With the Covid pandemic decreasing offline transactions by 60%, it comes as no surprise that the payments industry is undergoing a quiet revolution.
Understanding PayTech
Paytech, as the intersection of payment and technology, is at the centre of this transformation. As a sub-industry, it includes everything ranging from the Internet of Things and cryptocurrencies to your everyday contactless transactions and eWallet transfers. In one short phrase, Paytech is the future of payments.
Paytech, as the name suggests, is any payment that involves technology. It’s an industry that is considered a subsection of the financial technology (i.e. fintech) industry but focuses on transactions and payments rather than finance as a whole.
What is there to understand about payments?
The main idea behind Paytech is that before, payments were just an exchange of money. But now with wearables, innovations in payment methods, and embedded finance, transactions play a much larger part in someone’s life. As more people switch to mobile and digital payments, the payment experience is being completely reinvented - which means so is the customer experience. This turns payments into a branding opportunity rather than just a simple transaction.
With mobile and digital payments, there is an infinite opportunity to use innovation and technology to rethink the customer experience. With globalization, cross-border payments play an even larger role than before. And with convenient payment methods, we’re fundamentally changing the way people interact with money.
PayTech Industry Overview
The Paytech industry is growing rapidly every year due to the steady increase in digital payments. According to Capgemini’s 2020 World Payments Report, global non-cash transactions grew by 14% and totaled 708.9 billion in 2019 - the highest surge in the last 10 years (and that’s before the pandemic!). According to ACI Worldwide, global e-commerce sales experienced a 209% growth compared to the same period last year. And finally, e-wallet adoption rates - a sector that usually remains stagnant in the West - have finally started increasing in countries like the US.
The Paytech industry is booming, and thanks to new regulations and initiatives such as PSD2 and Open Banking, it seems it’s only getting started. With the Covid pandemic encouraging consumers to stay away from cash, it seems that cashless transactions are continuously on the rise, with some predicting 1.3 billion mobile payment transaction users in 2023.
Different Players in the PayTech Industry
There are different companies and organizations that play various important roles within the Paytech industry itself. These range from direct to consumer companies, payment processors, acquiring banks, card issuers, and more. Here’s a short summary of some of the different players in the industry:
Electronic Money Institutions (EMI): EMIs are organizations that do not hold a banking license and partner with other players to offer their services. They need to meet certain capital requirements and can issue electronic money.
Card network: card networks are companies like Mastercard and VISA that enable transactions between merchants and card issuers. They build the infrastructure and charge interchange fees to process card transactions.
Acquiring and issuing bank: the issuing bank issues payment cards to consumers or businesses on behalf of the card networks, and the acquiring bank maintains the merchant account and processes their card transactions.
Payment gateways: this is the software used to transmit transaction information between the customer and the acquiring bank.
Payment Service Providers (PSP): these provide a connection to the acquiring bank and act as a third party between the merchant’s account and a customer’s account. They essentially offer transaction management from end to end. This allows businesses to outsource nearly all of the payment processing to a third party. FinXP is an example of a PSP.
All these players are part of the Paytech industry, which is a smaller piece of the entire financial services industry.
Payments Regulation and Compliance
One of the main obstacles within the Paytech industry is that it is heavily regulated and requires payment companies to remain highly compliant. Over the past few years, we’ve seen quite a few new regulations and initiatives in place that have set the direction for the payments industry:
2017: SWIFT, the international payments network, develops 27 new protocols in order to further secure the payment environment.
2018: GDPR took effect in May 2018 and redefined what it meant to protect customers’ data, with big fines for noncompliance.
2018: several new Anti-Money Laundering (AML) directives came into force to reduce the number of prepaid cards and enforce a more restrictive verification of customers.
2018 and 2019: PSD2 is introduced, obliging several traditional banks to make their data shareable to third parties.
Some of the above regulations can make it difficult for payment institutions to remain compliant due to high costs and constant upgrades. Having said that, other initiatives such as PSD2 are seen to be innovative since they encourage more competition and innovation in the payments space.
PayTech and the Future
Looking towards the future, what will become of Paytech? Thanks to the rapid acceleration towards digital, we can only assume that it’s an industry that will become even more prevalent. It might be so prevalent, in fact, that it might cease to exist as a separate entity; payments will become so embedded into branding and customer journeys that we may not even need a name for them.
Here are a few interesting developments:
Omnichannel experience with IoT devices: customers will be able to pay with all sorts of wearables and will be able to switch seamlessly between the online and offline world.
Blockchain technology: safe, instant, and low-cost payments will drastically reduce friction between payments.
P2P payments: transferring funds between people will become more normal than ever before.
Personalised solutions with Big Data: companies armed with payment and customer data can offer a personalised experience to their customers and use money as an incentive.
As the Paytech industry grows, more companies within the space are being acquired or merging with other companies, such as Coinbase acquiring Blockr in 2014 and SumUp merging with Payleven.
Customer expectations are constantly changing too. As consumers trust their banks less and their favourite brands more, payment institutions like FinXP can help companies build longer-term relationships with their customers.
As we said earlier, Paytech is another word for the future of payments. Like “internet company”, the terms “fiat payment” or “offline payment” will soon be obsolete. Most payments will be online and digital, and will therefore be based on technology. 2020 saw the industry grow at an unprecedented rate, and we can only see this expanding throughout the rest of the decade.
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