- In 2023, regulatory scrutiny and product innovation will broaden consumer payment choice, intensifying competition among providers.
- Global funding for payments startups fell 49% last year, signaling a more cautious approach by investors amid high levels of economic uncertainty.
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The payments industry is due for another turbulent year in 2023. Volatile inflation and conservative spending amid an impending economic downturn is forcing payment providers to innovate aggressively to meet the demands of both consumers and merchants. What’s more, is the recent news and figures that are signaling uncertainty in the industry as a whole.
For payments startups, global funding fell 49% last year as investors took a cautious approach. In addition, payments funding for Q4 2022 fell 70.7% year-over-year (YoY) to $3.4 billion, dropping for the fourth straight quarter to hit its lowest level in two years. Still, when it came to funding and deal count last year, payments firms comfortably outperformed banking, wealthtech, and insurtech companies.
Incumbents, on the other hand, will face intensifying competition, regulatory scrutiny that threatens key revenue drivers, and record-high credit card interest rates, according to a Bankrate forecast. If economic headwinds get worse, some consumers may struggle to pay back their debt, which would increase the risk of defaults and hurt lenders’ balance sheets.
Meanwhile, widespread layoffs in the payments industry and other tech-heavy sectors—such as Socure, Plaid, Yapily, and Stripe—may indicate weak performance heading into earnings season.
Payment providers, whether established or not, will need to endure the negative economic growth that three-quarters of Fortune 500 CEOs expect before the end of 2023. Here, we dissect three trends in the payment industry that will help navigate what’s to come, plus identify new opportunities along the way.
Payment industry trend #1: Gen Z-focused payment options
In 2023, there will be more adult Gen Zers than adolescents for the first time, equaling about half the size of the millennial population. These digital natives are not only embracing emerging payments, but expecting seamless purchasing experiences as a bottom line.
To compete, payment providers should reshape the customer journey to cater to Gen Zers—investing in social media-driven marketing and digitally forward solutions such as peer-to-peer payment apps and buy now, pay later (BNPL) options.
Payment industry trend #2: Account-to-account (A2A) payments will become a consumer payment option
Seamless account-to-account (A2A) payments will soon become a viable consumer payment option. A2A payments operate on open banking technology, allowing payments to be made directly from bank accounts without the need of third-party networks. Businesses can then avoid expensive interchange fees, while consumers avoid having to enter account details such as routing numbers.
Almost one-third of US consumers are interested in new payment technologies that improve convenience and security, per PCI Pal and Worldpay. And FedNow, slated to launch this summer, will let them immediately fund digital wallets via their bank accounts.
A2A payments are threatening issuers’ and payment networks’ $12.54 trillion in US card volume, and will prompt them to push further into monetizing non-card payment options.
Payment industry trend #3: Regulators will scrutinize credit card fees
The CFPB has ramped up activity over the last year to regulate payments in the US. It’s investigating how multinationals use consumer payments data, looking into new rules for BNPL products, and reviewing guidelines to foster transparency and competition.
Swipe fees are one of the mainstays of revenue for card networks. Transaction processing fees alone, for example, made up around 57% of Mastercard’s net revenues in 2021.
Proposed legislation, however, aims to support merchants (specifically small businesses), as well as consumers, both of whom would benefit from the cost savings. In fact, US merchants were charged a total of $77.48 billion in credit card fees in 2021.
This legislation could also require large banks to ensure that their credit cards provide a choice of at least two unaffiliated networks to process payments. This could lead to more competitive pricing for processing payments, argue the senators. Although we don’t expect these efforts to result in new rules this year, it will drive more pressure for issuers to seek new avenues for long-term profitability.
This analysis is part of Insider Intelligence’s Payments Trends to Watch for 2023 report, which contains more insights and data to help guide your business strategies. To preview the full report, click here.
About Insider Intelligence
Insider Intelligence is a market research firm providing forecasts, analysis, trends, and benchmarks to more than 100,000 corporate subscribers worldwide. With an unbiased approach that covers industries across financial services, ecommerce and retail, and advertising, we equip clients with the tools they need to make grounded decisions about the future of their business.