Written by Brandon Wong

The report published by Pay.UK, “Strategic trends: Retail payments in a future world”, examines the way our homes, work and play are changing due to evolving technologies, smarter AI and changing consumer behaviours. It explores the key drivers of change in payments, underlying market trends, and what this could mean for how payments manifest themselves by 2030.

Amongst the nine key strategic payment drivers identified, the report lists three areas considered to be immediately significant given their potential impact on volume displacement and the opportunities they offer for growth in retail payments. These are:

1. Virtualisation

Virtualisation encompasses advances in tokenisation and distributed ledger technology enabling financial institutions, governments and consumers to develop and use virtual currencies to transfer monetary value. The report notes that virtual currencies could enhance or displace existing payment solutions in the future and offer easier reconciliation and greater fee transparency. Pay.UK states that it will continue to monitor the ever-changing regulatory landscape with respect to virtual currencies, particularly in light of the increasing interest in central bank digital currencies (CBDC).

2. Atomisation

Atomisation describes the emerging trend of payments fragmenting into smaller values due to changes in consumer behaviour and machine-to-machine communication. This is evident in the rise of contactless payments displacing cash for smaller purchases. Atomisation is likely to have a significant effect on payment volume especially given the rise in subscription-based payments and the long-regarded potential of the Internet of Things.

3. Internalisation

Internalisation focusses on large technology platforms bypassing traditional payment schemes and could see new types of closed payment loops on digital commerce platforms that reduce card and bank to bank volumes.

The report also outlines the democratisation of access to banking and payment infrastructures as a strategic payment driver. This has led to an increase in competition and innovation in the market, fuelled in part by the UK’s Open Banking initiative, which will only develop further as strides towards implementing the wider concept of Open Finance are taken. Separately, the FCA’s recent Financial Lives 2020 survey outlining the impact of the Covid-19 pandemic highlights that 1.2 million UK adults are currently ‘unbanked’. Despite 22% wanting a current account, perhaps more surprising is the 57% that did not want one. For some, accounts were too expensive, whilst for others, accounts did not suit their needs. The trends outlined in Pay.UK’s report, particularly around virtualisation, internalisation and democratisation, could hold the potential to integrate those currently excluded from the financial system by creating alternative, more appealing solutions to traditional banking and payment services.

The emphasis on technology within the key drivers identified is also noteworthy. The report demonstrates that innovation in payments is reliant on innovation in the underlying technology helping to deliver payment solutions. This reaffirms the prominent role Fintech is playing, and will play, in shaping the future of financial services and the way consumers engage with financial institutions.

Following its report, Pay.UK are also launching a Knowledge Hub aimed at encouraging more collaboration and innovation in the industry. Its first project asks for input regarding how the pandemic has changed the trajectory of the industry and impacted long-term payment trends.