The future of consumer payments; five scenarios
Anders Nyqvist
Strategist | Manager | Facilitator of Change | 30+ years || Father, husband, outdoors man, author
This article describes five scenarios for consumer payments in Sweden. These are applicable to the Nordic countries, as well as Europe. The scenarios may, or may not, play out. This is the nature of scenario design; possible futures are described.
Looking at consumer payments and services in Sweden, the payments industry has seen notable change the recent decade, driven by technology, preferences, regulations and more. As change is expected to continue with disintermediation and shifting roles in the payment value chain, scenarios can be used to (1) accelerate learning to understand and make sense of what to anticipate from different potential futures, (2) setting – or adjusting - strategic directions accordingly and, (3) to improve strategic readiness and organizational ambidexterity.
Scenarios should be of use for banks, card actors, payment service providers, and regulators, as they address (1) key drivers or uncertainty factors of change, (2) potential opportunities for product and service innovation, (3) shifts in the current payments split, (4) new or changed business models and, (5) change in roles actors in the payments’ ecosystem.
The aim with the scenarios is to offer insights for long term planning, innovation and development of consumer payment products and services, whilst also raising awareness and understanding of potential shifts and transformations lying ahead.
The scenarios are based on publicly available information and methods and I will share the full and comprehensive report, that includes more details, an appendix describing how the payment split have been built up, how the choice of scenarios was made and an extensive list of sources and references for further reading. Send me a PM for more.
Payments, payment rails and actors in the payment’s ecosystem
Payments
Regardless of being a consumer or a merchant you pay or get paid for products or services. And when you pay, you use money. Money can be physical coins and notes or digital as representations on an account or tokens in a digital wallet. A “payer” is someone who pays a “payee” for their goods or services using an instrument or method of payment, such as a card payment, an account-to-account transfer, an invoice (giro/autogiro), cash or during the recent years “Buy Now Pay Later” (BNPL) (that we consider as financed downpayments that is later paid by invoice, card or as an instant payment).
In this report, we look at scenarios for consumer payments on the Swedish market, but as the Nordic Countries are similar in many ways, the scenarios can be applied there as well. As Sweden is a member of the European Union, reflections on European level will also be possible.
The current payment split for consumers in Sweden is described in table 1.
Payment rails are the infrastructure
Payments (or transactions) are executed on different “payment rails”: (1) Card payments are done in real time on a card network such as Mastercard or Visa, where final settlement is done later “at the end of the day”, between the buyers’ (payers’) and sellers’ (payees’) bank accounts. A card can be physical or virtual in a digital wallet. (2) An account-to-account transaction is a transfer of funds from one bank account to another. This is either done in a scheduled batch like manner a couple of times per day or instantly (instant payment) with apps like Swish, Vipps (Norway) or MobilePay (Denmark, Finland) by entering a phone number, scanning a QR code or integrated in an e-, or m-commerce store. Account-to-account transfers are also done as a “pay from your bank” method, for example payment of invoices sent to the Kivra app, being a payment service provider. This is the “account-to-account rail” (A2A) – or “bank rail”. (3) Invoiced payments are physical (paper), digital (e-invoice) or automatic (autogiro), containing information on how to pay. Often to a giro account (but also by card or an instant application like Swish). Execution of invoiced payments is foremost done as giro payments via the bank account-to-account rail. (4) Cash payments are in decline, approaching a near zero usage, and many merchants do not accept cash payments. As cash is notes and coins, this is the physical “cash rail”.
Actors operating on the rails
There are many actors operating on the various payment rails, jointly forming the payment value chain going from a payer to a payee.
Uncertainties, trends, key drivers, and factors of change
The digitalization megatrend sets the scene for the future
Digitalization is the mega-trend that forms the basis of consumer behaviour, having three key drivers: (1) convenience, (2) pursuit of optimized productivity, (3) desire to stay informed, (4) personalization and, (5) new business models.
This megatrend extends in time and forms a foundation for other trends and uncertainties that drives change in the payment’s ecosystem.
Regulations
Regulations as forces of change
Regulations have capacities to shift roles for actors, to disintermediate or disrupt current payment value chains. Banks risks becoming infrastructural players, supplying accounts, financial information, and instant payments to actors offering applications that are closer to customer behaviours and needs.
