Payments landscape 2023: A year in review

by George Iddenden
2023 Payments

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What is this article about?

Looking back at what’s happened over the past 12 months in the payments industry, from digital currencies and their threats to fraud and new technologies, it’s been an eventful year.

Why is this important?

Insiders should be aware of what the areas of focus will be for 2024, knowing the previous year’s victories and shortfalls will help keep the important issues at the forefront of discussion.

What’s next?

The payments industry will likely be keeping an eye out for early indicators in 2024 which will open up new opportunities for innovation.

Plenty has happened in the payments space over the past 12 months. Landmark legislation has been passed and new technologies such as artificial intelligence (AI) have integrated themselves further, irreversibly changing the way transactions will be made.

Open banking solutions have gained traction, whilst the buy now, pay later (BNPL) space has cooled following its explosion into the UK payment space.

Much to the frustration of so many in the payments industry, fraud has worsened, with new legislation on fraud reimbursements on the horizon.

As the year draws to a close, we take a look at other triumphs and challenges faced by the industry in the past 12 months.

Standout year for fintech

At the start of the year, the payments industry had to contend with a backdrop of economic uncertainty, the imprints of the pandemic still fairly fresh. An ongoing cost-of-living crisis forced the industry to pivot slightly, innovative payment solutions and strategies to aid consumers were introduced, highlighting the sector’s role in providing financial relief and support.

The industry has made a lot of progress over the past year when it comes to gender parity. It kicked off with calls for further action, support and changes in corporate culture to foster an inclusive and diverse working environment for all.

Open banking solutions were conceived to improve financial services for consumers and the year kicked off with a focus on making open banking services more accessible across the board.

The Bank of England (BoE) launched a consultation on digital currencies and more specifically, the digital pound, as the conversation grew around their introductions while news of innovation in the space from China and India seeped through.

Fintech had a standout year, with the start of 2023 looking fruitful for challenger banks Monzo and Starling as record numbers of consumers switched their current accounts.

The rise in fraud post-pandemic meant that firms were starting to look towards new ways of combatting the growth in criminal financial activity.

AI and machine learning started becoming more of a defence against fraudulent activity alongside the smoothing out of issues behind two-factor authentication such as correctly identifying the relevant cardholder.

The Open Banking Implementation Entity (OBIE) completed the delivery of the Competition and Markets Authorities (CMA) open banking roadmap which saw the UK’s six largest banking providers fully implement the standards for open banking.

Cryptocurrency innovation

The spring kicked off innovation in the cryptocurrency sector, as the Bitcoin Lightning Network’s potential was outlined as a revolutionary payment rail.

The network offered fast and cost-effective transactions, making it an attractive option for both consumers and businesses. It enabled the moving of larger sums of money securely with no intermediaries across borders.

New consumer duty rules were on their way, meaning firms had to change their culture to comply, according to Matthew Long, director of payments and digital assets at the Financial Conduct Authority (FCA).  At the time, he said: “For many firms, meeting the duty will require a significant shift in culture and behaviour”.

The discourse around biometrics and how it could contribute to seamless customer journeys grew louder amid the introduction of Strong Customer Authentication (SCA). Optimising the technology was one of the goals for the industry in 2023 — whether its full potential was realised in the end was a different matter.

The Joint Regulatory Oversight Committee (JROC) published its recommendations for the next phase of open banking in April 2023, with many hoping it might supercharge the next phase of growth for open banking.

Alongside this, in April, the BoE released a consultation paper on its roadmap for real-time gross settlement service beyond 2024. The paper sought to gain industry input on what features should be implemented for the next stage of real-time gross settlement (RTGS). 

AI technology debut

AI might have had the fastest real-world debut of all emerging technologies. Within the space of what felt like weeks, the technology went from being a sci-fi myth to threatening jobs.

Its impact on the payments sector has been monumental and will continue to be. The summer watched AI technology show its usefulness in helping to detect fraud, enhancing customer services and improving payment processing speed.

