Five trends shaping the payments infrastructure revolution

The payments industry is under construction. From rails to regulation to currencies, nearly every element of the global payments infrastructure and ecosystem is undergoing a rebuild.

This period gives infrastructure players and various other payments market stakeholders a unique opportunity to define the future of payments and their roles within it.

Five trends reshaping payments

Several overlapping developments have thrust payments infrastructure providers into the forefront.

Infrastructure investment is reaching a tipping point

The payments industry faces heightened pressure to innovate—and this pressure is driving greater investment in payments infrastructure.

For example, banks are updat­ing their core infrastructure and accelerating their move to the cloud to operate more efficiently and compete with digital challengers.

Payments schemes are introducing richer data formats to enhance interoperability, expand data collection, and enable richer remittance information.

And more countries have adopted instant payments de­ployment. Before 2010, only a handful had RTP infrastruc­ture. Today, 81 countries have it, and that number is growing.

New payments rails are gaining momentum

In many parts of the world, APMs are taking share from cards. BCG’s Global Payments Report 2023  forecasts that APMs will grow twice as fast as person-to-merchant payments from 2022 to 2027.

As interest in APMs grows, infrastructure providers are expanding use cases beyond consumer transactions.

For example, since 2021, person-to-merchant and person-to-government transactions on Brazil’s PIX rail have seen their share of the total payments mix grow from about 25% to roughly 40%.

Globally, many merchants now consider the availability of APMs to be an important selection crite­rion when choosing a payments provider.

Beyond person-to-merchant payments, APMs are expand­ing into cross-border payments as well. Various initiatives to create interoperability between different alternate pay­ment methods are underway.

They include the Immediate Cross-Border Payments (IXB) pilot, Nexus, and the Asian Payments Network (APN). In addition, the European Mo­bile Payments Systems Association is exploring intercon­nectivity between APMs.

Central bank digital currencies are still a few years away

Over 90% of central banks are exploring central bank digital currencies (CBDCs), and there could be up to 15 retail and 9 wholesale CBDCs in circulation by 2030, according to the Bank for International Settlements.

These currencies will have widespread impacts on the entire payments ecosystem, making the design choices that go into them exceedingly complex.

Central banks and market participants must assess whether to use digital ledgers or pure blockchain, and whether to revert to a traditional payments infrastructure or use a hybrid of these technolo­gy options.

They also need to determine what limits to set on individual holdings, how best to protect data security, and how to ensure interoperability with domestic and global payments infrastructures. Getting the design right can unleash enormous benefits.

In addition to permitting greater monetary autonomy and financial inclusion for central banks and governments, CBDCs will enable broad­er industry applications.

Among the most exciting of these are programmable payments and the ability to integrate CBDCs into smart contracts and other forms of decentral­ized finance.

Engaging a broad spectrum of market partici­pants will be crucial to battle-testing the design phase of the rollout and minimizing any threats to the stability of financial market infrastructure.

Open Banking could finally deliver on its potential

Open Banking adoption has fared better in places that had lower barriers of entry for fintechs, such as through a sup­portive regulatory framework, the presence or absence of an advanced payments infrastructure, and generally attrac­tive market conditions.

In the US, for example, ACH pro­cessing used to take several days, making account and balance validation a lengthy process, but open banking has streamlined these steps, helping fintechs onboard and validate customers in a more seamless way.

In Europe, where Open Banking has had mixed success, PSD3 promis­es to broaden the scope of data included in Open Banking and enable greater standardization and access, removing barriers that have hindered the pace of adoption for many years.

Expanded access to data and greater standardiza­tion will allow infrastructure providers to offer a rich assort­ment of use cases, including real-time customer acquisi­tion and onboarding decisioning, and digital identity verification.

The changes can also enable newer payments forms to operate on real-time payments rails such as recur­ring and push payments.

Banks are also interested in participating in Open Banking to ensure that they fulfil regulatory mandates and to fend off competition.

Infra­structure providers can support banks with solutions that make compliance with regulatory mandates easier to review and allow banks to leverage Open Banking innova­tions for commercial applications.

Open Banking is not a product class of its own, however. The viability of various market solutions will depend on how participants leverage the infrastructure.

Regulators are raising the bar

Governments are be­coming more active in regulating payments, and this activi­ty is affecting the operations of some payments infrastruc­ture providers.

The Reserve Bank of India, for example, temporarily banned some card networks from issuing new cards because of noncompliance with local data storage rules.

And in Europe, the European Commission has pub­lished draft proposals for PSD3, Payment Service Regula­tion, and Regulation for Financial Data Access to reduce fraud levels, improve consumer rights, and create a more level playing field between banks and nonbanks.

In addi­tion, local rails, scheme issuance, and cobadging could cut into revenue growth for cards companies and impose new requirements for data security and operations.