Instant Payment Regulation as a builder of rails
At large, instant payments trend upwards. By end of 2024 the EU Instant Payment Regulation goes into effect. With this follows a requirement on banks within the EU to offer instant transfers from one account to another. It is expected to see a full implementation within three to five years. Assuming that Europe follows a similar rate of adoption as Swish in Sweden, having gone from zero to 79% of population from 2012 to 2024, instant payments may have full reach across EU no later than 2036.
Payment Services Directive 3 and Payment Services Regulation as a disintermediator
As Payments Services Directive 3 and Payment Services Regulation rolls out, “open banking” including “request to pay” extends across the EU, enabling actors to interconnect, by will or by law. PSR emphasizes the trend of “racing towards zero” for the current fees and surcharges on payments and payment services. The cost to pay, trends downward, as does the potential profits on payments.
Financial Data Access for consumers’ ownership and control of their data
The Financial Data Access Regulation strengthens a trend of “individualization”, as it intends to give individuals increased control of their own data.
Digital euro and e-kronor as disruptors
Central Bank Digital Currencies (CDBC), have a potential to disrupt current payment rails, depending upon how they are designed and implemented. The Central bank of Sweden have investigated and piloted e-kronor, and the EU explores a digital euro, with the ambition to be a free and electronic means of retail payments.
Digital Identities
The eIDAS regulation came into force in 2018, being a framework for digital identification and trust services, aiming to create confidence in electronic interactions. In Sweden there is BankID, but the eIDAS framework extends on scope, and geographical coverage. Digital Identification and Digital Identities is a strong global trend, as it must be considered a prerequisite for digital business.
Customers’ (payers’) and Merchants’ (payees’) preferences
Behaviours
As digitization has come to dominate society, consumers expect an ever-increasing degree of convenience whilst patience gets lower. For payments, consumer behaviour trends are powerful forces. Of these, the growing preference for digital wallets stands out. Consumers are not motivated by payments per se, but what money can be used for: Goods and services, experiences and satisfaction of needs, rewards, and bonuses. Therefore, loyalty programs and customer clubs become important, as is embedment of payments in apps that brings convenience like “merchant wallets”. A clear sign of prioritization of convenience and lack of patience is the growth of “buy now, pay later” (BNPL), where the paying experience is smooth whilst you do not need to save up for a purchase, with Klarna in a dominant position. But this trend is uncertain and depending upon the cost of capital. A contradictory trend is the growing preference towards instant or debit card payments, where a consumer can see the impact on their savings immediately, offering a sense of immediate control.
Consumption
We consume both physically and digitally. Building on convenience, and strengthened during the Covid-19 pandemic, the way we purchase and consume have been shifted towards e-commerce. As a response to this, point-of-sales have explored self-service, self-scanning, and self-checkout. There is a blend of physical and digital consumption. From a sustainability perspective, and during the pandemic, remote work increased, and travelling was reduced. This further strengthened digital consumption – like games, movies, social media, music - having been trending upwards notably for quite some time, with embedded payment solutions like “pay per use” from digital wallets and cards.
Demography
There are differences between age groups. A younger generation trends towards real time payments, having immediate effect on accounts. And an ageing population still uses credit cards.
Merchants’ specific preferences
Merchants’ preferences are very much dictated by what technology enables. Dependent upon customer loyalty, the ability to offer multiple methods of payments is elemental, as is security and trust in payments being done. Merchant’s makes their choice of payment services, based on how they integrate with their supply chain, and the cost (fees and service surcharges).
Macro
Growth of payment volumes
Payment volumes on global level will grow by ca 6% annually towards 2030. This varies across regions. Despite increasing inflation and interest rates, it can be foreseen that - although consumers will be more considerate about purchases - the total amount spent remains and grows.
Cash withdrawals
Although cash is seeing a decline towards zero, the recent geopolitical instability seems to have led to a stop of the decline, but as it is still too early to see if these are used to pay for goods and services, or just kept at home, it must be assumed that the cash spending will remain low and continue downwards or stay stable at a very low level.
Security
Fraud, cyber threats, ransomware, money laundering, and identity theft are things we absolutely want to avoid, but unfortunately the trend is growing. AI is predicted to give cyber attackers the upper hand. Ransomware will continue to fell many. Cybercrime is transforming into a highly professionalized and profitable business, with threats against data, availability, and supply chains.
Technology
Wearables and Contactless Payments (“Tap to pay”)
Demand for contactless payments grew rapidly during Covid-19, and is expected to continue to grow, supported by smart phones, where a payment is done as the payer “taps” his or her smartphone or card to the seller’s smart phone or device.
