It’s increasingly common for consumers to pay at the point of sale using Apple Pay or Google Pay. This transaction is made possible by two emerging payments technologies: contactless payments and digital wallets. If a customer has integrated a buy now, pay later option into their digital wallet, that single transaction could include three payments innovations.
Many digital wallets have also begun to support crypto transactions, but the infrastructure behind digital assets is equally crucial to the future of payments. Tokenization, stablecoins, and blockchain have been adopted by financial companies and are increasingly being used to drive innovation and build global connections.
Connectivity is also central to the open banking model that has emerged in recent years. This system is built on financial technology companies that serve as intermediaries between banks and their clients. It’s best exemplified by instant payments, also known as pay-by-bank or account-to-account transactions, where funds move from one bank account to another in seconds.
These five forces—contactless payments, BNPL, crypto, digital wallets, and open banking—have dominated headlines in recent years, and for good reason. These emerging payments trends are driving the future of the financial industry.
Introduction of Emerging Payments
BNPL is often seen as an evolution of layaway, but unlike traditional layaway, consumers don’t have to wait until an item is fully paid off to receive it. Instead, they can split their purchase into smaller installments at the point of sale and receive the product immediately.
BNPL loans have soared in popularity because they often come with no interest or fees, making them an attractive alternative to high-APR credit cards. However, customers who miss a payment may face late fees.
While BNPL is often associated with e-commerce checkout, it is increasingly being supported by digital wallets for a myriad of transactions. A digital wallet is an application that stores payment details and passwords for multiple payment methods in onr plsvr. Popular digital wallets, such as Apple Pay and Google Pay, originate from mobile platforms, which is why they are often referred to as mobile wallets.
The bridge between point-of-sale devices and digital wallets is contactless payment technology. Contactless payments, also known as tap-and-go, use radio frequency identification, near-field communication (NFC) or quick response (QR) code technology to process transactions.
In the U.S., most consumers use NFC to transmit payment data from their smartphones, wearable devices, or cards. In other regions, such as China and India, it is more common for customers to pay by scanning a QR code.
While digital wallets in the U.S. most frequently integrate with credit cards, mobile payments in Brazil or India more often rely on instant payments. These payments are facilitated by third-party technology companies that function as intermediaries between consumers and banks.
Third-party developers drive these transactions, and for the open banking system. One of the central tenets of open banking is unlocking customer banking data for third parties through application programming interfaces (APIs).
Some of the most well-known third-party fintechs are peer-to-peer platforms like Venmo and Cash App. In addition to allowing users to send payments to friends and family, both Venmo and Cash App have added support for cryptocurrency transactions in recent years.
Cryptocurrency is a digital currency that is not issued by any government or central bank. It is supported by blockchain, a network of computers that constantly validate and authenticate transactions. The goal of crypto is to create a decentralized platform where funds can be exchanged without the need for third parties.
Key Trends in Emerging Payments
Although designed to be decentralized, some of the world’s largest financial institutions have increased their involvement in digital assets. Institutional investing has accelerated since the approval and launch of bitcoin and ether ETFs, which allow retail investors to buy and sell crypto as easily as they would buy stocks.
Many of these institutions are finding innovative ways to use blockchain technology beyond crypto. There are a multitude of use cases for tokenization, which is the digitalization of physical assets. A house deed, for instance, could be tokenized, placed on the blockchain, and then bought or sold in near real-time. A token can also be fractionalized and sold to multiple parties.
Along with the growing adoption of digital asset technology, more organizations are leveraging open banking platforms to lower costs and increase efficiency. Instant payments, being secure and real-time, help businesses reduce fraud while enabling faster and more accurate reconciliation.
Another emerging trend for non-financial companies is offering financial products on their platform, known as embedded finance. For example, when a company provides a buy now, pay later option at their e-commerce checkout, the customer isn’t redirected to a separate payment system. Instead, the transaction is embedded within the company’s platform.
BNPL has become a popular addition for companies like Apple, which shuttered its in-house BNPL operations and integrated BNPL options from Affirm into Apple Pay. This integration highlights another trend for digital wallets: they are increasingly storing many of the same items found in physical wallets, including gift cards, loyalty cards, and even driver’s licenses in certain states. Digital wallets can go beyond physical wallets, also storing everything from coupons and tickets to crypto.
The continued adoption of digital IDs is a key trend for digital wallets. One factor hindering wider adoption is that consumers still often have to carry a physical wallet, often simply to house their ID. This duplication leads many consumers to question the need for both a physical and a digital wallet. However, as digital IDs gain ground, digital wallets have the potential to become the only wallet a consumer needs.
Contactless payments will be the primary method for these transactions as digital wallets gain traction. Verifying a digital ID through NFC technology also offers more security. When a customer purchases an age-restricted item like alcohol, they can verify their age without sharing any other personal data with the merchant.
The Opportunities of Emerging Payments
While contactless technology is driving the new payment paradigm, there is still ample room for growth. One of the most important benefits of contactless payments is its simplicity—customers can make purchases while leaving their cash or card in their wallet.
However, QR codes can transmit more payments data, which is why they have been widely adopted in countries where open banking is prevalent. QR codes offer both merchants and consumers added protection against fraud, as well as increased ease of use. When a customer scans a QR code, they can send the relevant payment data without compromising their personal details.
