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The global landscape of payments has been rapidly evolving, and digital payments have emerged as a dominant force in recent years. There are several key reasons that have contributed to the remarkable growth of digital payments, with factors such as the COVID-19 pandemic, the growth of e-commerce, government encouragement, and higher investment in digital payment projects playing crucial roles.
Factors leading to growth of digital payments
The COVID-19 pandemic has had a significant impact on consumer behavior, including the way people make payments. With concerns about hygiene and the need for social distancing, there has been a higher demand for contactless payments. Many consumers have turned to digital payment methods, such as mobile wallets and online banking, to avoid physical contact with cash or payment terminals. This has accelerated the adoption of digital payments, as consumers seek safer and more convenient ways to transact.
The growth of e-commerce has also been a driving force behind the rise of digital payments. E-commerce has been booming in recent years, with online retail sales experiencing a substantial increase of 25% in 2019-2020, according to industry reports. This growth is expected to continue, with projections of 12% to 15% year-on-year growth in e-commerce sales until 2025. As consumers increasingly shop online, they are turning to digital payment methods to complete their transactions securely and conveniently. E-commerce platforms have also been integrating various digital payment options, making it easier for consumers to make online purchases using digital wallets, mobile banking apps, and other digital payment methods.
In addition, governments around the world have been actively encouraging the adoption of digital payments. Governments see the potential benefits of digital payments in improving financial inclusion, reducing corruption and fraud, and promoting transparency. Many countries have introduced policies and initiatives to promote the use of digital payments, including waiving transaction fees, offering tax incentives, and providing financial incentives to merchants and consumers who adopt digital payment methods. These efforts by governments have helped create an enabling environment for digital payments to thrive, leading to their increased adoption by businesses and consumers alike.
Another key factor contributing to the growth of digital payments is the higher investment in digital payment projects. Businesses, financial institutions, and technology companies have been investing significantly in developing and expanding digital payment solutions. This has resulted in the creation of a wide range of innovative digital payment methods, including mobile wallets, digital currencies, and peer-to-peer payment platforms. These investments have not only improved the convenience and security of digital payments but have also expanded the reach of digital payment services to previously underserved populations, further driving the growth of digital payments. 40% of the $5.2 billion tech start-up capital investment in 2021 was made for fin-tech companies focussing on payment systems, as reported by Africa: The Big Deal - Startup Deals Database.
Furthermore, the growing digitization of economies and the increasing penetration of smartphones and internet connectivity have also contributed to the growth of digital payments. With the widespread availability of affordable smartphones and internet access, more people have access to digital payment services, even in remote areas. This has facilitated the adoption of digital payments among previously unbanked or underbanked populations, who now have access to financial services through their smartphones. The convenience, speed, and accessibility of digital payments have made them an attractive option for a wide range of consumers, from urban dwellers to rural populations.
In conclusion, the growth of digital payments can be attributed to several key factors, including the higher demand for contactless payments due to the COVID-19 pandemic, the rapid growth of e-commerce, government encouragement, and higher investment in digital payment projects. These factors have created an environment conducive to the adoption of digital payments, leading to their increasing popularity among businesses and consumers worldwide. As technology continues to advance and consumer preferences evolve, digital payments are expected to continue to grow, shaping the future of payments and transforming the way people transact and manage their finances.
Digital Payments in USA and Europe
USA
In the United States, digital payments have gained tremendous popularity, with nearly nine out of ten Americans adopting some form of digital payment method. The penetration of digital payments has reached 89% in 2022, indicating a widespread acceptance of this mode of transaction. Notably, the usage of multiple digital payment methods has experienced rapid growth, with the number of individuals utilizing two or more forms of digital payments increasing from 51% in 2021 to 62% in the same year.
Furthermore, surveys indicate that more than two-thirds of Americans anticipate having a digital wallet within the next two years, and it is likely that many individuals will have multiple wallets to cater to their diverse needs and preferences.
Interestingly, when asked about their actual behavior, consumers are more inclined to mention popular digital wallet providers like PayPal, Apple Pay, and Google Pay, both for online and in-person transactions, compared to other providers. These findings suggest that banks should not solely rely on existing customer relationships but should instead explore ways to meet the specific requirements and expectations of consumers in this evolving digital landscape.
