As the pandemic has continued to impact the global economy, businesses and consumers have increasingly sought more efficient ways to manage their finances. This shift towards digital transactions, which began before the pandemic, has accelerated due to the crisis. The rise in online shopping has spurred broader adoption of digital, contactless, and seamless payment methods.
This trend towards cashless payments, coupled with banks’ efforts to implement real-time payments (RTP), is influencing the entire e-commerce landscape. The global digital payments market saw significant growth in 2020, expanding by nearly 24 percent to reach $4.9 trillion, according to data from the Finnish financial website Sijoitusrahastot. The market continued to grow in 2021, with a 21 percent increase in transaction value and projections indicating a total transaction value of $4.93 trillion, alongside a 10.1 percent rise in the number of users, reaching 3.47 billion.
The enhanced digital payment infrastructure brought about by the pandemic has made payments faster and more integrated into businesses, leading to quicker and easier transactions for consumers. Scott Johnson, head of product at Western Union Business Solutions, predicts that the trend will continue, with everyday Internet of Things (IoT) devices potentially becoming new payment portals. This shift could make physical payment methods less common as technology evolves.
The Shift Towards Digital Payments
Over the past year, consumers have transitioned from using e-wallets in stores to relying on automatic payments through apps. Vince Graziani, CEO of IDEX Biometrics, notes that this evolution is setting new standards for payment infrastructure. The increased use of contactless payments, combined with other digital payment methods, is driving a move towards a cashless economy. Real-time payments are also playing a key role in this transformation.
Contactless payments allow consumers to make transactions by tapping a card or device near a point-of-sale terminal using radio frequency identification (RFID) or near-field communication (NFC) technology. This method, often referred to as “tap and go,” is becoming more prevalent. Additionally, IoT devices are emerging as potential primary payment methods, offering a more seamless payment experience.
Graziani predicts that the rise of contactless and invisible payments will lead to consolidation within the digital payments industry, potentially reducing the number of smaller players. Prior to the pandemic, many U.S. consumers were unfamiliar with contactless payments, but now, there is a strong demand for touch-free payment options to ensure safety and convenience.
Adoption of New Technologies
Consumer familiarity with biometric fingerprint technology is a significant factor in the adoption of new payment methods. Graziani highlights that as shoppers become more accustomed to these technologies, their acceptance of innovative payment solutions is likely to grow.
“Many people are already familiar with biometric fingerprint technology because they use it to unlock their phones and authenticate payment apps,” he noted. “This technology is not only available but has become a routine part of our daily lives for identity verification.”
Fingerprint biometrics are expected to play a significant role in the future of digital identity, and the technology is now accessible at a mass-market price.
Historically, the U.S. has been seen as behind other regions in adopting digital payment technologies. However, the COVID-19 pandemic has accelerated contactless payment adoption in the U.S., with Visa reporting a 150 percent year-over-year increase in usage as of May 2020. The World Health Organization’s recommendation to reduce cash use has further driven the adoption of contactless and emerging payment technologies, particularly in North America, according to Graziani.
Forbes reports that the U.S. mobile payment market, which was previously ranked sixth globally, has grown by 41 percent and is now valued at over $98 billion.
Payment Innovation
In the digital payments industry, some experts view new biometric payment options as a comprehensive solution for managing financial transactions. This includes devices connected to the Internet of Things (IoT), such as smart appliances and wearables, which can facilitate purchases.
Transactions are managed through third-party or branded mobile apps that protect users’ bank details. Payments can be made simply by using biometric authentication, like a fingerprint, directly within an app.
This method is similar to one-click purchases but is used in physical settings, where a smartphone effectively acts as a single-point checkout system.
The growth of biometric payment technology is driven by the trust and security it provides. Fingerprint biometrics can be used for various applications beyond payments, such as mass transit, event access, healthcare records, voter identification, and IoT device access, as explained by Graziani.
He considers biometric fingerprint technology crucial for the future of cashless payments due to its hygienic and secure nature, which helps protect individual privacy. The biometric data is stored securely on the consumer’s payment card or app, minimizing risks associated with cloud storage and potential security breaches.
Graziani anticipates that biometric fingerprint technology will play a key role in integrating digital identity and authentication across various industries, including healthcare and IT.
Why Banks Support Real-Time Payments (RTP)
Banks are upgrading their backend systems to handle digital payments more efficiently. One prominent solution for real-time payments is expected to gain widespread adoption this year, according to Dimitri Dadiomov, co-founder and CEO of Modern Treasury.
The Federal Reserve’s real-time payment system, FedNow, is set to launch in 2023 or 2024. Once available, it will provide businesses with two major real-time, bank-connected payment options, potentially enhancing service quality and reducing costs, as noted by Dadiomov.
Dadiomov identifies five reasons why Real-Time Payments (RTP) are likely to gain mainstream adoption this year. One significant factor for banks is that RTP can counter efforts by Mastercard and Visa to develop their own faster payments systems.
The pandemic has accelerated the shift towards digital solutions, including payments, leading to heightened expectations for instant transactions.
Additionally, businesses and vendors require rapid payments to keep up with transaction volumes and manage cash flow effectively. This need has become more pressing due to the financial strain many small and medium-sized businesses (SMBs) have experienced during the pandemic.
RTP also offers the advantage of including detailed transaction information, which simplifies immediate reconciliation and can reduce accounting complexities and costs.
Lastly, banks are motivated to adopt RTP to benefit from technological advancements. Upgrading from the outdated ACH system, which was designed in the 1970s, aligns with efforts to streamline processes and reduce costs.
Digital Payment Adoption
Security remains a critical issue for both vendors and consumers, as Graziani highlighted. Financial services providers and retailers are responsible for ensuring the safety of consumers during payment transactions.
“Even small businesses, like rural ice cream stands, have moved beyond cash-only operations and are now using digital payment solutions such as Square,” Graziani noted.
Biometric authentication in payment systems can address current security concerns, such as forged signatures, compromised PINs, and hacked online accounts. Fingerprints, which are unique and difficult to replicate, enhance security.
Graziani speculated that the U.S. might transition to a largely cashless society within a year due to the impact of COVID-19, a shift that was previously expected to take three to five years.
How Biometric Security Works
Biometric fingerprint payment cards use end-to-end encryption to protect user data and card information, according to Graziani.
With a fingerprint biometric card, users authenticate their identity by placing their finger on the card’s sensor while holding it over a contactless payment terminal. This process eliminates the need for public PIN pads or checkout counters, making it similar to current contactless payment methods.
“This touch-free payment technology offers the convenience of contactless payments with enhanced security, as the card is directly linked to the owner’s biometric information,” Graziani explained.