One of the key opportunities for digital wallets is integrating instant payments into the U.S. market. FedNow and RTP are instant payments rails that launched in the U.S. last year. While many financial institutions have joined the networks, their connectivity is often limited. The number of banks fully integrated with these rails is still just a fraction of the U.S. banking system.
BNPL has come much further in the U.S., but there is still the opportunity for expansion, especially among different demographics. BNPL has been most widely adopted by younger and lower-income consumers, leaving an opportunity for the tech to make inroads with older and more affluent consumers.
One of the reasons why many U.S. consumers still use credit cards is the airline miles and cashback perks they offer. These rewards aren’t currently an option with buy now, pay later services, but they could be in the future. There is also the potential for BNPL to become a viable option in cross-border payments.
Cross-border payments are in high demand, yet issues persist with slow payment settlement, complex currency conversions, and country-specific regulations. One of the most promising candidates for facilitating cross-border transactions is stablecoins. A stablecoin is a type of crypto that tracks the value of a fiat currency, such as the U.S. dollar, one-to-one.
Stablecoins are an attractive alternative for organizations because they are less volatile than many other cryptocurrencies. They can be a reliable way to send instant cross-border payments in the situations where they are accepted.
Challenges Facing Emerging Payments
The insufficient regulatory framework surrounding digital assets has become an increasingly urgent issue for the crypto industry, especially in the U.S. The U.S. Securities and Exchange Commission has taken the position that cryptocurrencies are securities, not commodities, meaning that digital assets fall under securities laws. The SEC has initiated enforcement actions against many major crypto players, alleging they are operating as unregistered securities brokers.
Regulators worldwide are concerned that bad actors might use crypto and digital assets to conduct nefarious activities like money laundering and fraud. There has been a rise in fraud attacks across the industry, with decentralized protocols making crypto holders more vulnerable to criminals. Once a crypto owner transfers their assets, the transaction is irrevocable and there are often no consumer protections in place.
That irrevocability is also a challenge for instant payments. Users can be manipulated into sending an instant payment to criminals, leaving no framework for reimbursement. The potential for fraud or misrouting increases with cross-border instant payments.
Another challenge to the adoption of instant payments is that many financial institutions aren’t equipped to invest the time and money required to upgrade their systems. The U.S. has a well-established and efficient banking system, so many businesses and consumers don’t see the benefit in switching.
While many banks and credit unions have successfully undergone digital transformation, they often rely on third-party companies for an increasing number of functions, which can lead to gaps in service. Such was the case with Synapse, where the fintech company failed to do their due diligence with compliance. There is also increased potential for fraud when there are multiple parties that have access to customers’ banking data.
Digital wallets also carry risks of fraud. As digital wallets contain more sensitive data, they become targets for hackers. If a user’s phone is stolen, a criminal can gain access to all the data stored in the wallet.
Though contactless payments are generally more secure, there have been concerns that hackers could intercept contactless payment details at the point of sale, either by installing a device at checkout or standing nearby with a mobile phone.
Fraud isn’t as much of a concern with BNPL, but the industry has attracted regulatory scrutiny because of its lack of consumer protections. BNPL providers aren’t required to report their loans to the New York Federal Reserve like credit card companies, and the skyrocketing growth of BNPL debt has led many to speculate that there is a mounting amount of “phantom debt” that could soon spiral out of control.
The U.S. Consumer Financial Protection Bureau recently issued rules stating BNPL companies must conform to the same standards as credit card companies. BNPL services will have to send monthly billing statements, fully disclose their fees, and handle disputes like their credit card counterparts.
The CFPB has also become apprehensive about the massive amounts of consumer financial data that is available to non-bank companies. To that end, the CFPB has proposed rules that would require digital wallet providers to abide by the same laws that govern banks.
What’s Next for Emerging Payments
Those regulatory concerns aren’t likely to hinder the growth of digital wallets or BNPL. Instead, BNPL services have increasingly expanded their efforts to make BNPL a payment option at brick-and-mortar stores.
There may also be growing support for instant payments at U.S. One factor that will drive the traction of instant payments is collaboration between instant payment networks and merchants to offer loyalty rewards or discounts that can compete with credit cards. The industry also has room to improve its consumer protections.
One way to ensure transactions are accurate and secure is through biometric authentication. While contactless payments are currently accomplished through a mobile device, there have been pilot programs for customers to pay by facial recognition or fingerprint verification. These purchases are faster and much more secure, which is why biometrics have been adopted by many digital wallet providers.
Digital wallets are set to become the central hub of payments behavior, and one of their main integrations will be increasing support for crypto, stablecoins, and central bank digital currencies. CBDCs are like stablecoins that are issued and backed by a government instead of a private company.
Conclusion
In addition to tokenization and stablecoins, blockchain will be a powerful driver for payments because it provides a highly secure infrastructure for real-time transactions. Although there has been some uncertainty in the U.S. about digital assets technologies, the EU has begun to define a framework for crypto regulation that could serve as the blueprint for other countries to follow.
Any emerging payment method will be subject to regulatory scrutiny, but a clearer framework should only serve to guide the financial technology industry as it shapes the way forward. There are proven use cases for BNPL, digital wallets, contactless payments, crypto and open banking, and that will continue to drive these technologies—and the payments industry—forward for years to come.
