Payments In 2021: Five Trends Driving Industry Transformation

The unforeseen market shifts that confronted the payments industry in early 2020 remained prevalent throughout the year. These shifts further catalyzed three overarching themes that continue to reshape the competitive dynamics within the payments ecosystem: the rapid growth of digital commerce, the proliferation of emerging payment methods and the development of next-generation payment infrastructure. In 2021, these three inextricably intertwined themes will be at the heart of payments industry transformation and innovation.

While there are no shortage of trends to monitor this year, five in particular have the potential to make a broad impact across the industry. These trends are discussed in greater detail below.

Merchants will reassess the effectiveness of their payment-processing partnerships

High-performing payment infrastructure is needed to accommodate the shifts in payment volume, new customer shopping demands, and changes in the fraud environment that manifested throughout 2020. Not all payment infrastructure is created equal. Many merchants were hamstrung in 2020 by their legacy, siloed payment systems, which stood in the way of the integrated and seamless shopping experiences their customers desire.

Payment infrastructure that can easily transcend sales channels to deliver omnichannel experiences, scale up quickly to support heightened e-commerce volume, and effortlessly enable multiple payment options is now critical to remain competitive and relevant in the eyes of customers. Merchants that were challenged to make the necessary transitions to serve customers effectively in 2020 are likely to begin reevaluating the ability of their payment infrastructure to meet their long-term business needs. This was already becoming a priority before the pandemic, with nearly one in three merchants citing 'modernizing payments infrastructure' as a high-importance payments initiative for their organization, according to 451 Research’s Voice of the Enterprise: Customer Experience & Commerce Q2 2020 Merchant Study. This number is likely to only increase in months ahead.

Fraud-prevention strategies will morph into CX strategies as the mindset around the 'job to be done' evolves

While many merchants can skate by with a generic checkout flow in-store, the stakes online are much higher. Just one friction point can be enough to cause shoppers to abandon their cart and look elsewhere. This is an obvious area for improvement, with 57% of digital merchants strongly agreeing that their approach to fraud prevention makes it challenging to provide a smooth customer experience. In fact, the majority tend to sacrifice their CX in favor of fraud prevention, according to 451 Research's Voice of the Enterprise: Customer Experience and Commerce Q2 2020 Merchant Study.

As e-commerce accelerates, the objective for fraud-prevention teams must broaden to include preserving – and ideally elevating – the customer experience in addition to preventing losses. Enterprises must reimagine their fraud-prevention strategies as a framework for removing excess friction for loyal customers by reducing false declines, streamlining login and delivering a personalized customer journey. Successful execution requires the ability to determine the legitimacy of each customer interaction well before the point of purchase. Fraud-prevention vendors that have augmented their capabilities to help enterprises monitor shopper behavior across customer touchpoints will be increasingly well positioned.

Embedded finance infrastructure will have a breakout year

During the past several years, financial services have become embedded into a wide variety of software and applications peddled by non-bank providers. This trend is widely referred to as embedded finance. It is reshaping the distribution model for financial services while creating a new role for technology companies in the financial lives of consumers and enterprises. It's also posing a growing challenge for financial institutions, which must reimagine how they will attract and retain customers in this emerging tech-influenced banking landscape.

The embedded-finance opportunity remains in the early stages, but the market is quickly waking up to the transformative impact it has had for companies like Shopify, Lightspeed, Square SQ and Grab. 2021 is likely to be remembered as a breakout year for embedded finance, with more technology companies exploring ways to augment their offerings with richer, stickier and more lucrative user-value propositions through the incorporation of financial services. This trend will be accelerated by providers of financial fabric – vendors that deliver the underlying infrastructure for embedded finance. Vendors in this category are helping to completely transform the unit economics for launching a banking product by providing financial services infrastructure on an as-a-service basis. Several dozen startups are taking aim at this market, and funding is flourishing. Stripe's recent launch of Stripe Treasury serves as a major validation of the embedded finance market opportunity and will be particularly interesting to follow as it scales up through 2021.

QR codes will strike back

In the early 2010s, QR codes were widely viewed as a challenger to NFC-based payments. While that has held true in various Asian markets, they have largely fallen out of fashion for open-loop payments in the US. That is beginning to change as a result of COVID-19, and more merchants are likely to introduce QR codes in 2021 as part of a no-contact checkout strategy. Both Square and Adyen have recently introduced pay-by-QR-code payment experiences, where merchants can present a QR code to shoppers (either via POS terminal or printed) that directs them to a link (e.g., pay by link) to complete their payment. PayPal PYPL has unveiled a similar capability in the UK. Other processors are likely to follow suit.

QR codes have also become an enabling technology for several installment payment providers, with Affirm and Klarna leveraging them to extend their capabilities in-store. Notably, Venmo's new in-store payment experience, which is currently live with CVS, also relies on QR codes. It would not be surprising to see additional wallet and payment app providers, such as Google GOOG Pay and Square's Cash App, introduce a similar capability in 2021.

Super apps will enter formative years in the US

Digital wallets have soared to new heights in markets like China and India by encompassing a value proposition that extends well beyond payments. To date, wallet apps in the US have been largely payment-centric, throttling their market opportunity. This is beginning to change. Several US-based players made moves in 2020 toward becoming so-called 'super apps' through the incorporation of diverse capabilities, such as interactive offers, cryptocurrency purchasing, banking services, investments and messaging.

A more concerted push toward a broader digital wallet value proposition is likely to unfold in 2021. Square's Cash App has emerged as a front-runner, but both PayPal and Google Pay have announced app redesigns with a nod toward expanded functionality. Traction of Google's Plex Accounts, which brings banking capabilities into Google Pay, will be worth following closely when it launches in early 2021. If successful, the move could help fundamentally reshape the role of digital wallets in the US.