World & U.S. News

Pay-by-Bank Cost Savings and the Future of Payments?

Capitalism and competition in its truest form are playing out in the field of payments and how you will interact with a seller of merchandise.

You may wake up one day in the not-too-distant future and wonder what happened to all those plastic credit and debit cards with chips that we used to use. This really is a literal case of money following the money.

Consumers will always need things that sellers are selling. Banks, Fintech, et al have been middlemen in regard to how you get your payment to the seller. If JP Morgan and others have their way, it will be through what is known as Pay-by-Bank, where you can ditch the credit or debit card, and have the seller directly access your bank account, ostensibly eliminating the middleman, and the usury fees.

It will be difficult for banks like JP Morgan to give in to Fintech and lose the credit card cash flow that is so vital to its earnings.

While fees received by banks and others on credit cards in 2020 amounted to approximately $110 billion on transactions of roughly $7.6 trillion, banks like JP Morgan are willing to risk these current cash flow streams to be a part of the next payment processing generation.

Consumers are not the only ones who want transparency and reduced fees.

Behemoths like Amazon and Walmart have pestered financial institutions about their interchange fees that average 1.8% per transaction in the U.S. So you might ask yourself, what about using something like Zelle as a mobile merchant app? After all, it seems to be very popular in transactions between consumers.

According to JP Morgan and other banks, the problem is partly because it is run by a separate company owned by a consortium of lenders.

As global economies recover from the struggles of the pandemic, we are set to enter a new phase in the payments industry. The focus for the next 18 months is likely to be on sustainable growth, powered by digital technology. With that said, the global e-commerce market grew 19% to $4.6 trillion last year, the highest growth in the past five years, according to FIS, and it is estimated that growth into 2024 will be $7.3 trillion worldwide. 

Cash is king might have been the mantra of the 80s, but in the current inflationary environment, we find that the cashless society of the future is quickly becoming a reality.

In 2020, cash accounted for just one-fifth of all in-store payments globally, trailing significantly behind credit cards (50% of in-store payments) and mobile wallets (26%). According to forecasts by FIS, within the next five years, expect that cash will account for less than 13% of payments worldwide.

Of all the current payment methods, buy now and pay later (BNPL) has become the fastest-growing segment of methods of payment, and is expected to double its current growth pace by 2024.

Just like shopping carts evolved in the early phases of the internet, payment processing is evolving to a level not seen before.

Payments are evolving from a necessary part of a business to a component that actively adds value and appeals to consumers and supply chains. Many companies are now viewing payments as a way to differentiate themselves from the competition, improve the user experience, and generate revenue.

Payments are now directly a contributor to top-line growth, and direct-to-consumer payments like Pay-by-Bank are believed to lead the way. 

The advent of the digital wallet will likely be what takes the masses from bank card to bank account. Users in the U.S. are reticent to join the technology, unlike our international peers.

Driven by regulatory changes and increased adoption of open banking, a growing number of mobile wallets are being funded directly from bank accounts. Experts predict that by 2030 the use of digital wallets for consumer spending will comprise fifty percent of transactions in the U.S.

Payments are primed to grow thanks to innovation, changing consumer behavior, and a surge in payments fintech funding. While large banks like JP Morgan are segueing from bank cards to Pay-by-Bank, the payments frontier is wide open, with the future belonging to those who can harness technology to drive new value for businesses and consumers alike.

World & U.S. News