AI - Smart payments, but also “fake customers” and “fake sellers”
Leveraging AI, “smart contracts” and sharing of data payments shall be expected to be “smarter” insofar they will be personalized, and tailored to a product, service, individual, context and in time. But with phenomenon like “deep fakes” there is a trend towards fraud using AI generated faked buyers and sellers.
Multi/omni payments
Omni payment solutions will offer merchants multiple ways to meet customer expectations on different types of payment methods.
Embedded payments
Payments integrated in a service or product, i.e., you pay as you consume is growing from pay per use and subscription services. This can be expected to grow and expand being interlinked with for example tap to pay, and smart payments, supported by open banking.
Digital Wallets
The growth trend for digital Wallets, like Apple and Google Pay are strong, and is predicted to pass 50% of consumer payments on Nordic level by 2030.
Payment rails
The card rail
As card network operators, like Mastercard and Visa, are so invested in their network, and coming from a dominant position, it is assumed that they will invest to defend their rail as well as expanding into other rails.
The bank rail
The bank rail is several different networks, that over time merges. Within the euro-zone development is driven largely by regulations, but from a consumer’s and merchant’s point of view it can be predicted that there will be a strong growth towards an instant account to account rail, step by step abandoning the older batch driven settlement solution.
Giro and Cash rails
The giro rail can be expected to be stable or follow GDP growth, whilst the cash rail must be considered stable, being at its lowest level.
Payment split projections
Looking at historical data, as well as forecasts, projections for the payment rails can be made depending upon different assumptions. In these, one must take notice of the different outcomes can be projected, where in all cases there is a decline in the card share.
Competitive landscape
We shall expect continued competition across the payment ecosystem and in the payment value chain. Mergers and Acquisitions will re-shape the landscape. Incumbents will be disrupted and disintermediated, having to shift their role and position.
The outlook for the competitive landscape is continued turbulence, growth, and re-shaping. As regulations come into play, actors will have to adapt, change, transform or risk disappearing.
BNPL and checkout providers is seen entering the payment space broadening their reach into adjacent financial services. Apps are becoming FinTechs, moving towards payment services, such as document platforms, budget apps and credential platforms, like Kivra.
Weak Signals
What have been described so far are quite solid and observable trends. But there are some weak signals, that we should observe. In February 2021, the Dasgupta Review wrote that “we have collectively failed to engage with nature sustainably, to the extent that our demands far exceed its capacity to supply us with the goods and services we all rely on”, “the solution starts with understanding and accepting a simple truth: our economies are embedded with nature, not external to it”, “we need to” … “transform our institutions and systems – in particular our finance and educational systems”… In the review it is said that the share devoted to enhancing our natural assets, of our current financial flows are dwarfed by other financial flows that harm these assets. Furthermore, the (digital) circular economy market is expected to grow with a 24.3% CAGR from 2023 to 2028. In this market, re-use and sharing of goods and services is elemental. These observations together, indicates that the current strictly monetary financial flows are insufficient for longevity, and that there is a potential trending shift towards payments systems that take other values into consideration, leading to value being a function of many different variables, requiring payments to reflect both monetary and non-monetary values. The principle of “smart contracts” in blockchains and distributed ledgers, may then become a potential way to solve and manage complex value and payment functions.
Slow deaths
Are we witnessing any slow deaths? Cash usage is at its lowest ever. Will cash disappear completely? Probably not, as it is perceived as a safe and trusted “back-up”. Will physical payment cards disappear? Probably not, as they are convenient to carry, and contrary to virtual cards in a digital wallet do not require any batteries.
Wild cards
Closed loop payments
Closed loops, being isolated networks insofar that everything is done in a closed network have yet to grow on the European/Nordic/Swedish market. The bitcoin blockchain is such an example, and African mobile money (m-Pesa) another. Although the mobile money network in Africa is in a dominant position, the outlook for these types of closed loops is poor when looking at the European, Nordic, and Swedish markets. A closed loop taking market position may be considered a wild card.
Central Bank Digital Currencies (CDBC)
Although addressed above as a regulatory trend, an actual introduction of CBDC should be thought of as a “wild card”, as these may challenge all current rails, depending upon how they are designed and implemented. With a “wild card” choice of implementation, commercial banks and PSPs risks losing their customer holding accounts. Customer relationships will be shifted, and so will market dynamics.
