NFTs, rewards, buy now/pay later: Front lines of payments in 2022

December 26, 2021 9:00 PM

The wave of innovation that accompanied the pandemic is far from over. Already, the move to remote work and digital commerce has reshaped how people handle retail shopping, cryptocurrency, B2B payments and cross-border transactions.

The seismic shift began last year, when COVID-19 caused in-person card payments to decline by 11.7 billion transactions, or 13%, from 2019. Simultaneously, online and in-app payments rose by 8.7 billion transactions, or 24%, according to data the Federal Reserve released in December.

Pressure to improve the speed, accuracy and security of payments increased, pushing crypto closer to the mainstream. Now central banks around the world — including China — are flirting with the launch of their own digital currencies.

Fintechs are enabling many of these new payment innovations, and in some cases they're directly challenging traditional financial services providers. In others, fintechs are partners instead.

The interplay between fintechs, banks and credit unions has never been more dynamic, and it will likely become even more so in 2022. Here are the top trends to watch:

Bloomberg

NFTs

The payments market got its first taste of nonfungible tokens in the past year, and the initial buzz may soon give way to more diverse uses for financial institutions.

“NFTs are easy to understand, that’s the plus," said Kosala Hemachandra, CEO and founder of MEW, a Los Angeles-based cryptocurrency firm.

NFTs are digital assets that represent art, music, gaming, videos and other content. Visa and Mastercard and the blockchain firm Ripple are among the payment companies that have

taken an interest

in NFTs. There's potential payment flows in the buying and selling of NFTs, for example.

Since NFTs usually are tied to visual imagery, they can also feel less abstract than cryptocurrency does.

"Similar to collectibles in the real world, NFTs can easily be explained as collectibles in the digital world," Hemachandra said.

Enterprise adoption of NFT technology will come in waves, from nonprofits tracking donations on the blockchain to more marketing opportunities with NFTs, according to Joel Edgerton, head of Americas for Ledger Enterprise Solutions, a Paris-based blockchain technology company.

In 2022, physical items such as car titles and house deeds, for example, will become NFTs, Hemachandra said. "With every new wave, NFTs bring something new to the table, which means we haven't even seen the full potential of NFTs yet. That’s where legal documents and payments come into play."

Credit card rewards

Credit card reward programs survived a major test during the pandemic, when card spending slowed and travel rewards became largely irrelevant. Card issuers quickly

pivoted their loyalty programs

to reward customers for ordering takeout food and Netflix subscriptions, among other stay-at-home activities.

Some of the issuers of pricier travel cards waived annual fees and extended elite status to keep their cards at the top of grounded travelers’ wallets. The end result was that many airline cards saw spending increase on those accounts during 2020 and 2021.

With the rise of e-commerce over the past two years, credit card rewards issuers also structured perks to emphasize in-app payments for recurring subscriptions as another way to keep their cards relevant as shopping habits shifted.

American Express was so encouraged by these trends that the issuer

hiked the annual fee

for its elite platinum card by 25%, to $695, in 2021. The issuer packed its revised rewards program with more practical perks including a statement credit for a Walmart+ membership. During the second half of the year, Amex gained a record number of new customers for its gold and platinum cards, and about 75% were

under age 40

, Amex CFO Jeff Campbell told investors in December 2021.

For mainstream credit card issuers, lavishing customers with cash-back rewards remains a winning strategy, and that concept has gained momentum with

inflation encroaching

. “During uncertain financial times, consumer behavior trends toward cash-back rewards,” said Daniela Hawkins, managing principal at the financial services consulting firm Capco.

Going forward, credit card rewards will become more streamlined and customizable, following the example travel-card issuers set during the pandemic, experts say.

“I think a lot of people are starting to expect this kind of customization to happen automatically,” said Gina DeCorla, senior research analyst at Curinos, which provides consumer data and market research to financial institutions.

