When was the last time you went to an ATM to withdraw some cash?

Cash transactions across the globe have declined since the outbreak of the COVID-19 pandemic. Consumer payment behavior has changed dramatically, accelerated by contactless payments to avoid widespread infection, which has induced an increase in e-commerce transactions.

According to a report by the Federal Reserve Bank of San Francisco, U.S. consumers made an average of 34 payments in October 2020, out of which only 19% accounted for payments through cash. 

Similarly, ATM usage fell by 47% in April 2020 in India, while the United Kingdom experienced a decline of 46% per month on average from March to July 2020, according to a McKinsey report.

Source: McKinsey Payments Insight

Global payment revenue has marked $1.9 trillion in 2020, slightly down by revenue from 2019 due to the impact of the pandemic, but rebounded in 2021 and is expected to reach $2.5 trillion by 2025. This growth is seen in commercial and consumer transactions and is induced by continuous cash displacement across emerging and mature markets. This reduced usage of cash led to the birth of several digital financial products such as virtual banking cards, digital wallets, payment apps, buy now pay later options, and A2A transfer, finally carving a path into embedded finance.

Harnessing the power of digital payments

Interestingly, Pizza hut claims that the first-ever online purchase was made for a Pizza Hut pizza in 1994! Soon after, with the explosion of the internet, corporations started recognizing the power of digital payments.

The first-ever online payment company Paypal marked a remarkable development in this space in 1998, followed by Amazon and several other e-commerce companies being a gamechanger in the digital payments market.

Governments around the world have laid down regulations on payment methods, majorly controlled by monetary policies. Some globally accepted methods of digital payments are:

• Banking cards: Debit cards and prepaid cards help with online transactions at restaurants, malls, supermarkets, gas stations, and so on, via POS machines or terminals. It is the most common form of payment yet seriously challenged in recent years, due to the rise in contactless payments.
• Digital wallets: Digital wallets or e-wallets are payment systems that store users’ payment information and allow secure online transactions instantly using mobile devices. Digital wallets act as an intermediary between bank accounts and allow users to add money to the wallet.
• Unified payments interface (UPI): UPI is a common mode of digital payment in India, Bhutan, Sri Lanka, and some other countries. Unlike e-wallets, UPI allows the transfer of money directly to the user's bank account without any intermediary. A unique UPI ID is generated electronically that acts as an alternative to the payee’s bank account details.
• Bank transfers: Bank transfers involve the transfer of funds from the payer’s account to the payee’s account via A2A transfer. Internet banking and mobile banking are the two widely used methods for online bank transfers.
• Buy now pay later: Buy now pay later is a method of instant lending and paying at the checkout that is still in its infancy. It lets customers pay later over time without needing a credit card.
• Cryptocurrency: Cryptocurrency is not a common type of payment method due to its regulatory restrictions and high volatility. Blockchain-backed coins such as Bitcoin, Ethereum, Dogecoin, etc., are yet to gain traction by the digital-first community. 

The rapid growth of e-commerce, fintech, banking services platforms, and technological advancements like AI and blockchain has resulted in a massive increase in digital payments across nations.

Driving forces behind the revolution

Companies are participating in the expanding global marketplace—cross-border commercial relationships are based on buying goods and services in return for payments, and businesses need quicker ways to make that happen.

But what is causing digital payments to evolve faster than anything else? Technological advancements in digital payments can be traced back to the past decade, but the pandemic has had a bigger role to play.

Source: BCG (Global Payments 2021)

The COVID-19 pandemic shifted consumers’ purchasing habits, replaced cash with cashless transactions, and catalyzed the phenomenal growth of e-commerce. When the economy was drowned by the pandemic, the payment industry responded to the change, which contributed to making 2020 and 2021 years of huge fintech investments and accelerated several fintech trends.

But, fintech investments are not only driven by consumer adoption of global payments, banking also has a serious role to play. As per G2 data, the Digital Banking Platforms category saw a 187% traffic increase from March 2020 to March 2021. Similarly, the Mobile Banking software category experienced an increase in traffic by 271% during the same time. The increased interest of financial institutions (banks, microfinances, etc.) toward these digital products is triggered by the urgency to stay relevant in such a competitive market. 

Patrick Szakiel, G2’s market research manager and senior research analyst, fintech and legaltech, has shed light on the evolving partnership between banks and techs:

“Financial services’ customers increasingly exist online, and financial institutions need to meet them where they are if they want to maintain market share. With rising competition from the neo-banks and fintech, one way to stay relevant is to partner with tech companies that excel at creating customer-centric digital experiences.”

For financial institutions, It’s no more about the competition with each other; the focus has shifted toward partnership, collaboration, and integration. Platformization of banking services and payments is the core tech stack of fintech that gives birth to embedded solutions in the financial service industry.

Gaining competitive advantage with G2’s Payment Software categories

Payment software is the one common functionality that helps business in all sectors in their day-to-day transactions. G2 hosts multiple Payment software categories, ranging from Installment Payment Software, Payment Analytics Software, Payment Card Issuance Software, Payment Gateways to Payment Processing Software.

According to the G2 review data from pre- and post-pandemic years (2019 to 2021), the share of reviews to the Payment Gateway category is the highest among all Payment categories. The rise in interest in this category can be attributed to businesses scouting capabilities for their platforms that help them automate transactions or integrate payments with accounting or CRM software or POS system. Similarly, payment processing software comes second in share of reviews, which indicates businesses are looking for solutions that enable them to execute transactions activities between merchants and partner banks.

Preparing for 2022 and beyond

The digital payment revolution is not going anywhere as it has ushered consumers into an era of easy, quick, and convenient payments. Fintechs specializing in payments are going to be the torchbearers in 2022 for the future of the global payment landscape. Traditional banks have to face increasing competition to stay relevant, and financial services companies need to shake hands and innovate.