How the Next Wave of Payments in the Digital Economy Might Look

The digital economy is supported by payments infrastructure created decades ago, when payments were exclusively a physical activity.

In the digital age, instant communications have been “matching up” with instant clearing and settlement and the ability to move money in the blink of an eye.

Pockets of friction still exist though.

“Whether you look at it from a banking lens or a payment lens, the industry writ large, globally, still is an amalgam of different pieces of a puzzle,” Jim McCarthy, executive vice president of product and sales at Thredd, told Karen Webster.

Historically, the world was set up so that products and services were linear, as payments enablement simply meant facilitating a transaction at the end of a consumer’s journey. Credit card issuers have built credit engines, for example, which have served their stated purposes.

But the legacy systems have not aged well, which explains the wave of mega-mergers that marked the pre-pandemic months, where Fiserv bought First Data and Global Payments grabbed TSYS, among others.

Pull back the covers, and financial services have been built across a range of siloed products and services that don’t talk to each other. For banks, processing transactions in-house is proving expensive and time-consuming. FinTechs, on the other hand, need the expertise and regulatory compliance that is already in place with banks.

The companies that thrive will be the companies that combine everything from identity and authentication to payments and security. Retail payments may be among the most visible tranches of commerce ripe for digital pivots, but B2B is worth hundreds of trillions of dollars.

The most valuable players in financial services will have the broadest set of services underpinned by compliant cores, McCarthy said. That range of services means that although payments themselves won’t change, the actual means of making those payments will change, and they may be unrecognizable in just a few short years.

Transformations Are Often Underestimated

It’s become commonplace, in McCarthy’s words, to consider a firm “next generation” when it moves to “check the box of … being ‘digital first.’” But just tokenizing transactions and supporting wallets is akin to doing the digital front-end work and not transforming the back end, and the result is bolting on new processes to creaky legacy systems.

Companies that are holding back on the digital transformation risk being left behind. Change comes quickly in payments, often in seismic waves, McCarthy said. A case in point has been the heady rise of peer-to-peer (P2P) payments.

“I was in the room when Cash App was created, and no one in that room thought it would be what it is today,” he told Webster.

Against that backdrop, he said, we’re a long way from more than a decade ago when M-Pesa, the mobile money transfer service, launched in emerging markets and crafted a closed-loop system. Now even closed-loop systems have been connected to open-loop prepaid and debit instruments.

Eventually, truly open systems will allow interactions across platforms, operating systems and devices, regardless of geographies or payment methods, across debit, credit and lending, McCarthy said. But change is indeed coming, and the investments of the past 10 to 15 years have been bearing fruit as real-time rails are cemented around the globe.

Risks of Marginalization

The legacy players risk being marginalized if they don’t adapt, he said.

That’s easier said than done, as banks have built up moats through the decades but have grown complacent with legacy systems. That leaves fertile ground for new, digital entrants to pick up the pace with the aid of instant rails and catch up to, if not surpass, the marquee names in financial services.

Partnerships are key to hastening — and being part of — the digital transformation, he said. Companies like Thredd, which offers global processing services (with a presence across the Middle East, Europe and Canada), can take a more holistic approach to help modernize card issuance with controls, spend management and helping client firms expand into new regions.

The digital startups with institutional backing — Thredd counts Advent International and Viking, among others, as its investors — can weather volatile capital markets more adroitly.

The big challenge is going global, he said. Platforms’ global reach, combined with a market-by-market approach, is essential. Open banking is gaining ground in Europe, and localized payments and digital wallets are being embraced by consumers and even businesses on a global basis. For FinTechs, it’s equally important to have the right banking partners in place.

“Compliance is hard,” said McCarthy, only a bit tongue-in-cheek.

Looking Ahead

For Thredd, opportunity beckons to move beyond debit, pre-paid cards, McCarthy said. Buy now, pay later (BNPL) and other lines of credit are ample opportunities. (Cryptocurrency has been overhyped, he said.)

“We need a credit platform, and we need to be a global provider, and we need to service both cash in and cash out … we’re looking at many ways to get there,” he said.

The winners of the future, he told Webster, “will be not wed to card processing or ACH and wire processing or payouts … They’ll have a set of services that allow corporates or commercial banks or FinTechs to build services that put payments at the heart of their businesses.”