In this overview, we will delve into the latest trends shaping the digital payments sector in Europe, exploring the rise of contactless payments, the expansion of Open Banking into Open Finance, the emergence of Embedded Finance, and the growing role of cryptocurrencies. Each of these trends offers a glimpse into the future of payments. Digital, seamless, and secure transactions will be the norm.
About Digital Payments
Digital payments, a broad term encompassing various electronic transactions, have revolutionised how we conduct financial exchanges. They offer a seamless, quick, secure alternative to traditional cash-based transactions. Their adoption is rapidly increasing across the globe.
Mobile Wallets: Mobile wallets, such as Apple Pay, Google Pay, and Samsung Pay, are applications that store your credit or debit card information on your mobile device, allowing you to make payments directly from your phone. They offer the convenience of carrying all your cards on one digital platform and the ability to make contactless payments at physical stores.
Online Banking and Bank Transfers: Online banking and bank transfers are another form of digital payment. They allow users to transfer money directly from their bank account to another online account. This method is commonly used to pay bills, send money to individuals, and purchase online.
Peer-to-Peer (P2P) Payments: P2P payment platforms, such as Venmo and PayPal, enable individuals to send money to each other instantly via an app. These platforms are often used to split bills, pay friends, or transfer money to family members.
Cryptocurrencies: Cryptocurrencies, such as Bitcoin and Ethereum, represent a more recent development in digital payments. These digital currencies use blockchain technology to enable secure, decentralised transactions. While not yet widely accepted for everyday transactions, cryptocurrencies are becoming increasingly popular for investment and speculative trading.
Contactless Cards: Contactless cards are a form of a card that uses Near-Field Communication (NFC) technology to make secure payments. Users can make quick and easy payments without needing to enter a PIN by tapping the card on a compatible card reader.
Digital Currencies: Digital currencies, such as Central Bank Digital Currencies (CBDCs), are a new form of digital payment currently being explored by various countries’ central banks. These digital forms of national currencies aim to provide the benefits of digital payments while maintaining the stability and trust associated with traditional currencies.
Regulatory Push for Instant Euro Payments
Cross-border payments, a vital cog in global commerce, have recently been the focus of significant attention and innovation. Regulators, particularly within the European Union, have been instrumental in pushing for instant euro payments, aiming to streamline transactions and foster economic growth across borders.
This initiative is part of a broader global effort, with the G20 Roadmap prioritising the enhancement of cross-border payment systems and advocating for greater interoperability.
The COVID-19 pandemic has accelerated this shift towards digitalisation. Over half of organisations worldwide have reported increased payment volume via Automated Clearing Houses (ACH), digital wallets, Real-Time Payments (RTP), and virtual cards, replacing traditional methods such as checks and cash.
This trend has been amplified by public and private payment systems and regulators, who recognise these digital platforms’ efficiency and security benefits.
The Rise of Digital Wallets in Europe
Over the past three years, the transaction value of digital and mobile payments in Europe has surged by over 30%, with the number of cashless payment users predicted to exceed 700 million by 2023. This rise is driven by consumer preference for digital payments, the desire for easier cross-border transactions, and the forthcoming launch of the European Digital Identity Wallet.
Digital wallets, or e-wallets, securely store and encrypt identification and payment information, simplifying customer payments and reducing merchants’ fraud risk. Popular digital wallet apps include PayPal, Apple Pay, and Samsung Pay, but preferences vary widely by country and region. For instance, YooMoney and QIWI are favoured in Russia, iDEAL in the Netherlands, and PayPal in Germany. At the same time, credit cards remain the preferred form of payment in the UK.
With only around 23% of online transactions conducted via credit cards worldwide, alternative payment methods like bank transfers and e-wallets are gaining popularity. To navigate this evolving landscape, businesses are turning to fintech partners like Rapyd to provide seamless access to all customer payment options. As digital wallet adoption is projected to exceed 1.3 billion consumers globally, offering flexible payment methods, including digital wallets, credit cards, bank transfers, or cash, is becoming essential for businesses to reach new markets and grow sales.