Europe
In Europe, the usage of cash for point-of-sale transactions in the euro area has declined to 59% in 2022, down from 72% in 2019. This decrease can be attributed to the increasing prevalence of electronic payment methods such as cards and online payments. However, cash remains the preferred payment option for small-value purchases and person-to-person transactions, as acknowledged by a majority (60%) of individuals in the euro area.
The proportion of online purchases in the euro area has witnessed significant growth, accounting for 17% of all day-to-day transactions in 2022, a notable increase from the mere 6% recorded in 2019.
Additionally, the share of card payments has also risen in recent years. In 2022, card payments constituted 34% of all point-of-sale transactions, up from 25% in 2019. Contactless payments, in particular, have become the predominant form of card payments, experiencing a substantial surge from 41% of all card payments in 2019 to 62% in 2022 at the point of sale.
Digital Payments in Emerging Markets
By 2026, the Asia-Pacific region is expected to dominate digital wallet usage for in-person transactions, representing 59% of the total $36.7 trillion regional point-of-sale market. In comparison, the Middle East and Africa are projected to account for 24%, Europe for 20%, and North America for 16% of the market, as indicated by FIS.
As reported by Bloomberg, Indonesia has emerged as the largest digital payments market in ASEAN. The volume of payments jumped almost 40% in 2020, and e-commerce platforms doubled their transactions to about 430 trillion rupiah (about US$30.1 billion).
In the Philippines, 97% of digital merchants accept digital payments and two-thirds have adopted digital lending facilities. According to one survey, about 40% of merchants say they would not have survived the pandemic without access to digital platforms.
The number of noncash retail payment transactions globally witnessed a compound annual growth rate (CAGR) of 13% between 2018 and 2021. However, in emerging markets, this growth rate was even higher at 25%. Notably, some of the most rapid expansions occurred in emerging markets in Africa, including Morocco, Nigeria, and South Africa, as well as in Asia.
In Africa, the domestic e-payments market is forecasted to experience substantial revenue growth, estimated at approximately 20% per year. By 2025, it is expected to reach around $40 billion, in comparison to Latin America's approximate $200 billion.
Looking ahead, strong growth is anticipated to continue in select emerging markets over the next few years, with projected CAGRs of 15% between 2021 and 2026.
Digital Payment systems
Banks
The services offered by banks can vary depending on the country and the bank itself. Some of the most popular services offered by banks include online banking, bank wallets, mobile banking, and payments through QR code scanning or using a near-field communication (NFC) device. One of the reasons why banks offer such services is due to first-mover advantage. Another reason is the low financial inclusion and card penetration in some countries, where banks have to offer more accessible services to reach a wider customer base. Lastly, there are stricter regulations for non-banks, which means that banks have an advantage over fintech companies and other non-banking financial institutions. Digital payment solutions offered by banks are most widely used in Brazil, Nigeria, Singapore and Hong Kong.
Unified payment systems
Some governments around the world have established unified payment systems, which offer instant bank transfers and can be adopted by banks, government institutions, and other financial service providers. These systems aim to simplify the payment process and reduce the transaction time and costs. Brazil and India are two of the top countries that have implemented unified payment systems.
Mobile payment systems
Mobile payment systems are also gaining popularity, with Apple Pay and Samsung Pay being among the most popular. These mobile payment systems were created by smartphone manufacturers and are being used by some banks that partnered with them. Venmo, owned by PayPal, is also very popular, especially in the US. In China, Alipay and WeChat dominate the market, providing convenient and accessible payment solutions to millions of people.
Tech companies
In China, Alipay is the most dominant player, along with payment services offered by Chinese super-app WeChat. Facebook's parent company rebranded Facebook Pay as Meta Pay in 2022, which can be used in apps like Facebook, Messenger, Instagram and WhatsApp to shop, send money and donate. Google Pay remains an important player in Russia, India and the US. As per Statista, Google Pay was used more often for in-store payments in both India and Russia than in either the United States or the UK in early 2022.
Digital Wallets
Digital wallets are another popular payment solution, especially in countries where payments infrastructure is less evolved, and there are lower regulatory barriers. Telecom companies are also launching digital wallets in some countries, offering their customers easy and convenient payment solutions. Kenya, Ghana, Philippines, Vietnam, Indonesia, and Thailand are some of the top countries where digital wallets are widely used.