Scenarios
We should be able to see many things from the trends, uncertainties, and drivers. Regulations are important to understand, as they do not only dictate what banks and payment services providers must do, but also that regulations are a voice of the consumer, and that they lead way to new and different business models (innovation). It should also be no surprise that consumer behaviours and preferences dictate what is going to be successful, and that technology (and digitization) possibly is the most important enabler. And that there are concerns and uncertainties how criminal activities will come to have an impact. Uncertainties leads way to scenarios.
Strategic uncertainties
Dimensions of a scenario cross
As use of cash are in decline, near zero, and giro payments are assessed to be quite stable, there are two major uncertainties to consider as scenarios are explored. The first is the choice of payment method, be it an instant or card payment. These are mutually exclusive. You pay by one or the other. And the choice is driven by payer preferences and which method the payee accept. And this, in its turn, depends upon what is offered by banks and payment service providers. The second uncertainty relates to the level of regulation; how much payments and payment services are regulated and complied with. The level of uncertainty is strongly influenced by political ambitions from time to time, compliancy, and adoption of regulations. This gives a scenario cross, with two dimensions; (1) method of payment (2) degree of regulation.
Method of payment
Preference towards instant payments
At this end of the scale, preferences go toward instant payments and instant payment apps, like Swish in Sweden, MobilePay in Denmark and Finland and Vipps in Norway. Preferences are driven by consumers’ expectations on convenience and control, and their lack of patience. They want to see smooth payment experiences with few steps, in a fast manner, with immediate impact on their accounts. Merchants’ expectations are instant settlement, with integrated or embedded payment solutions, i.e. they want to see integration with their supply chain, bookkeeping, and more, with payments made available immediately. In Sweden, and the Nordics, instant payment apps are well established, but although almost the entire population in Sweden have Swish most transactions are small sum and peer to peer, i.e., not directly paying for goods and services. But since 2017 Swish has grown in consumer to merchant payments. The growth is fast, but from low volumes (2023).
From a political point of view within the EU, there is a strong drive toward instant payments being a competitive power to the non-EU owned card networks. There are political ambitions to increase competition, to reduce the dominant positions of MasterCard and Visa.
At this end of the scale, instant payments will find profitability and growth through leverage of the bank owned account-to-account rail, ease of implementation in digital payment apps, meeting demands of convenience and control for consumers, and integration, security, and instant settlement for merchants. Coming from low volumes, the growth of instant payments outpaces the growth of card payments, overtaking and shifting balances, seeing actors in the instant payment space being more successful than card actors.
Card actors struggle to keep pace, most certainly due to a lack of investments required to defend positions, meeting the expectations from customers, merchants, and politicians – perhaps due to declining profits, from reduced volumes, a strong dependency to the few large networks, and failures in innovation, planning and decision making.
Preference towards card payments
As card payments have a long history with more than half of consumer payments made, their position is strong and dominant. Debit and credit cards cater to different needs offering efficient, secure, and proven payments with global reach. Preferences is further driven by the way cards meets expectations on convenience, control, and smooth payment experiences.
At this end of the scale, card actors are successful in enhancing offerings that are attractive to consumers and merchants. Continued virtualization of cards into wallets, in combination with a growing set of value adding services, solidifies the strong position of card payments. Physical cards benefit from being easy to bring, not requiring a smart phone, to pay. Merchants benefit from seeing innovative services to not only accept card payments, but to manage, control and perform analysis of payments through their supply chain.
From a regulatory point of view, preferences towards cards may be strengthen with stricter regulations on interchange fees, i.e., what payment actors can (or cannot) charge for card payments. Although this reduces profits for card actors, it increases transparency, and grow demands from merchants, seeing cards being less expensive to accept.
In this end, payment cards and card networks maintain their position of strength. This can come from several reasons. Networks MasterCard and Visa have huge investment capacity, not only to innovate, but to acquire innovative startups, adding to a growth of brand awareness (marketing) and services. With only a few major networks, interfaces are easy to maintain and re-use. Services benefits from the scale possible to achieve on a large network. Here card actors are successful in adapting to customer expectations, modernizing offerings such as virtual cards, digital wallets, peer-to-peer transfers, bill payments and more.
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At this end, as an instant payment ecosystem depends on all banks being connected to the same rail, a failure to achieve connectivity is most certainly a reality, there is a failure to coordinate leading to a lack of sufficient interconnectivity for instant payments, with a too spread set of offerings not being attractive for neither consumers nor merchants. Swish, as an example, becomes typical, being a tool for smaller peer to peer transactions, rather than payment for services and products.