The EU Digital ID Wallet: A New Era of Payment Authentication
In the digital age, securing payments against fraud is paramount. Europe’s revised Payment Services Directive – Finance mandates Strong Customer Authentication (SCA) for all businesses processing payments, bolstering consumer protection. The Anti-Money Laundering Directive (AMLD) further safeguards against illicit activities. The EU Digital ID wallet, set to launch in 2023, is poised to enhance these measures, offering seamless verification for safer payments.
The European Digital Identity is a biometrically secured digital wallet that links users’ national digital identities with personal details, providing a single digital identity for accessing public and commercial services across the EU. It offers quick, secure identity verification and added security for digital payments and online transactions.
The wallet aims to streamline ID verification and payment processing, offering a fool-proof authentication tool that simplifies Know Your Customer (KYC) and onboarding processes. This leads to faster authentication and secure payments. Additionally, the wallet aids in fraud prevention by ensuring the legitimacy of every transaction, thereby enhancing customer satisfaction.
The EU Digital ID will simplify identity verification and authentication while ensuring user data privacy. It will foster trust between buyers and sellers, reduce compliance costs for businesses, and promote safe online transactions. As mobile wallets become increasingly popular, integrating payments and identity under a single framework will make verification and payment processing more seamless, driving further growth and innovation in the payment industry.
Instant Payments: The Future of Digital Finance in Europe
Instant payments, settled virtually in real-time, are set to challenge traditional cards or wire transfers, potentially becoming a gateway to digital finance across the single market.
Europe already accounts for over half of the global market in instant payments, with adoption accelerating tenfold between 2019 and 2021. These payments offer versatility, speed, certainty, and cost-effectiveness. However, challenges persist, including voluntary participation by Account Servicing Payment Service Providers (ASPSPs), inconsistent adoption across countries, prohibitive costs, lack of interoperability between Clearing and Settlement Mechanisms (CSMs), and a low transaction limit.
Despite the widespread availability of instant payments in Germany, only 25% of Germans use SCT Inst. more frequently than conventional transfers, primarily due to higher costs. However, 69% of German consumers would use instant payments without fees, indicating potential for broader adoption.
To ensure instant payments become the gateway to digital finance, the Commission should mandate adherence to SEPA Instant Credit Transfer, support both sending and receiving instant payments, make instant payments free for consumers, provide more protection on payment certainty for merchants, and assure consumers that instant payments are less risky than alternative payment options.
The Future of Cross-Border Payments
The ongoing efforts to improve cross-border payments are not just about convenience; they are about creating a more inclusive and efficient global financial system. As we move forward, the role of regulators and the adoption of digital payment methods will continue to shape the landscape of cross-border transactions.
Understanding Central Bank Digital Currencies
Central Bank Digital Currencies (CBDCs) represent a new frontier in finance. They are essentially a digital form of a country’s fiat currency, issued and regulated by the central bank. Unlike decentralised cryptocurrencies, which operate independently of a central authority, CBDCs are centralised and maintain traditional money’s stability and regulatory oversight.
Potential Benefits of CBDCs
The potential benefits of CBDCs are manifold. They promise to enhance payment efficiency, reduce transaction costs, and improve financial inclusion, especially in regions with limited access to traditional banking services. Furthermore, CBDCs could provide a more secure, traceable form of money, aiding the fight against financial crimes such as money laundering and fraud.
Countries Exploring and Launching CBDCs
Several countries around the globe are exploring the concept of CBDCs, with some having already launched their digital currencies. China, for instance, has been at the forefront of this movement, having launched a pilot for its Digital Currency Electronic Payment / Digital renminbi (DCEP) system. The Bahamas has also launched its “Sand Dollar” digital currency. Meanwhile, other countries, including the UK, are actively exploring the potential of launching their CBDCs, often referred to as “Britcoin” in the case of the UK.
As we move forward, the exploration and adoption of CBDCs will undoubtedly continue to shape the landscape of global finance, offering new possibilities and challenges in equal measure.