Silicon Valley Bank’s (SVB) downfall plunged the banking sector into uncertainty, eventually being rescued by HSBC for a total of £1, much to the relief of industry insiders.

The Payments Association director general, Tony Craddock, says “Thank goodness the leadership at HSBC had the courage to take on SVB UK at a time of crisis. Without this, the contagion would have spread like wildfire through banking, and we would have all suffered.”

Payment service providers (PSPs) Stripe and Klarna both implemented ChatGPT into their products and services. Klarna enabled ChatGPT for customers to request product recommendations, as well as receive links to shop-recommended products through its search and compare tool.

The Swedish firm’s CEO and co-founder Sebastian Siemiatkowski said at the time that the tool was “easy to use” and “genuinely solves a ton of problems”.

Global mergers and acquisitions were almost back to pre-pandemic levels, with inflated expectations, bloated cost bases and unrealistic growth ambitions reined in.

Nine deals occurred in Q1, with less than $330 million in deal volume as embedded finance, BNPL and digital currencies all boomed in interest.

The challenge in the growth of open banking was building on momentum, trust and consumer confidence after April’s JROC recommendations.

The Competition and Markets Authority (CMA) highlighted that a smooth transition of the work undertaken by the OBIE to a future entity would begin in Q4 2023.

Fintech investment

The Farage Coutts scandal caused ripples through the banking world, culminating in Peter Flavel and Alison Rose both leaving their roles.

The episode forced a rethink on how the wider banking sector, which was already under fire from the Treasury committee over claims of “profiteering” from savers, should move forward to protect its reputation.

The UK maintained its position as Europe’s leading financial centre despite investment in fintech falling by 57% in the first half of the year, KPMG data revealed.

Total fintech investment in the UK during the first six months of the year fell to £4.6 billion, marking a heavy fall from the £10.8 billion which was recorded during the same period last year.

Rising interest rates, booming levels of inflation and worsening geopolitical tensions have all helped to dampen investor confidence.

Apple launched Tap to Pay in the autumn, making it easier for SMEs to accept Apple Pay, debit, credit and other variations of contactless payments.

Merchants became able to accept payments from consumers from just an iPhone or a partner-enabled iOS app, rendering the need for a point-of-sale (PoS) terminal unnecessary.

Access to crypto assets

While progress has been made on crypto in the UK sector, the winter has seen crypto asset firms grow frustrated with the scene.

It has encountered a dual challenge linked to the legacy banking sector which is preventing progress from being made, according to insiders.

One of the major issues is currently revolving around retail customers’ ability to access crypto products, with large banks, including Chase Bank, blocking transactions with crypto exchanges.

Perhaps the primary reason for this is the new app reporting requirements introduced by the Payment Systems Regulator (PSR), making banks increasingly risk-averse.

Automotive giant Mercedes-Benz announced a new feature that will allow drivers based in its native Germany to pay for fuel directly from their vehicle.

In collaboration with Mastercard, users of selected models will be able to use their debit or credit card to complete the transaction by scanning their fingerprints through Mercedes’ pay+ payment facility.

Pay+ technology will be able to calculate the required amount and the cost of the fuel before the transaction has been completed due to its connection to the Mercedes Fuel and Pay function.

Gary Gensler, chairman of the Securities and Exchange Commission has warned regulators that a “nearly unavoidable” financial crisis will occur within the decade if AI technology is left to evolve without legislation.

A lot to build on…

There’s a lot to focus on for the coming 12 months, but it must be recognised that progress has been made in breaking down silos on some difficult issues. The pressing matter of fraud will undoubtedly continue to dominate the payment space moving forward.

The potential of AI, threats and promises, will continue to unravel after a year when the technology started to play a more influential part in the financial services sector.

Digital currencies will require further attention from regulators and banks alike, with eyes surely focused on the prominent use cases across the globe already making their marks.

Fintech had a good year, gaining market shares in the legacy banking space, will traditional institutions claw back ground or will the two industries collaborate on even more products and services?

For a more comprehensive overview, subscribe to our quarterly magazine, Payments Review here.

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