Level of regulation
High level of regulation
Following several historical waves of failures in banking, where governments have had to step in, the industry at large has become more and more regulated. At this end of the scale, the trend of regulations continues further and deeper, not only for payments, but for related areas such as security, integrity, reliability, identity, and openness to bank accounts and bank services. With regulation also comes a high level of standardization of interfaces and communication required for payments. It will be easy – but in a controlled and restricted manner – for actors in the payment value chain to interact. Banks and PSPs will have no option but to share their data at the discretion of the customer’s and offer account to account transfers instantaneously not only within a country, but cross border. And as surcharges and interchange fees are banned or regulated to zero or near zero, payments trends towards becoming a commodity difficult or impossible to make profits on. A strict regulation of payments leads to payment processing becoming a matter of scale and efficiency, where processing experts will come to dominate as this is required for a profitable business. This will implicitly drive innovation and transformation as payment actors will have to seek other or new income streams.
At this end of the scale, a high degree of inertia should be expected, as regulations risks limiting incumbent banks and card actors, lacking positive incentives to stay compliant. We shall expect to see slow adoption of regulations, and long and complicated legal battles between the legislator and commercial actors. We will see actors deciding to leave the market, as the cost of staying compliant becomes too high, or as earlier sources of income disappears.
Low level of regulation (de-regulation)
At this end, the level of regulation is kept low and there may even be de-regulations letting market forces and dynamics drive development of the payment landscape. Any regulation rather strives at maintaining a “level playing field” supporting competition, keeping some control on actors risking growing too dominant. As the market are free to set standards, openness will be restricted to various and different payment ecosystems. We will see “pay for data” rather than “share data”. This opens for new business models and “bridging actors” placing themselves in between payment suppliers and customers for data brokerage, packaging, service, and payments orchestration.
Understanding and meeting customer behaviours and expectations is very important here to stay competitive. This will strengthen the current trend of shifts in the payments landscape. Although competition can be seen as beneficial, leading to alternatives in services and options, a lack of regulation of the payment infrastructure, may lead to consumers and merchants being locked in into certain payment ecosystems, seeing a growth of costs for payments and payment services.
With a low level of regulation there is also a risk that security is not sufficiently regulated and monitored, leading to increases in fraudulent behaviour, money laundering, as supervisory authorities have less legal support for monitoring.
#1: The Status Quo Scenario
In this scenario card payments maintain their current dominant position and regulations are kept on a low level, even being de-regulated. We can think of this as keeping a status quo when it comes to the share of payments done by cards. But this is not a scenario lacking development. Contrary, the status quo is maintained by help of a growth of virtual cards and digital wallets.
Physical cards are replaced by virtual cards in digital wallets as this meet consumer preferences and expectations on convenience and efficiency being able to pay digitally from their mobile devices both in e-commerce and in stores. As this scenario is lowly regulated, there are few limitations to digital wallets, that grow in use and numbers.
The virtual cards become a “centrepiece”, being added to multiple devices and digital wallets used by both payers and payees. “Tapping” devices to pay is such an example.
There are still regulations, but as requirements are kept low (or implementation of regulations are slow), banks see few benefits from integrating with each other for a cross-border instant payment rail. This strengthens the value of the global reach for cards, especially as e-commerce shopping extends outside countries. In Sweden Swish remains stable (as Vipps do in Norway, and MobilePay in Finland and Denmark), growing foremost in e-commerce, but at point of sales only slowly and in smaller ecosystems where card payment solutions are considered too costly or too comprehensive, for example for smaller businesses, sales markets, hobby clubs and organizations.
With virtual cards as a “go to” funding source, competition for consumers’ payments is made via digital wallets, as a consumer’s relationship is rather with wallet suppliers, rather than with card issuers. And there will be many wallets. This trend is already clear. Not only are we going to see payment wallets, such as Apple and Google, but also merchant wallets, each displaying their set of specific offerings and services, having cards embedded for payments. Merchant Wallets expands on loyalty, bonuses, and convenience. Each store will have their “scan and pay” in which you use your smart phone camera to scan what you purchase, and also pay for it. Here we shall expect to see “galleria apps”, where several different stores are under one “roof”, using a shared method of payment, combining a physical and digital experience.
