Mirroring a similar framework to the UK and EU, Saudi Arabia announced proposals for new open banking rules in November which focuses on the development of account information services and payment initiation services.
Even in the US, which has typically taken a market-led approach to this issue, the Consumer Financial Protection Bureau (CFPB) has recently outlined options to strengthen the consumer’s access to (and control over) their financial data.
Meanwhile in Switzerland, policymakers are also allowing a market-led approach, for now. In December, the Federal Council gave the industry until mid-2024 to build open finance or it will regulate the matter.
Given its intended disruption, open banking is often seen as a battle between incumbent banks and upstart fintechs.
Even though the EU is seen as a pioneer in open banking, adoption in this space has been slow. Critics point to fragmentation and lack of standardisation, particularly in the provision of application programming interfaces (APIs), as potential reasons.
In May, the European Commission launched a consultation as part of a wide-ranging review of PSD2, setting the ball rolling and raising the prospect of a future PSD3, which could iron out some of the kinks.
Card fee regulation
A more heavy-handed approach to regulatory intervention can be seen in card fee caps. Critics argue that the benefits available to issuers and acquirers from card fees deter them from offering or supporting alternative products.
In August, US Senator Richard Durbin (D-IL) proposed a new set of rules that would open up the credit card network to players that sit outside the Visa-Mastercard “duopoly”, as Durbin put it, through increased competition leading to lower fees.
Durbin is the architect behind the post-financial crash Durbin Amendment to the Dodd-Frank Act. This amendment placed interchange caps on debit cards, alongside other competitive requirements on issuers.
However, as VIXIO reported in December, despite numerous efforts to attach the bill to must-pass spending legislation, the proposal failed to get a reading in last year’s Congress, which ended today (January 3).
In Australia, which was one of the first countries to impose interchange caps back in 2003, regulators have recently expanded least-cost routing (LCR) requirements to online transactions (by the end of 2022) and mobile wallet payments (by the end of 2024).
This will mean that merchants can choose whether to route debit card transactions through eftpos, the low-cost domestic system, or through Visa and Mastercard for contactless, online and mobile wallet transactions.
In 2022 alone, new interchange fee caps have either been proposed or amended in Brazil, Chile, Malaysia and New Zealand.
Meanwhile, in the UK, the Payments Systems Regulator (PSR) launched a review on cross-border interchange fees following an outcry post-Brexit, when the card schemes significantly increased their rates between the UK and EU.
The PSR is also doing a separate review of scheme and processing fees, an area that has typically not been in the sight of regulators. However, merchants who are eagerly awaiting an outcome on fees will have to wait. In October, the regulator outlined a timeline, which highlighted that it would take two years before any conclusions on card fees were made.
Although it can be difficult to keep up with the seemingly continuous regulatory interventions within the payments industry, policymakers are often trying to respond to a market that is arguably going through unprecedented levels of change and market disruption.
With the addition of central bank digital currencies (CBDC), BNPL, crypto and innovations in cross-border payments, it is difficult to predict how payments will be made in five, let alone ten, years’ time.
Whichever way it pans out, end users are increasingly expecting payments that are faster, borderless and frictionless.
For businesses that rely on a continuous flow of payments, meeting these expectations — even in industries that have historically relied on high levels of cash use — will help firms improve their customer experience and gain a competitive advantage.
The battle for your wallet looks set to continue in 2023.
