Many merchants are hesitant to take the plunge on new payment methods because they are concerned about the time or resource investment, as well as the ever-present threat of fraud.
However, in many cases, the benefits of adopting emerging payments dramatically outweigh the drawbacks. For instance, many younger consumers might not qualify for a credit card, but they can qualify for a buy now, pay later loan, which typically requires only a soft credit check. Adding BNPL support could aid a merchant in making inroads with a younger clientele.
Though mobile payments might often be associated with a younger demographic, contactless payments and digital wallets have reached ubiquity among all ages. The current use cases for these methods are only the tip of the iceberg—tap-to-phone contactless technology could revolutionize payments for small businesses, and digital wallets can give loyalty programs a substantial edge.
Instant payments are a fixture of daily life in many countries, and the open-banking staple has the potential to be just as impactful for U.S. merchants. The same goes for crypto and digital assets, which can connect merchants to a global highway.
Because these five payment trends—contactless payments, BNPL, crypto, digital wallets, and open banking—will dominate the future payments landscape, merchants should consider ways to integrate them.
Contactless Prevalence
The heartbeat of emerging payments is the mobile phone. Contactless payments gained traction during the pandemic because they are more hygienic than other payment methods. After the pandemic faded, contactless payments have continued to pick up steam because they are effective and secure.
Tap-to-pay transactions don’t include a customer’s account details, so a consumer must physically initiate the transaction, which makes it more difficult to send a contactless payment accidentally.
They are also faster—contactless transactions usually require a single action, like tapping a card or pushing a button on an app. Point-of-sale card transactions can often lag due to card approval times or PIN entry, and cash transactions are even less efficient.
Due to those benefits, customers have come to expect contactless options, and the demand will only increase. Though contactless payments are here to stay, tap-to-pay transactions are only half of what a mobile phone can do in the payments realm. The technology exists for tap-to-phone payments, in which the same contactless payment chip that smartphones use to transmit payment data can receive payments, giving almost any phone the capability of being a payment terminal.
Adopting tap-to-phone is a game-changer for smaller businesses or gig economy merchants who don’t have the need or the resources to purchase regular terminals. A business owner could receive contactless payments on their phone from contactless-enabled cards and mobile devices.
“Once the use cases manifest themselves, tap-to-phone will become increasingly popular,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research, in a conversation with PaymentsJournal. “There is a growing middle ground where individuals need some business capabilities on their personal account. We’re at a tipping point where, even going into next year, we’re going to see tap-to-phone become far more prevalent than it has been.”
A Path for Digital Wallets
Though many contactless payments are made without digital wallets, ease of use has made digital wallets an increasingly popular option. Mobile wallets like Apple Pay and Google Pay give customers a way to store their credit and debit cards and make faster transactions at the point of sale.
Simpler transactions will reduce wait times and increase customer satisfaction, and digital wallets also offer an additional way for businesses to interact with customers. For instance, Starbucks’ mobile app integrates directly into a digital wallet that allows customers to make payments, earn rewards, and order ahead.
The loyalty aspect is critical because it can drive engagement and fuel repeat purchases. Digital wallets also provide merchants with invaluable data about consumer spending habits, allowing for targeted marketing and personalized offers.
Beyond loyalty, digital wallets can store a range of items useful to consumers, including coupons, tickets, and gift cards. However, one of the barriers to digital wallet adoption is that many consumers still have to carry their physical wallet to house their ID. For digital wallets to surpass their physical counterparts, digital IDs must become more prominent.
Digital ID programs have lagged in many U.S. states, and merchants likely feel they have no power to move legislation forward. However, digital identification regulations are often developed with merchants’ preferences in mind, so business owners can have a say in digital ID acceptance, standards, and training in their industry.
“Those are all good things, but most businesses aren’t going to take that initiative on their own, especially smaller businesses,” said Christopher Miller, Lead Emerging Payments Analyst at Javelin Strategy & Research. “There’s an opportunity here for payments providers to supercharge digital ID acceptance by providing guidance to their merchants. It could differentiate them from other financial companies and potentially create a path forward for digital wallet acceptance.”
BNPL Expansion
Another key trend for digital wallets is support for more payment types, such as BNPL services. BNPL has become an established payment method in a short time, and brands like Klarna, Affirm, and Afterpay make deals with large merchants on a near-daily basis.
