Payments in 2021: What's coming, what's going and what's poised for a comeback

As we enter the second year of the pandemic, many people have made dramatic changes to how they handle payments. But more change is on the horizon, as people who receive vaccinations attempt to get back to their old way of life.

The question is not whether things will magically return to the 2019 status quo. Many merchants that didn't previously accept contactless payments have upgraded their terminals and have no reason to turn that feature off. The bigger question is: Where is there still pent-up demand among consumers and merchants?

Payments providers are now poised to see the return of travel, the expansion of fintech-powered installment loans and vicious new fraud threats. There is almost certainly going to be increasing complexity around privacy and access to consumer accounts and data in what's likely to be a stabler regulatory atmosphere under the new president.

While mass vaccinations are finally promising some relief from restrictive conditions, the payments industry will never be the same.

Bloomberg

Doing more with mobile and contactless

Before coronavirus struck, mobile wallet providers were trying everything they could think of to spur adoption, usually with a focus on loyalty. Some even ditched the phone to provide a high-tech contactless card that could spend from multiple accounts, including the use of loyalty points at the point of sale.

None of these efforts worked quite as well as the COVID-19 pandemic, which in the early days prompted people to use contactless payment methods as an alternative to touching cash and PIN pads.

The next step is to capitalize on this trend before the novelty wears off.

A key example is PayPal’s Venmo, which this year is rolling out its digital-first Visa card with Synchrony, which has a QR code printed on it to encourage mobile P2P payments.

Separately, Walgreens has a digital-first Mastercard credit card and prepaid debit card in the works. Both programs provide customers with a physical card, but this year could prove to be a turning point for mobile payments as more big merchants push the digital-first experience with cobranded cards.

The pandemic also accelerated digitization of B2B payments, and now solutions are in development to ensure accounts receivable payments are as secure as they are seamless. Digital tools for managing real-time consumer and corporate payments are seeing explosive growth, including in supply chain payment management and financing.

Travel sickness

The travel industry is poised to rebound this year, but the payment cards most deeply intertwined with the travel industry through loyalty programs and booking services may never operate like they used to.

In an effort to keep consumers interested in travel cards, many issuers expanded the use of points as currency to let customers earn and redeem rewards in everyday-purchase categories like supermarkets. In 2021, issuers including JPMorgan Chase, Capital One and American Express will need to weigh whether to keep expanding their rewards options in this way, or roll back some changes as a way to spur travel spending.

These product investments will be costly after a painful year, and 2021 could put more pressure on struggling midsize cobranded airline rewards cards. Amex saw a 95% drop in its travel and entertainment business during the first quarter of 2020, and recovery has initially been slow.

Chase is raising the stakes with its recent purchase of cxLoyalty, a major credit card loyalty program. The move enables Chase to directly offer its travel rewards card customers access to a full-service travel agency, creating a complete ecosystem for financing and managing loyalty around travel purchases.

Installment purchasing may have to slow down

The pandemic fanned the flames of the emerging $24 billion buy now, pay later (BNPL) lending sector, as more consumers concerned about cash flow looked for alternative financing from fintech-powered providers that tend to bypass traditional credit checks.

Affirm raised at least $1.2 billion from its IPO this month, and other top BNPL firms including PayPal, Afterpay, Klarna and Sezzle are seeing strong adoption from merchants targeting a wide range of potential users for 2021.

There's more room to grow — a recent Cornerstone Advisors survey suggested only 7% of U.S. consumers have made a purchase using a BNPL service — but regulation may pump the brakes on this market.

Australian lawmakers this month are conducting inquiries into whether BNPL firms Afterpay and Zip Co. unduly influence consumer spending and the U.K.’s top consumer watchdog last month issued a call for British banking authorities to fully regulate Britain's BNPL firms.

The BNPL model is also putting pressure on traditional credit card issuers, many of which responded by adding installment payment options.

Data tug-of-war

The control of consumer account data will be a critical issue this year, based on the U.S. government’s recent antitrust challenge, which led Visa to cancel its $5.3 billion merger with Plaid, the bank account data aggregator.

Interestingly, Visa’s failure to close the deal to buy Plaid exposed the challenge these new data gatekeepers pose to traditional payments industry providers.

Plaid’s customer base grew 60% in 2020, reaching more than 4,000 customers, and the company may now be tempted do its own IPO with other startups specializing in data account-sharing waiting in the wings.

“Data services like Plaid create significant opportunities for identifying customer needs and building appropriate, customized financial solutions, and even though Visa’s resources are larger than Plaid’s, the capability of extracting insights from data is where fintechs like Plaid are superior,” said Pinar Ozcan, a professor of entrepreneurship and innovation at Oxford Said Business School in London.

Fraud fears

Hordes of fraudsters are hiding among the many first-time e-commerce shoppers, devising new scams and phishing schemes related to COVID-19, a trend likely to escalate this year as distribution of vaccinations and stimulus payments drag on.

Synthetic ID fraud is expected to continue as the fastest growing and most insidious type of fraud, because perpetrators can mix and match widely available customer data to create fictitious customers with healthy-looking credit.

Experian recently warned of an alarming new twist, in which criminals could hack facial recognitionto worsen the effect of synthetic ID fraud.

Card issuers this year will be able to fight back with the Social Security Administration’s new Consent Based Social Security Verification (eCBSV) service, which is currently in pilot. The service confirms identities in real time.

Lost in plain sight

Wage and income gaps have widened during the pandemic, further isolating millions of unbanked, unemployed and impoverished families along with downtrodden businesses unable to access stimulus payments and other forms of aid.

More stimulus payments and government aid to businesses are in the works, with the opportunity for banks and fintechs poised to streamline the way funds reach recipients. But many of the neediest members of society still operate in cash for a variety of reasons, including having no path to access digital payment tools.

Startups working to improve the way schools collect money and distribute federally funded meal programs saw strong growth throughout the pandemic, while transit systems also are in the midst of rapid development enabling subsidized fares with contactless connections.