Initially in this scenario, Swish will grow market shares from its easy way to implement payment solutions into wallets, but as card networks, Visa, and MasterCard, invests further in their proprietary wallet, Swish growth will come to a stop.
Further, the trust for card payments is strengthened from purchase guarantees offered, having a proprietary network difficult to target for cybercriminals. And as “open banking” and ”instant payments” do not fully play out in this scenario, PSPs that leverages business models based on connecting to banks, cannot offer sufficient competition towards card offerings and struggles for their position, instead they turn to brokerage of data, whilst banks themselves gets stuck wanting to charge for data, rather than finding business models for data.
But there is also a limitation to the speed of renewal and business development for cards as well, coming from the cost of capital, due to increased interest rates in combination with relatively low interchange fees, card operators will have to grow for volumes, to keep cost per transaction low. This will drive further consolidation and specialization on the operational side.
Depending upon how global actors behave and shape the competitive landscape, this scenario may play out for many years, but if some actors are considered growing in dominance, the “EU standard” scenario may kick in. Given the large number of wallets, and therefore options for consumers, it will take some time to see the outcomes, and as regulations are already in the making, it will not be until towards 2030 that the effects from these may be seen.
#2: A new balance
In this scenario, instant payment grows to dominance, becoming a preferred way to pay in e-commerce and at point of sales. In Sweden Swish will come to hold a dominant position both as a payment method, but also with added functionality in its app. And there will be many different apps, using instant payments, catering to different needs and ecosystems.
Just like in the “status quo” scenario, a strong driver for development are merchant wallets for specific purposes, for examples in stores. But in this scenario, Swish becomes successful in its way to offer an open platform for development. I.e., it becomes easy for developers of apps to embed Swish as a method of payment in their apps.
This gives Swish a strong competitive advantage when it comes to time-to-market for new applications in Sweden. (But this logic can also be applied to the Nordic countries at large, and European countries as they also see instant payment apps grow to domination). With ease of embedding a payment solution, even smaller and minor businesses have no choice but to select Swish as their primary method of payment, but this is also the fact for “pay per use” offerings, such as movies and games. Not only is it easy to implement, but as instant payments offer immediate clearing and settlement, this offers a better level of comfort for merchants, seeing payments immediately on their accounts, compared to card payments that are settled and cleared in batches at a later time. Whilst card payments mainly offer convenience for payers, Swish offers convenience for payers as well as payees and developers of applications.
Ease of implementation, and the direct connection to bank accounts with all its services is a breach head for Swish and similar instant payment actors.
The trend of embedding Swish is already visible, being embedded in applications, e-stores, and in terminals at point of sales. As you get a digital bill, you get a link to pay by Swish. As you pay taxes, you get a link to pay by Swish.
In this scenario, the owners of Swish (incumbent banks) decide to invest to add further functionalities into Swish, such as growing its scanning capabilities, tap to pay via smart phone and wearables, adding bank like functionalities like tracking of expenses, savings, split and divide costs between friends.
As Swish takes market shares from card payments, third party vendors shift their focus towards swish. A business of value adds, like insurance, bonuses and loyalty schemes connected to Swish come to grow. This type of offerings may be an integral part of merchant offerings, but these may also be specific member-based applications. We will see digital “shopping malls” and “virtual shopping”, where goods, services and bonuses and other value adding services are bundled and added to all the store’s offerings. In this scenario, we will come to see Swish being expanded beyond Sweden, but we will also see competing payment solutions entering locally to try their luck. This will happen on several fronts, firstly other instant apps will enter Sweden, such as Vipps, MobilePay and iDEAL. Secondly, existing payment wallets, such as PayPal will enter the instant payment space, competing with their wallet-to-wallet instant transactions. This is supplier driven, if you – as a consumer – want to purchase something from a vendor, you must use their offered methods of payments, and this will then drive Swish to expand abroad, whilst e-commerce from abroad will enter Sweden.
As regulation is weak, there will be a multitude of payment apps, and it will be difficult to compare and understand them. Payment Gateways will grow in importance, operating as ”switch-boards” between different banks and payment apps. Merchants will struggle to accept payments. And consumers will have a “portfolio” of payment apps, wallets, and merchant wallets in their smart phone. With the abundance of payment apps, and “switch boards”, there will also come an abundance of fake apps trying to trick you of payments, like fake “pop up stores”. And as instant payments are instant in their final settlement, contrary to card payments, these becomes an attractive value proposition for fraudsters.