Rise of Buy-Now-Pay-Later
The global buy now pay later market size was worth USD 132 billion in 2021 and is estimated to reach an expected value of USD 3680 billion by 2030 at a CAGR of 45% during the forecast period (2022-2030). Buy-Now-Pay-Later or BNPL is a payment option which customers can avail when they prefer to buy an item but get the option to pay for it installments over a period of time. BNPL is offered by third-party companies for online as well as offline transactions.
According to research conducted by the United Nations Conference on Trade and Development (UNCTAD), global retail sales are projected to rise from 16% to 19% by 2020. This increase is expected to contribute to a total value of USD 26.7 trillion for global e-commerce conducted through online platforms. The rise in online shopping, the increasing adoption of BNPL services by millennials and Gen Z, and the growing popularity of contactless payments are some of the major factors driving the growth of the market. BNPL is also cheaper than credit card loans and offers an easier approval process.
Some of the top BNPL providers are PayPal, Klarna, Sezzle, Affirm, AfterPay, QuadPay, Zip and Future Pay, with the biggest market being North America. Asia Pacific is the fastest growing market for these services. India is considered one of the most promising markets, poised for significant growth in the buy now, pay later (BNPL) sector. It is projected that the number of BNPL users in India will surge from 25 million in 2022 to reach 116 million by 2027, as per Juniper Research.
Cryptocurrency
Philipp Plein was among the first brands to start accepting payments in 15 different cryptocurrencies in August 2021. In 2022, Off-White and Gucci started accepting cryptocurrency. Gucci initially accepted Bitcoin, Bitcoin Cash, Ether, Litecoin, and Dogecoin at select stores in New York, Los Angeles, Miami, Atlanta, and Las Vegas. In August 2022, Gucci expanded its cryptocurrency acceptance to all of its directly operated stores in North America.
These brands’ decision to accept cryptocurrency is a sign of the growing acceptance of digital assets by mainstream businesses. In recent months, other luxury brands such as Balenciaga, Patek Philippe, and LVMH brands like Louis Vuitton, Berluti, Tag Heuer and many others have also announced plans to accept cryptocurrency.
The acceptance of cryptocurrency by luxury brands is a significant development for the cryptocurrency industry. It shows that digital assets are becoming more mainstream and that they are being seen as a legitimate form of payment. This could help to boost the adoption of cryptocurrency and could lead to further investment in the industry.
What draws customers to digital payments
Loyalty reward systems
Loyalty reward systems are a major factor that draws customers to digital payments. Many digital payment platforms offer rewards programs that incentivize customers to use their service more often. These programs can include cash back, points that can be redeemed for merchandise, and other incentives that can be very appealing to customers. By offering rewards, digital payment platforms are able to build customer loyalty and encourage repeat use.
Broad range of financial services
Another major draw for customers is the broad range of financial services that are available through digital payment platforms. Many platforms offer services like loans, credit and debit cards, BNPL services, wealth management, and more. This can be very appealing to customers who want to have all their financial needs met in one place, without having to go to multiple institutions.
Compatibility with other apps
Compatibility with other apps is another factor that draws customers to digital payments. Many digital payment platforms have integrations with other apps, such as budgeting and personal finance apps. This can make it easier for customers to manage their finances in one place, without having to switch between multiple apps.
Sustainability and environmental initiatives
Sustainability and environmental initiatives are also becoming increasingly important to customers. Digital payments are seen as more environmentally friendly than traditional payment methods, as they reduce the need for paper receipts and physical cards. Many digital payment platforms are also taking steps to reduce their carbon footprint, which can be appealing to environmentally conscious customers.
Cross-border payments
Digital payments are useful for customers for cross-border payments because they offer convenience, speed, cost-effectiveness, and accessibility compared to traditional payment methods.
Spend analysis
As per a study by Katar Global, many users, especially those in Germany, Belgium and Latvia, preferred a digital payment method that allowed them to have an overview of their spending.
Social features
Finally, social features can also draw customers to digital payments. Some platforms allow users to send and receive money with friends and family, or to split bills with ease. This can make digital payments a more social experience, which can be appealing to customers who value connectivity and convenience.