Six Major Trends in the Payment Industry for 2023

In 2023, innovation in the payments sector will continue to accelerate, but the path will differ from previous years. As venture capital firms tighten funding and startups struggle, traditional payment giants may seize the opportunity to acquire some smaller industry players.

Meanwhile, under harsh economic conditions such as rising borrowing costs and recession threats, some fintech companies may shut down.

One promising new payment area is embedded finance, especially embedded payments—the practice of seamlessly bundling payments with services or products. Various companies are considering how to apply such tools, and their scope may expand from consumer-facing to enterprise-facing applications.

The launch of the Federal Reserve's real-time payment system, FedNow, is expected not only to improve payment efficiency but also to create new tracks for service development and incentivize more startups to enter the industry.

Although the boom of "buy now, pay later" (BNPL) has cooled after the pandemic-driven surge in online shopping, it will remain an industry hotspot as it expands into offline scenarios and new regulatory rules emerge in 2023.

At the same time, regulators are not the only ones focused on consumer safety. With the rise of digital payments, legislators and payment companies will also strengthen cybersecurity protections.

FedNow is about to launch

The industry has high hopes for the launch of FedNow, and its launch time could beas early as May. Industry participants expect this to greatly boost the adoption of real-time payments in the U.S. and spur innovation.

Thisnew nationwide systemallows payments of up to $500,000 per transaction to be completed in seconds at any date and any time, and may also help the U.S.catch up with other countriesin the leading pace of real-time payment technology.

The system will build on the existing private-sector real-time payment network RTP, which was launched in 2017 by The Clearing House, owned by banks. RTP has already brought its large bank owners into the real-time payment system, while FedNow aims to attract more small and mid-sized banks.

"In 2023, real-time payments in the U.S. will truly begin to take off," said Sanjay Gupta, head of biller payments at payment company ACI Worldwide. He explained that instant payments have been transformative in other countries. Now, U.S. companies, including ACI, are also preparing to leverage real-time payments, Gupta said in an interview last week.

More banks using real-time systems means more U.S. businesses can access these services through their financial institutions, thereby improving payment efficiency.

As more companies adopt real-time payments, they will be able to upgrade other aspects of their payment and financial infrastructure, said Dimitri Dadiomov, CEO of Modern Treasury, in an interview this week.

While the service may seem expensive compared to Automated Clearing House (ACH) payments, it is cheaper than wire transfers and more efficient than checks, Dadiomov noted. Additionally, as FedNow, The Clearing House, and banks compete in the real-time payment space, prices will gradually decline.

"All in all, I think within a few years it will become very important, and may even become the dominant payment type," he said of real-time payments. "I don't see cost as the main obstacle."

Eventually, digital payment requests could also become a more important part of the real-time payment space, Dadiomov said. RTP is "currently somewhat of a send-only use case."

Needless to say, the rise of digital payments could also drive business-to-business (B2B) payments, as companies realize the benefits of faster payments, especially in a high-interest-rate environment where the importance of holding funds increases, Dadiomov said. Instant payments can also increase cost savings.

"Given the market environment, people's main priority is efficiency," Dadiomov said. The operations of payments and the CFO's office are key areas for improving efficiency, he explained.

Ultimately, real-time payments will also improve cross-border payments, but that won't happen this year, Dadiomov said.

Funding challenges won't slow competition

Despite harder funding conditions, competition among startups is unlikely to weaken. But capital will tilt toward certain areas, such as B2B or infrastructure concepts, rather than consumer or cryptocurrency plays, payment industry insiders said.

Fintech infrastructure companies "will be favored," said Sunil Singh, CEO and founder of card-issuing fintech Tallied. "There are still many different parts of the economy that can benefit from technology upgrades."

Embedded finance and cross-border e-commerce look promising this year, said Rob Anderson, a partner at San Francisco venture capital firm FTV Capital.

Startups have already become more accepting of current valuations and the harsher economic environment, he said. "I think you're starting to see that mindset manifest in 2023."

Early-stage fintechs still have capital available, said Jordan McKee, principal research analyst at 451 Research, part of S&P Global Market Intelligence. "The challenge is with the more mature fintechs," which seek large funding rounds of around $100 million or more, McKee said. In those areas, investors have become more skeptical of profitability and scale plans.

Given the venture capital retreat, partnerships between fintech startups and large companies could accelerate in 2023, said Tom Zschach, chief innovation officer at international financial messaging company Swift.

After a period of abundant capital and too many competing ideas, some startups will also exit, he said. "But this will also make the survivors stronger and more focused, as they must create value faster."

Embedded payments rise

Consulting firmBain & Company predictsthat embedded finance transactions will reach $7 trillion by 2026. "We're seeing a high level of attention on embedded finance this year," said Jodie Kelley, CEO of industry group Electronic Transactions Association, in an email.

