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6 payment trends positioned to win – or lose – in 2024
- Where will issues like open-payment data sharing and new digital wallets rank?
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Last year was momentous for digital payments, from FedNow’s historic rollout to a proliferation of embedded payment experiences. But while some innovations will continue their upward trajectory, others will likely lose steam in 2024.
Which ones matter most for banks? Here are three payment trends positioned to boom in 2024, and three that could be a bust.
Last year, two significant developments – the FedNow launch and the CFPB’s proposed Personal Financial Data Rights rule – changed how banks and customers share their payment data.
FedNow relies on the ISO 20022 messaging standard, an expanded messaging format that lets banks quickly screen transactions and process multiple payments simultaneously. When two banks review payment data between an enterprise business and a supplier, they can view everything from basic payment information to account details and custom text entries (like an invoice number).
How does this benefit banks? For starters, it’s easier to identify fraudulent transactions. What’s more, enhanced fraud detection can help banks boost their customers’ confidence in every transaction. As FedNow’s adoption grows in 2024, more banks and customers will quickly realize these benefits.
That’s not all, though. Thanks to the CFPB’s proposed rule, banks won’t just be able to process more payment data securely – they’ll be able to access consumer data from other financial institutions and third-party services. That’s because the new rule would let consumers share their data (from credit card, checking, prepaid, and digital wallet accounts) with the rest of the financial services ecosystem.
If it takes effect, this data-sharing rule might seem risky: some banks could theoretically lose their competitive edge. But in reality, greater data access creates a massive opportunity for banks to improve the quality of their products and services.
For example, banks can incorporate new financial data into their web and mobile banking apps. Customers get a 360-degree view of their finances across financial institutions. And by improving the digital banking experience, banks have a new way to create stickier customers and attract new ones.
As banks prepare in 2024 for secure data sharing, that will translate to new revenue and experiential benefits for banks and their customers in the future.
The Clearing House’s Real-Time Payments (RTP) service, launched in 2017 and owned by a consortium of the largest U.S. banks, has been the U.S.’s sole instant payment offering. But few banks, mostly consortium members, use it to send and receive instant payments; most other banks participate in receive-only mode due partly to concerns about fraud risk on the bank-owned network.
With FedNow from the Federal Reserve now on the playing field, though, there’s competition in instant payments for the first time. FedNow gives banks an unbiased, government-run instant payments service that uses their existing Federal Reserve master account. And it could be an attractive option for banks that want to serve enterprise customers better.
While small businesses have buzzy fintech options like PayPal and Venmo, large enterprises have historically needed a single, secure instant payment service that customers’ and suppliers’ banks also use. But as more banks explore FedNow in 2024, more parties in a transaction will likely have access to faster payments.
Don’t expect a Gold-Rush-style boom in adoption, though. Whether RTP or FedNow, the “instant” part of instant payments still makes many banks nervous. Some customers may not see the need to ditch standard ACH payments if their transactions fall within same-day processing windows.
While 2024 will see an uptick in B2B instant payments, the banks interested will likely spend a lot of the year listening to stakeholders and evaluating use cases so they can smooth out implementation.
I noted that 2024 will see more data sharing between banks and third-party services. With bank-fintech partnerships getting more scrutiny, a likely knock-on effect worth watching is more partnerships between banks and established data-sharing API vendors.
APIs are essential for fast and secure data sharing. And so far, vendors like Plaid have retained their dominance in this space, remaining independent from some of the biggest financial services providers.
What does this mean in 2024? With the new CFPB rule on the horizon, Plaid and a small group of others will be the dominant financial data networks. And as banks update their infrastructure to share customer data smoothly, they’ll turn to these fintechs for help. Their long-established status in the industry ensures that customers can trust their financial soundness and data-handling practices.
Established fintech partnerships might rise, but banks will be more hesitant to work with newer fintechs this year. The biggest reason: 2023 saw some high-profile collaborations fizzle.
Take, for instance, JPMorgan Chase’s experience with Frank. The bank acquired the startup for $175 million in 2021 only to uncover last year it really had purchased millions of fake users and data points.
Frank might be an edge case (and to be fair, it wasn’t a payments fintech). But a massive chunk of bank-fintech partnerships, at around 40%, fail to operationalize, much less realize value. And when it comes to a space like payments with already established fintech partners, many banks are likely to choose proven successes over high-risk bets.
As the US grows closer to realizing open banking, there’s been a lot of buzz around “Pay by Bank” technology, allowing businesses to accept payments directly from a customer’s bank checking account.
Pay by Bank is attractive to retail businesses because, theoretically, any fees charged would be much less than those paid for card acceptance. But I don’t expect consumers to flock to this option in 2024.
That’s because credit cards have an iron grip on Americans. Card fees flow primarily to the issuing bank, but they often pass those dollars on to cardholders. Between sign-on bonuses, cash-back options, and personalized rewards categories, consumers need more reason to choose a Pay by Bank option at checkout. Debit cards also draw from a checking account and offer the same utility.
Digital wallets like PayPal, Venmo, Apple Pay and Square Cash have skyrocketed in popularity in recent years.
Banks, of course, want to compete. But at least one example shows the barriers that exist. Early Warning Services, a bank-owned cooperative, aims to capitalize on digital wallet demand with an offering called Paze, essentially providing the Zelle money transfer service banks offer.
Paze has some attractive features: no merchant fees, card selection based on purchase history and tokenized card numbers for added security. But I expect these benefits will fail to win over consumers or merchants.
Consumers already have multiple digital wallets they use and trust, and they’re consolidating the ones they use: 31% use just one digital wallet, up 10 percentage points from 2021.
Of course, some consumers have multiple wallets for specific purposes (e.g., Apple Pay for in-person purchases and PayPal for online shopping). But the overall trend is toward fewer digital wallets, not more.
On the merchant side, another digital wallet will prove a tough sell. Though Paze doesn’t plan to charge a merchant fee, the cost of the underlying card transaction would remain. Moreover, merchants likely will only add another payment button to checkout if it’s from a highly trusted vendor.
It’s still early in 2024, so there’s room to refine your banking strategy this year.
With more knowledge about these trends, you can ensure your bank makes smart investments and nurtures partnerships with the right conditions to succeed.
David Ritter is Director of Financial Services Strategy at CI&T.
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