Buy now/pay later

The buy now/pay later approach to consumer lending that began in Australia and Europe several years ago and recently spread to the U.S. has become a $100 billion industry that’s here to stay.

And it’s still evolving.

Millions of consumers have opted to make purchases they repay in installments, instead of putting those transactions on credit cards. BNPL loans typically are offered at the point of sale, with merchants paying BNPL providers a fee of 3% to 6% in exchange for closing the deal.

The success of fintechs driving U.S. BNPL adoption — including Affirm, Afterpay (which Block agreed to buy for $29 billion), Klarna, Zip and PayPal — recently drew the interest of the Consumer Financial Protection Bureau. The agency has launched an

inquiry into BNPL

companies’ data-gathering and underwriting practices. This could portend tighter supervision of an area that is so far mostly unregulated.

Banks may be cheering a potential crackdown on BNPL loans that siphon off credit card loan volume, but BNPL fintechs are leaning into the CFPB probe. Their initial line of defense is to say that BNPL loans are safer and more transparent than traditional credit cards because borrower commitments are smaller and easier to manage.

In the BNPL category’s next phase, credit card networks are working with banks to roll out new installment loan products in 2022 alongside traditional card loans.

Visa Installments

, currently in pilot, will enable participating banks to offer a range of installment loan offers to consumers, and

Mastercard

is developing its own platform to connect banks, consumers and merchants. Discover has teamed with Sezzle to offer consumers BNPL loans at checkout, and American Express has fashioned a post-purchase BNPL option for consumers.

Although the U.S. BNPL sector accounts for only about 3% of all consumer loans now, it’s on track to reach 20% within five years, according to Bryce Deeney, CEO of the BNPL payments technology startup equipifi. “I think the CFPB’s inquiry into BNPL loans suggests this is a niche that’s not going away,” Deeney said.

Autonomous retail

The scramble to minimize the spread of COVID-19 by avoiding contact with surfaces or cash went a long way toward

accelerating development

of autonomous, or “hands-free” checkout approaches that could essentially make retail front ends

disappear

.

The pandemic seemingly reversed the fortunes of stores like Amazon Go, which were under fire for discouraging or excluding cash as a payment option. Today, more than 100 U.S. retail shops — convenience stores, event venues and locations in high-traffic commuter and travel zones — now support autonomous checkouts. Hundreds more are set to open in 2022.

Amazon

recently opened its sixth full-size Amazon Fresh grocery store enabled with its

Just Walk Out

technology, which it’s now licensing to other merchants. Customers entering the store trigger Just Walk Out by scanning a QR code in the Amazon mobile app, or scanning their palm on the Amazon One reader. They may also use a payment card linked to their Amazon account. Overhead cameras, weight sensors and AI work together to detect items shoppers take from or return to the shelves.

Combined with AI technology to anticipate consumers’ purchases based on their habits and history in brick-and-mortar stores, stadiums and travel venues, checkouts are now poised to become so streamlined and intuitive that they may seem invisible.

The startup Standard AI is working with other merchants to retrofit existing locations — like Circle K convenience stores — with its own AI-powered checkout-free technology. Grabango is supplying similar checkout technology to convenience store operator Giant Eagle.

Checkout-free technology can generate deeper insights into business operations. Mastercard is working directly with merchants including Dunkin Donuts to extend its Shop Anywhere insights and analytics platform to add checkout-free shops at stadiums and sporting events, personalizing the shopping experience while refining staffing and inventory requirements.

“The shopping experience needs to evolve to meet the consumer wherever they are, and across whichever touchpoint they’re interacting through,” said Sherri Hammond, executive vice president of Digital Partnerships at Mastercard.

Stablecoins

After a year of almost exponential growth, stablecoins and cryptocurrency could finally gain a role in mainstream payments if the long-awaited Diem makes its debut and Block (formerly Square) expands its nascent cryptocurrency division.

