To a large extent the future of payments will be built on foundations laid in the past, but greatly enhanced by digital innovations that are creating entirely new use cases and experiences.
That’s the view of i2c President Jim McCarthy, who in an interview with PYMNTS’ Karen Webster for the “Executive Insights Series — The Next Three Years” spoke of shifting sands in payments technology from banking to retail that call for new solutions to intractable issues.
Noting how legacy constructs among issuers and payments processors are being “flattened” by new digital demands, he said, “As payments become more embedded … with merchants wanting payment capabilities, payouts, gig workers, to me, all these are just use cases that require a rich set of APIs of payment functionality. This is forcing the players in the space to become more fully functional and less wed to classic industry definitions.”
This is evident in trends like tokenization, where he pointed to Visa’s recent announcement that its Visa Token Service (VTS) has issued over 4 billion network tokens worldwide.
He said that’s “more cards than they’ve ever issued in the Visa portfolio on the planet and is just the beginning. They went from the pays tokenization to eCommerce tokenization, and the next step — it’s actually happening as we speak — is ACH tokenization and real-time payment rails. Tokens are critical to that.”
Moreover, new use cases created “get more interesting, because I think for the first time you can plum for IoT and, God forbid, metaverse-like, applications. In all honesty, the foundation is there to create really interesting payment use cases,” he said.
This doesn’t mean legacy players are dying — McCarthy said “the death of legacy players, however you define them, certainly in the space I occupy, the big processors, is not happening anytime soon” — but they will become part of a new ecosystem, and perhaps less primary.
With a nod to strong moves by banks like BofA and Chase into cross-border and other emerging areas, McCarthy thinks the next three years will be more about or fintechs, crypto players, neobanks and merchants that have gone global partnering with legacy on innovation.
“They’re going to look for partners that can provide all those capabilities. They don’t want to piecemeal it the way they’ve been forced to historically,” he said.
See also: Embedded Finance Experiences Should Be as ‘Easy as an iPhone’
New Areas of Specialization
As payments become more complex it will require a melding of the power of large commercial banks with the FinTechs’ agility of to usher in new forms of specialization that differ from the era of specialization that came first in the tangle of issuers, acquirers and networks.
“I don’t want to say this is the end of specialization,” McCarthy said. “I do think, as certain things become more ubiquitous in some platforms, that new areas for specialization pop up. Whether it’s disputes, especially for real-time payments, they don’t exist. Someone’s got to solve that.”
That also applies to authentication and identity, a space that he said “is up for grabs. AML and KYC compliance in a world that’s increasingly regulated and regulated differently, compliance as a service is important. New niches will appear. I’ve always questioned in some cases, are those real longstanding businesses, or are they a capability or business waiting to be acquired?”
The fact that financial systems have been largely built around managing exceptions, as Webster pointed out, gives bank-issuer-fintech partnerships fresh ground on which to innovate together.
Rulemaking is one example he turned to here, saying the banks and issuers have done “exceptionally well” with rulemaking and leveling the playing field.
But he added, “Even then they’ve innovated, if you think about the acquisitions of [companies like] Verifi, realizing that there are better ways to solve for some of those cases outside of the core network and to take those exceptions and try to deal with them outside of the core network. You’ll continue to see that. I thought it was very interesting to see Visa and Chase join up on B2B Connect.”
Saying card networks have been less successful penetrating B2B, for example, he added, “I do find some of these new networks that combine rulemaking with money movement and the ability to facilitate data exchange and manage those core cases, I think will be the winner.”
See also: i2c, Marygold & Co. Team on Contactless Debit Mastercard and Savings Platform
Building on Firm Foundation
Surveying the next three years for things like real-time payments and what rail or rails will come to dominate there, he said, “We’re early innings and these things take time. I put this in the test and learn phase to a large degree for most of these efforts.
“Do the domestic real-time payment rails figure out a way to kind of work together with a patchwork of national rules and schemes? It is a jump ball, but I agree wholeheartedly that is a space that’s ripe for innovation.”
That talk track also takes in blockchain and crypto and smart contracts, where McCarthy said, “There’s still a ton of inefficiency, not only in the payment piece, but the contracting piece. Then programmatic payments … and certainly for governments that that need help with all sorts of services in a post pandemic world. There’s a ton of opportunity.”
Saying he feels like we’re living in film “Groundhog Day,” McCarthy said predictions are extra difficult now because “there are just so many moving parts and the data is not clear.”
He is expecting many businesses to take a defensive posture, speculating that there will be “a flight to quality. Some people will not get through it. You’ll see a lot of roll-ups and M&A.”
As for concepts like metaverse on a three-year timeline, he said, “Maybe I’m aging out, but I’m just not seeing it. I get the creator economy, and I do understand that there’s a generation of people that interact differently in technology than I do. But I struggle with, has that technology gotten to the point where it’s so good that people will be compelled to continue to use it?”
Ultimately his three-year prognostication boils down to this: “The things that were carrying us the last 10 years will continue to improve,” like numerous use cases for contactless payments.
“Some of the ones that you see right in front of us, the tap to pay coming to devices themselves without having to have a dongle continues to open up. Acceptance, identity, what’s happening with FIDO and federated identity where I could combine a wallet with an identity that travels. I think again, it improves commerce and hopefully, with tokens, improves it safely.”
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