Consumers of all walks of life have been attracted to the plans because they can split a purchase into installments and avoid the high interest rates and late fees that often come with credit cards. Even in brick-and-mortar stores, customers increasingly expect to break their transactions into installments.
“The main selling point for merchants is that BNPL has been touted to increase the average order volume by 2% to 3%,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “However, the business has to pay a fee to support BNPL, which can range from 3% to 10%, depending on the type of financing that’s offered. The merchant will have to decide if the sale is worth the fee.”
Though it might not be right for every merchant, BNPL is a must-have for businesses that have traditionally supported installments or financing, such as appliance and electronics stores. BNPL has also gained traction in the travel industry.
BNPL companies have worked to expand beyond big-ticket items to everyday spending categories. Because consumers are increasingly returning to stores, many BNPL companies have adapted to offer physical cards, but there are still more use cases for BNPL.
“The big BNPL companies like Affirm and Klarna are moving beyond simply partnering with merchants, and they are aggregating information from many businesses into their e-commerce platform,” Danner said. “It’s like their own marketplace, which of course features the financing options they offer at various businesses. For merchants, there is the opportunity to be featured in Affirm or Klarna’s marketplace, which can drive sales.”
Opportunities in Open Banking
The emerging open-banking model also offers new ways for merchants to reach customers. In open banking, consumer financial data is opened to third parties—through the approval of the consumer—to hasten digital transformations. Merchants can also realize that benefit, and it comes with substantial freedom. Businesses are able to shop around for the best rates on loans and financial products.
Instant payments are the pulse of open banking, and merchants can leverage them to make secure and efficient payments to suppliers and partners. Real-time settlement also facilitates reconciliation and other accounting functions.
Instant refunds can bolster customer satisfaction in the event of a warranty claim or a return. If a merchant relies on contractors or gig workers, it can offer real-time payouts to keep those partners engaged.
Though some merchants might be hesitant to adopt bank-to-bank transfers, there are two instant payment rails—FedNow and RTP—that are firmly established and connected to an increasing number of financial institutions.
Adoption of Instant payments will gain traction as more Americans become comfortable with paying by bank and as there is a more established regulatory framework. To the latter end, the Consumer Financial Protection Bureau has just released its long-awaited rules to govern open banking, which are set to go into effect in just two years.
Digital Assets
The regulatory environment around digital assets and crypto has been much more contentious, and that could be one reason merchants might shy away from accepting crypto payments. However, key innovations in digital assets offer substantial benefits for businesses.
For instance, blockchain technology can be much more than a highway for crypto; it can be a secure infrastructure for digitizing and verifying all sorts of assets. Tokenization is the process of creating a digital version of a physical asset, and it can be a boon for merchants in industries that rely on paper documentation.
An auto title or a house deed could be tokenized and transferred in the fraction of the time it takes to conduct the process through physical documentation. A tokenized asset can be bought and sold in real time, and it can also be easily fractionalized and sold to multiple parties.
Stablecoins might be the digital asset technology that has the most widescale impact on merchants. The volatility of cryptocurrencies is well-documented, but major stablecoins are built to track a fiat currency, such as the U.S. dollar, one-to-one.
One of the most compelling use cases for stablecoins lies in cross-border payments. Despite increased demand for cross-border transactions, there can often be issues with sluggish payment settlement, difficult currency conversions, and country-specific regulations.
Stablecoins can be an instant cross-border solution, which is one of the reasons some of the biggest companies in the financial industry have invested heavily in the technology. PayPal has launched its proprietary stablecoin, PayPal USD (PYUSD), which has quickly gained traction.
Stripe initiated support for Circle’s USDC stablecoin on its platform and saw transactions processed in 70 countries on the first day of the service. The company then made one of the largest acquisitions in crypto history with its $1.1 billion purchase of stablecoin company Bridge.
As stablecoins receive more support from payments processors, they become a compelling option for merchants who have, or wish to realize, a global reach for their businesses.
Early Adopters
Though emerging payment methods can make an impact on a global scale, they can be just as significant for a local artist who sells paintings at a farmer’s market. Merchants that support multiple forms of payment can increase customer satisfaction and save significant time and expense in the long run.
Though there are always concerns with new payment methods, the well-established use cases for BNPL, digital wallets, contactless payments, crypto, and open banking will keep them relevant for years to come, and new use cases will continually emerge. As the future regulatory framework takes shape, merchants that are early adopters of emerging payments could reap powerful benefits.