The market capitalization of cryptocurrency passed $3 trillion by the end of 2021, up from $600 billion at the end of 2020; and the market capitalization of stablecoins passed

$152 billion

, up from less than $20 billion in 2020.

"Stablecoins had a breakout year in 2021," said Matthew Gould, CEO and founder of Unstoppable Domains, a San Francisco-based blockchain technology firm. Gould predicts stablecoins will reach a market cap of $1 trillion in the next two years.

Stablecoins are designed to avoid the volatility of other cryptocurrencies by tying their value to that of a traditional currency. That makes stablecoins more likely to be used for payments, drawing the interest of Visa, Mastercard and other payment companies. "The ability to send peer-to-peer transactions instantly across borders without middlemen is what’s going to convince skeptics that this technology is here to stay,” Gould said.

One of the most watched stablecoins, Diem, has made several changes to assuage regulators and is slated for launch in early 2022. Diem was originally called Libra when it was unveiled by Facebook (now called Meta), and the social network is still part of Diem's network. Diem will join an already fast-growing stablecoin market that includes Circle and Tether.

Other forms of cryptocurrency should also expand, but that part of the market will become

more competitive

as companies place more emphasis on uses that go beyond investment. Block, for example, is working on

TBD

, a division for decentralized and permissionless financial services, building off of the success of Cash App as a venue for Bitcoin investing.

As crypto and stablecoins grow, the

unresolved

battle over regulation will spill into the new year. Democrats and the President's Working Group on Financial Markets are in favor of regulating stablecoin issuers similar to how they regulate traditional banks, while Republicans tend to favor a lighter touch that potentially includes a separate charter for stablecoin issuers.

"Stablecoins are supposed to be decentralized and transparent," said Sen. Sherrod Brown, D-Ohio, during a Senate hearing on stablecoin regulation in late December. Brown was quickly followed at the hearing by Sen. Pat Toomey, R-Pa., who favors Congressional action that carves out a lighter touch for stablecoin issuers. "Whatever Congress does, let's make sure we don't stifle innovation," Toomey said.

Business-to-business payments

Checks are still the leading payment method for business-to-business transactions, but the pandemic marked a significant turning point in B2B payments’ shift to digital channels.

When the virus forced employees to work from home, businesses quickly had to find digital alternatives to paper-based payments in every category to maintain cash flow.

The transition went into an even higher gear when the CARES Act’s SBA Paycheck Protection Program opened, and many

fintechs reached out

to handle the

influx of small-business loan applications

, putting pressure on banks that were unprepared.

In the aftermath, millions of small businesses have abandoned slower, manual processes and shifted many routine and cross-border B2B payments to electronic channels including ACH and virtual cards, according to Austin, Texas-based Invoiced, which recently conducted a broad survey on The State of B2B Payment Acceptance.

Sixty-four percent of U.S. finance and accounting executives say their organizations are open to or planning to accept virtual cards and 62% expect the same for cross-border payments. Invoiced surveyed 269 B2B payments execs in August 2021.

B2B payments executives are not enthusiastic about cryptocurrency payments at this point. Fifty-nine percent of respondents were not open to the idea of accepting cryptocurrency as a form of payment — at least not until business customers are asking for it.

In general, B2B payments are following the path of consumer payments, becoming faster and more streamlined. In the case of B2B payments, digital channels enable more data to accompany payments than paper-based checks and invoices. This is a boon for tracking and analyzing payments flow.

As supply-chain issues dogged U.S. businesses in 2021, pressure to further upgrade and improve digital payment processes intensified, causing more organizations to adopt

real-time B2B payments

and further digitize payments processing.

These trends have caused Swift to initiate major changes to speed up and simplify its cross-border payment options. The Belgium-based Society for Worldwide Interbank Financial Telecommunication in early 2021 announced

Swift Go

, a lower-cost, high-speed service for businesses and consumers sending cross-border payments under $10,000.