Initially in this scenario cards maintain a position, but losses are immediate on volume, foremost on debit cards, but also on credit cards as cost of capital is high, considering a reduction of an aging group of people revolving payments on their credit cards. But cards are still a preference – or even a requirement – for cross border payments. And as cards are accepted at most of the sales point, being considered a trusted fallback to pay for expenses, the number of cards issued remains stable, but the number of transactions decline notably.
By 2030 it is obvious that Swish grows faster and more efficient than card payments, but cards will still have a larger share of payments at that time, and it will not be until 2040 that instant payments overtake card payments.
The payment landscape will grow in complexity in this scenario and in this complexity, there will be gaps being used for frauds. We shall expect to see bankruptcy and failures, and the phase of complexity may be replaced by a move towards the status quo scenario as trust for the system shifts back to cards, or a move towards a highly regulated “EU standard scenario.”
#3: The EU standard
One of the triggers for the ”EU standard” scenario has already happened, as the EU instant payment regulations comes into force shortly. But for the scenario to fully play out, more is needed. As regulations requires investments in development for banks and payment service providers, full compliancy is not expected to happen until 2028 at the earliest, more likely 2030. A shared instant payment rail across the EU will not be sufficient for this scenario, as this will not change the position of Swish in Sweden. But as the EU standardises – and even regulates – on a shared European Digital Payment Wallet and a shared Digital Identity Wallet, Swish, Vipps, MobilePay and other current payment applications will either adapt themselves to regulations and standards or be replaced.
The EU standard can come in two flavours, either as a government issued wallet, or a standard for commercial actors to adhere to. The latter will allow for Swish et. al., to further develop themselves and potentially expand their reach to other countries. In this scenario, instant payment will be like sending a mail or a text message; regardless of device or payment application, the payment will come through instantaneously across Europe.
The scenario is largely driven by a concern for consumers, and a political wish to limit few large payment giants to be too dominant. An EU-controlled instant payment rail is considered a necessary alternative to the dominant card networks, that have their domicile outside of the EU. Still, as card payments are global, cards maintain a position for cross-border (cross EU, non-EU currencies) payments.
Payment Cards and the Card Network still holds a position, but as regulations have pushed fees towards zero, profitability is low, even at a loss. After a period of consolidations, there remains a few issuers and acquirers focusing on global travellers, cross border payments, and a small aging group of customers that prefers credit cards, paying monthly bills, rather than instantly. Debit cards are kept by consumers at large, but only as a means of payments whilst travelling outside of Europe or purchasing products or services from vendors outside the region.
Due to a poor outlook for profitable business, card actors Visa and MasterCard limits their investments in the region, even closing services, as profitability goes towards zero. Card processing becomes a business of volume, surviving as a generic service offered by the few dominant players that have specialised themselves in operational efficiency, with an extremely low cost per transaction. To control and limit card actors in this scenario, payment interchange fees and surcharging for services are regulated, and driven towards zero. Card acquirers, and payment service providers, that earlier profited from proprietary hardware solutions have either had to close down or move towards open software driven solutions, like tap to pay on standard smartphones.
As regulations are strict, supervision is detailed, leading to increasing costs to enter the payment market as a bank or PSP. The instant payment rail is standardized, with a reach across Europe. This helps interconnection, and trust as cyberthreats, fraud, money laundering and conflicting problems becomes easier to control, avoid and even reduce.
Following consequences from regulated fees with low – or no – earnings on transactions, there is initially a lack of innovations until the required investments to stay compliant are done. At that time – after 2030 - the competitive landscape starts to shift, with banks and PSPs migrating away from payments as a service. Instead, they focus on embedding payments into services and products, value adding offerings, where there are profitable businesses to be found.
In this scenario, the instant rail not only becomes standardized, but it is also required by all banks to connect to this rail in a similar manner. The EU also regulates and standardizes an EU Payment Wallet as well as an EU Digital Identity Wallet, seeing these as prerequisites for an efficient and trusted payment rail.
Detailed and comprehensive regulations have not only driven, but defined instant payments and open banking, in a way that instant payments as a payment rail have benefited and grown into a dominating position, with standardised (per se, or by choice from consumers and merchants) payment apps and wallets. Such an EU wallet, either offered via central banks, or by commercial actors following a regulated and standardised form will replace Swish in Sweden, as it will also replace Vipps in Norway and MobilePay in Denmark and Finland, unless these are transformed to comply to (be) EU wallets.