Many fintech companies are seizing the opportunity to sell embedded financial services to software companies that haven't yet monetized payments, said Tom Bell, CEO of Maast. Maast, a subsidiary of Synovus Bank, sells banking and payment services to software providers.

Even as capital becomes less abundant, investors remain attracted to embedded finance. That's because such businesses don't require as much capital to scale as consumer fintechs do, McKee said.

"It's not acquiring users one by one," McKee said. "It's selling through one relationship to a large platform or large tech company, thereby reaching all their customers."

The B2B space is increasingly being drawn into this trend. Embedded payments have mainly focused on bundling products and services with consumer payments, but will enter a 2.0 phase, accelerating in back-office corporate payments, said Andrew Jamison, CEO of Extend.

The next iteration of embedded payments will begin to permeate the use of business software, such as payments in Intuit's QuickBooks and German software provider SAP, Jamison predicted.

BNPL matures under pressure

"Buy now, pay later" will experience growing pains this year, facing shifts in shopping habits, consumer debt burdens, and potential regulation.

Installment payment providers, such as San Francisco's Affirm, Sweden's Klarna, Block's Afterpay, Australia's Zip, and Minneapolis's Sezzle, are tightening credit approvals under inflationary pressure.

They also face pressure from investors to prioritize profitability over growth and are preparing for regulation following last year'sConsumer Financial Protection Bureau report.

Regulators have been "behind the curve" on BNPL, said Daniela Hawkins, managing principal at Capco, but are now under scrutiny as they realize consumers struggling with debt management may become over-indebted.

Hawkins said she is watching for when rising interest rates and higher debt levels prompt consumers to cut spending, and how that will affect products like BNPL. "Will they fall out of favor as consumer debt levels become tricky?" she said.

Additionally, BNPL companies that benefited from the e-commerce surge are working to strengthen offline availability to adapt to the return to in-store shopping.

"These players have to figure out how to be easy to use in physical stores, or they'll be stuck in digital channels," said Jason Barro, founder of Bain & Company's NPS Prism, a customer experience benchmarking service.

The rapid maturation of BNPL shows it meets market demand, but Thad Peterson, a strategic advisor at Aite-Novarica, and other payment consultants expect a shakeout among BNPL providers in 2023, potentially leading to industry consolidation and some companies being acquired.

M&A activity heats up

M&A activity in the payments industryis expected to increase this yearas economic difficulties and reduced venture capital lead to lower valuations, making companies more attractive.

In the first 10 days of 2023, one acquisition was already announced: Canadian company Nuvei said it would acquire Atlanta-based payment integrator Paya for $1.3 billion.

Additionally, according toBloomberg Newsreports, Florida-based payment software company ACI Worldwide is considering a sale.

Deals could appear at all levels of the payments space, regardless of player size, and won't necessarily lead to consolidation, as some large companies may also face divestitures.

Investors holding stakes in large payment processors Fidelity National Information Services and Fiserv are pressuring these companies to consider divesting businesses, which could lead to spinning off parts. The companies declined to comment on these possibilities.

Large incumbents and private equity firms still have ample capital to make acquisitions, even if smaller fintechs don't, which will drive an increase in deals this year, said Jamison, whose company sells virtual card and expense management software services.

"Opportunities to accelerate M&A will arise because there's still a lot of capital in the ecosystem," Jamison said. "There will be good technology available to buy because many fintech companies will start running out of capital."

Younger fintechs struggling to raise their next round of capital may suddenly consider selling, while larger peers are waiting to acquire talent, technology, and intellectual property.

Jack Henry & Associates CEO David Foss has said the company is eager to make acquisitions once prices fall. Digital payment giant PayPal may also become aggressive in acquisitions, as activist investors push the company to boost financial results,Truist Securities analysts suggested in a report last week.。

Cracking down on malicious actors

As digital payments rise across all rails, from real-time payments to B2B to peer-to-peer, fraudsters and other criminals follow the money.

As a result, cybersecurity could become a major trend this year, with payment companies seeking to prevent fraud and protect customers. It's not just companies strengthening defenses; regulators and legislators are also seeking to enhance safeguards, especially in light of the collapse of the FTX cryptocurrency exchange.

"Cybersecurity is an area where people will continue to double down," Jamison said.

A wave of companies selling payment protection software and services has emerged, from digital identity verification firms like Socure to chargeback fraud prevention companies like Chargebacks911.

Industry efforts to combat fraudhave shown results, such as a decline in card fraud, but cybercriminals are also evolving.

"Malicious actors are becoming more sophisticated, using phishing, social phishing, various methods, account takeovers," Gupta said. "Security is an important theme, but I think it becomes even more important this year."

Some payment companies and software companies,including tech giant Google, have advocated for years for moving from passwords to biometrics to fight back. Nevertheless, biometrics as a payment method appears to be a trend that won't take off this year.