PayTech refers to the emerging technologies that are transforming payments. Technologies like AI, IoT and blockchains are making payments more efficient. But, cybersecurity, complicated regulatory environment and social concerns are challenges. Also, the marginalization of cash payers in some economies is another hurdle. The future of PayTech will involve using everyday devices to make payments. Also, voice payments and decentralized payment protocols will gain ground. Ultimately, payments will get embedded in your transactions.
PayTech or payment technology is the largest growing sub-segment in FinTech. Machine learning and AI, IoT and blockchain are transforming the digital payment industry. But there are challenges: cybersecurity, complicated regulatory environment and social concerns. Some segments of society are also concerned about the marginalization of cash payers.
Contactless payments using everyday wearables is gaining ground. Voice payments using Alexa and Google Home may become the norm. And decentralized payment protocols using blockchains will be the future of PayTech.
The market for global digital payments
Global digital payment market size is likely to grow from USD 79.3 billion in 2020 to USD 154.1 billion by 2025. That is a compounded annual growth rate (CAGR) of about 14%.
Major drivers of growth in the payments market
Growing internet penetration and the exponential growth of mobile phones are major drivers. And the resultant surge in ecommerce and m-commerce sales are other factors. Also, governments and central banks across the world are promoting cashless payments. The demonetization initiative in India is a case in point.
The growth of contactless payment methods is rapidly pushing the traditional plastic cards out of circulation. Customers now have a wide variety of contactless payment methods. Contactless payments are growing because of the sheer convenience and value-added services that vendors offer. Also, improved security features and incentives from several governments are also other factors. Plus, the recent pandemic has further accelerated contactless payments.
Different payments methods have emerged. Let’s look at the major forms of contactless payments.
- QR Code Payment
Quick Response (QR) codes are two-dimensional bar codes with an optical label. Customers can scan them to make payments using their mobile phones. PayPal is a leader in this space. And PayTM in India has considerable market traction. - Mobile wallets
About 2.1 billion customers are using mobile wallets currently. A mobile wallet is an application that mimics an actual physical wallet. With a mobile wallet, you can send money to other users, receive money from other users. And also collect reward points and store money inside the wallet. Apple, Google and Samsung are prominent players in this market. - Mobile Point of Sale Payments (mPoS)
This technology frees the merchants from their brick-and-mortar locations and in-store payments. And you can even make payments in venues such as concerts, trade shows, mobile vending situations such as food trucks. You can expect around 27.7 million mPOS devices to be operational by the end of 2021. - Cashless P2P payments
You can transfer money to someone else’s account using P2P payment solutions. You can do that either from your bank account or your credit card, using your phone. PayPal is the market leader in P2P payments. Venmo offers free, mobile-based P2P payment services. Square, with its product, Square Cash, helps users to transfer money through email. - Voice-activated payments
Very soon, you can use your smart speaker at home to make payments. As you know, right now, you can give voice commands for various things such as getting weather updates, traffic updates and ordering from Zomato or booking a cab from Uber. The next logical application is to use these devices for making payments. Amazon’s Alexa and Google Home are prominent players in this market. - PayTech of Things
PayTech of Things refers to using your everyday devices to make payments. In fact, PayTech converts any object into a payment device. For example, you can use your phone, watch, ring, glasses as well as key chains or even a cup or a bottle! For example, in London, commuters can pay using a Lucozade bottle with an NFC (Near Field Communications) chip. And you can even wave your phone across a reader, to make a payment.In China, the government is experimenting with the NFC technology. This will help you make payments to a vendor without handling cash. China’s CBDC (Central Bank Digital Currency) is likely to use this method.
Apple, Visa and Samsung are in the forefront of PayTech of Things. Samsung’s solution uses mobile phones. And Apple uses its smart watch. Visa is experimenting with glasses, keys, rings and wristbands for contactless payments.
So, what are the emerging technologies in the PayTech space?
The following technologies improve security. They also prevent payment frauds and streamline payment processes and increase process efficiency. They can also predict and prevent transaction failures.
Let’s break them down for you.
- Biometric devices for secure transactions
Biometric authentication uses biological and structural characteristics of a person. Some common examples include fingerprinting scanners, facial recognition and iris recognition. The other methods are heartbeat analysis and vein mapping. - Machine learning and AI applications in digital payments
Companies use AI to identify fraudulent transactions. They do this by analyzing a huge amount of data collected over a vast number of transactions. Another use of AI is to predict payment failures. Some companies use conversational AI to hand-hold customers while they transact. - Blockchain-based decentralized payments
As you probably know, blockchains remove the need for any trusted intermediary. Also, they remove the possible central point of failure in a network. Most security issues facing the payment sector will go away once this technology becomes mainstream. But it is still too early days for this technology. Also, the regulatory landscape is still emerging. However, there are already a few cutting-edge DeFi (decentralized finance) protocols that offer payment solutions using cryptocurrencies.
Regulatory environment for payments technology
PSD2 stands for Payment Services Directive 2. It is a European regulation for electronic payment services. It seeks to make payments more secure in Europe, boost innovation and help banking services adapt to new technologies. PSD2 lays down transparency standards and levels the playing field for banks and other payment services providers. And, this is a model for the rest of the world to draw inspiration from.
Global central banks are creating regulatory frameworks to speed up cashless payments. In India, RBI has released its short-term ‘Payment Systems Vision’ for 20-21. Also, the central banks of UAE, Saudi Arabia, South Africa and Nigeria have released their respective payments vision documents.
Challenges to PayTech
Increasing number of cyberattacks is a major threat to the growth of digital payments. The security risks such as identity thefts, data theft and privacy violations seem to be on the rise. Other risks include mobile malware, phishing attacks, SIM card duplication and physical theft. But most emerging contactless payment methods are less amenable to these attacks.
What’s next for PayTech?
Cashless and contactless payments are the future. The technology is still evolving. And there are security challenges to overcome. Regulations around data collection and privacy are issues to consider. In future, you may find payments to get integrated seamlessly with the transactions you do.