Technology and the digital age are triggering major changes in all sectors of the economy. The application of technology in the financial sphere has given rise to the fintech phenomenon, which comes from the English words financial technology and refers to the union of digital technologies and financial services.
Within the fintech framework, we find many different areas, also called verticals, ranging from alternative financing, cryptocurrencies, and personal finance to payment methods, transactional services, and neobanks, among others.
This post focuses on the payment methods segment, where a real revolution is taking place due to the emergence of new alternatives (digital wallets, blockchain platforms, phone bill payments, etc.).
Why is it the main fintech vertical in 2021?
The impact of fintech on payment methods has triggered a revolution due to the emergence of new digital alternatives, such as e-wallets or P2P (peer-to-peer) platforms. To this phenomenon, we must add the public health crisis caused by COVID-19, which has put the global economy in a situation of uncertainty.
In the payments sector, a series of trends in the behavioural habits of consumers and businesses have accelerated:
In short, half a decade’s worth of change has taken place in just a few months in areas that are slow to evolve, such as payment operating models. However, the changes were not uniform across sectors or geographies during the first half of 2020, according to the McKinsey Global Payments Report:
In Europe, differences in shopping behaviour between countries narrowed dramatically, as many older consumers turned to online shopping for the first time.
However, the COVID-19 pandemic has not been the only trigger for the financial technology revolution. Long before that, changes brought about by blockchain technology, artificial intelligence, the internet of things, and quantum computing began.
Payment methods include all those entities whose main objective is to provide payment services, mainly online, through mobile devices and electronic platforms. It is the most relevant segment within the fintech sector and includes:
Local payment schemes going international, the rise of APM (Application Performance Management) software that reduces merchant processing costs and opens up new markets, the development of mobile POS, contactless payments, and QR code, among others, are also part of this revolution.
Not surprisingly, payment methods are at the forefront of the fintech phenomenon. The emerging economies of countries such as Brazil, Russia, and China are experiencing very rapid growth and the highest penetration of digital payment methods.
On the one hand, China is the largest fintech market in the world thanks to its leadership in digital payments. On the other hand, the United States ranks second due to the powerful innovation in financial technology.
How do payment methods influence the younger generations?
Beyond the technological evolution and the behavioural changes generated by the COVID-19 pandemic (reduction in the use of cash, less cash withdrawals at ATMs, increase in contactless and increase in eCommerce purchases), we must highlight the importance of social aspects as a driver of change in the sector.
The new generations X and Z are increasingly familiar with the use of technology and are looking for immediate services. Millennials and centennials are likely to increasingly rely on payment services and non-traditional financial service providers. This not only generates a change in consumer behaviour, but also attracts the attention of new competitors.
Examples include Asian giants Alibaba or Tencent, whose technology platforms continue to innovate to provide an excellent user experience. For example, Tobao, China's largest eCommerce platform, plans to create retail stores to attract young consumers.
Innovations in the payment sector range from transaction services, such as payment gateways, to traditional media, such as cards and physical POS.
Two of the most widely used means of payment today are:
Although mobile payments are currently the main fintech vertical, this ecosystem is much broader.
Payment methods alone cannot cope with the disruption of financial technology. In fact, there are other financial trends driving the long-term growth of fintech, such as Buy Now Pay Later (BNPL) services and enterprise cloud solutions for financial firms. (Global X)
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