Demystifying Stablecoins
Stablecoins, a type of cryptocurrency, have emerged as a significant player in the digital currency landscape. Unlike their more volatile counterparts, such as Bitcoin or Ethereum, stablecoins are designed to maintain a stable value. They achieve this by being pegged to a reserve of assets, typically a fiat currency like the US dollar or a commodity like gold. This pegging mechanism provides the stability that gives stablecoins their name and makes them an attractive option for those seeking the benefits of digital currency without the associated volatility.
However, the rapid growth of the stablecoin market has not gone unnoticed by global regulators. Concerns have been raised about the transparency of the reserve assets backing these digital currencies and the potential systemic risks they could pose to the financial system. Regulators worldwide are scrutinising stablecoin operations, with calls for comprehensive regulatory frameworks to ensure their safe and transparent process.
The Evolution of Open Banking to Open Finance
Open Finance is an extension of the principles of Open Banking. In this system, banks and other financial institutions provide access to their data to third-party providers (TPPs) via Application Programming Interfaces (APIs). While Open Banking primarily focuses on sharing data related to payment accounts, Open Finance broadens this scope to include a broader range of financial products such as savings, pensions, insurance, and mortgage data. The aim is to provide consumers with a more comprehensive view of their financial situation and to foster competition and innovation in the financial services sector.
In the Open Finance ecosystem, TPPs play a crucial role. They use the data shared by financial institutions to build new and innovative financial products and services. These can range from personal finance management tools to more competitive insurance products designed to give consumers more choices and better control over their financial lives.
Unpacking Embedded Finance
Embedded finance is a burgeoning concept in fintech that integrates financial services into non-financial platforms. This means that companies, regardless of their industry, can offer financial assistance directly to their customers without them having to leave their platform. The goal is to enhance the customer experience by providing seamless access to financial services, thereby increasing customer engagement and loyalty.
Technology solutions such as Banking-as-a-Service (BaaS) and API-driven platforms have facilitated the rise of embedded finance. BaaS allows non-banks to connect with banking systems and offer financial services. At the same time, APIs provide the necessary interfaces for these integrations. These technologies enable companies to embed financial services into their platforms, creating a more integrated and seamless customer experience.
Pandemic-Induced Shifts in Payment Methods
The COVID-19 pandemic has significantly altered the landscape of financial transactions, with safety concerns over face-to-face interactions and the handling of cash or checks driving a shift towards contactless payments. Traditional payment methods, such as checks and cash, which require unnecessary touchpoints and often involve face-to-face interaction, became a safety issue during remote operations.
In response to these concerns, many European countries have increased the transaction limit for contactless card payments. This move reduces the need for physical contact at payment terminals. It makes it easier for consumers to make larger purchases without using cash or entering their PIN.
Trends in Digital Payments
Innovation is reshaping the EU’s payment landscape, opening up business opportunities and altering the future of digital payments. Five key trends are at the forefront.
Digital Currency and Identity
The advent of a central bank digital currency and a European digital identity wallet creates a unified pan-European payment solution. The digital euro, currently under investigation, is expected to enhance the use of public money for digital payments across the euro area by 2025.
Real-Time Payments on the Rise
New regulations and the growth of mobile commerce are driving the rise of real-time payments across the EU. This trend is expected to continue, with the European real-time payments market set for significant growth from 2022 to 2027.
BNPL, Revolutionising Online Shopping
Buy now pay later (BNPL) schemes are revolutionising online shopping, making it more accessible through easy financing and flexible repayment options. Its soaring popularity fosters strategic partnerships between traditional banks, retailers, and fintech players in the EU.
The Rise of Digital Wallets, RTP, Cards, and ACH
Organisations are planning to aggressively increase the usage of digital wallets, Real-Time Payments (RTP), cards, virtual cards, and Automated Clearing House (ACH) payments. These digital platforms offer numerous advantages over traditional payment methods, including increased speed, security, and convenience. Conversely, there is a clear intention to decrease the usage of dated, paper-based methods like checks and cash, which are less efficient and pose more significant security risks.
Cryptocurrency: A Growing but Niche Market
Interestingly, a sizable percentage of organisations also intend to increase their usage of cryptocurrencies. However, many organisations identified cryptocurrency as a means of paying vendors as not applicable to their business, suggesting that while crypto is growing in popularity, it remains a niche market in the broader context of digital payments.