Swift is also joining The Clearing House and EBA Clearing in a pilot involving several large international banks exploring the feasibility of

instant cross-border B2B payments

Central bank digital currencies

The Winter Olympics, set to start Feb. 4, could provide a clue to what the next 12 months may look like for government digital currencies.

China, the major economy that's closest to launching a central bank digital currency, may debut its Digital Yuan at the Beijing Olympics, according to research from

ING

. Such a move could

renew pressure

on the U.S. and EU to expedite their own CBDC strategies.

The U.S. has moved slowly on a potential digital dollar, with the

Federal Reserve

studying the necessity of an American CBDC. More than three dozen nations are studying CBDCs, with only nine currencies launched, mostly in smaller countries such as the Bahamas, according to

the Atlantic Council

.

Among large markets,

India

plans a CBDC pilot in 2022 and the EU recently launched a CBDC project that could last as much as two years, with a pilot to follow.

A year of tests and experiments will provide a chance for Visa and Mastercard to hone their strategies to support CBDCs. Both card networks are working on technology that would help governments and banks disburse digital currencies.

"We’re entering a world in which there will be a global patchwork of cryptocurrencies, stablecoins, and CBDCs," said Eric Grover, a principal at Intrepid Ventures in Minden Nevada, adding there’s a logical role for Mastercard and Visa as clearinghouses enabling global interoperability.

While digital currencies can function as payment networks, it's "not inconceivable that Mastercard and/or Visa might support some national CBDCs, with a view that it’s better to cannibalize some of their traditional payments business themselves," Grover said.

Real-time payments

A full group of about two dozen banks and bank technology companies Jack Henry and Fiserv are expected to soon support payment request messages through the bank-supported RTP network, covering nearly half of U.S. consumer accounts.

A small number of banks, including PNC Financial Services Group, JPMorgan Chase, Citigroup, US Bancorp and BNY Mellon, launched Request for Payment messaging late in 2021. This allows clients of these banks that submit millions of recurring bills, such as utility bills, to route payments through The Clearing House's RTP network. These early adopters are expected to create

competitive pressure

, pushing deeper adoption of RTP in the year ahead.

In an email, an RTP network spokesman projected volume in 2022 to increase from 40 million payments in the fourth quarter of 2021 to between 80 million and 160 million in the fourth quarter of 2022.

The RTP network currently has about 190 members out of 5,000 banks in the U.S., and the RTP spokesman said a rollout by Fiserv in early 2022 should substantially boost that number. RTP will still be the primary real-time rail in the U.S., as the government-backed FedNow service is not expected to launch until 2023 at the earliest.

"Real-time pay will advance to a broader audience because consumers expect seamless payments and a smooth customer experience," said Marge Hannum, chief risk officer for Mercury Financial, a financial institution with offices in Wilmington, Delaware and Austin, Texas. Mercury offers Mastercards through First Bank & Trust, a $3.9-billion asset bank based in Brookings, South Dakota.

Big tech

Companies like Amazon, Google and Apple keep adding financial services to their core products, but will any of these companies become banks in the next year?

Grover cited

Google's wish

to be a provider of services to banks, instead of a provider of banking services, as an example of the boundaries tech firms are setting for themselves.

"While the technology giants want to boost consumer engagement where they can, they're understandably leery of controlling activity that would have them regulated like banks," Grover said.

These companies are more likely to focus on financial products that can aid in shopping, similar to Apple adding buy now/pay later lending to its Apple Card partnership with Goldman Sachs.

"Big tech can be a distribution play," said Richard Crone, a payments consultant. Digital account opening through buy now/pay later lending and social payments like Venmo are examples of new ways to increase monetizable daily active users for all the stakeholders, according to Crone.

"Accruing balances — especially private label prepaid balances as in the case of PayPal, Venmo, or Cash App — is the ultimate loyalty play," Crone said. "The challenge for traditional financial institutions is to look for partnerships that put them at the edge of the network, at the point of sale."