This scenario drags out in time due to two main reasons, firstly the cost and time needed to be compliant, and secondly resistance from actors seeing a risk of losses, deciding for legal action against the EU or leaving the market. Typically, one can expect a decade or more, from legislation to a market adapted and in tune with regulations. This would indicate that the scenario does not play out fully until beyond 2035, during which lowly regulated scenarios will gain traction.
#4: Payments Industry Transformed
In the “payments industry transformed”, payments and payment services are heavily regulated. But compliancy to regulations gets drawn out in time as banks and PSPs struggle to comply due to massive investments required for development to stay compliant. The political wills within EU to grow instant payments do not keep pace. And the card rail is under increasing pressure due to lack of profits from fees and surcharges. It is difficult to earn money on payments, but there are few alternatives to card payments.
This scenario is initially characterised by long and complicated legal battles on regulations between the EU and giant payment actors, especially non-EU based, like Apple, MasterCard and Visa, and this will be a modus operandi for many years, including long and tedious lobbying processes. Subject matter experts within the EU gets tied up on these extensive arguments and dialogues, effectively putting a halt on progress.
Meanwhile, card actors, banks, PSPs and FinTechs starts to explore ways to achieve profitability, transforming themselves either into operational experts, or payment value adding experts, earning profits on services related to purchases, such as insurance, transportation, service, guarantees, and loyalty programs. Growing the number of transactions, and earning money elsewhere, becomes a strategy and card actors gets successful in doing this.
We will see incumbent banks deciding to leave the consumer segment, causing turbulence and a wave of mergers and acquisitions. For a while, this leaves a gap for alternative payment methods to enter the market, such as a growing use of cryptocurrencies and stablecoins, experiments with mobile payments like the m-Pesa, and closed loop payments like PayPal, and WeChat Pay, that are all topped up by transfers from accounts. But as these becomes regulated, they will also struggle with investments required to stay compliant.
After a period of consolidations to achieve benefits of scale, only a few large actors remain, being specialists in payment processing. Cards are mostly virtual in digital wallets. MasterCard and Visa have successfully captured a notable part of the market with their proprietary Digital Wallet offering.
As virtual cards are easy to issue, consumers will come to have several virtual cards than they can keep track of, as it becomes convenient and secure to issue a single virtual card for each payment, or for each merchant you shop from. This drives volumes of transactions up. “Cards” not “accounts” becomes a new way of thinking about household economy, having different cards for different purposes; to pay, get paid, save, and loan. To increase profits, card issuers offer “savings and credit cards”, earning incomes on interest rates. There may even be “mortgage credit cards”, where homes are purchased on cards, and paid off during many years. With this lending actors partners with card actors, to offer long-term financing, but also securing customer relationships and earnings from interests. Instead of paying bills, a specific virtual card will be deposited at the vendors, and card issuers will offer their customers a dashboard, from where they can manage their portfolio of virtual cards, “outplaced” with various vendors. From this, expenses can be tracked, payments can be “postponed”, “split” or moved in time or to a different card. A growing number of people will want to migrate their entire personal economy to the “card dashboard” ecosystem. People will want to “save” on different cards, setting aside money beforehand for a vacation, that is going to be paid using a certain card in a certain vacation wallet. Consumer banking on accounts is transformed to consumer cards.
Eventually card actors secure their market shares by offering peer-to-peer transactions, as earnings are now good elsewhere, competing with Swish not only on country level but for global transactions.
Although strongly regulated, this scenario opens for cybercrime, fraud, and money laundering, for a while in the gaps created as the industry transforms and new entrants try their luck, before regulations can close any gaps. Due to the fact that the complications from regulations have to play out, before transformation is initiated, the majority of outcomes from this scenario will not be visible until after 2030.
Scenario #5: The disruptor – Centralized Central Bank Digital Currency Networks
Turbulence and concerns
In a future with increasing geopolitical turbulence, fraud and cyberthreats, security concerns and shifting political ambitions towards centralization and control, Central Bank Digital Currency (CDBC) Networks comes into play.
This scenario can be triggered by different causes:
Centralization and control bringing collapse to other payment rails
In this scenario, it is decided to centralize and digitize payments, issuing “digital coins and notes” directly to consumers and merchants from the central bank (or a dedicated third party centrally supervised) to ensure trust and traceability for the purpose of security and hindering payments for criminal purposes.
As this becomes a new payment rail, it also becomes a disruptor to the card and instant payment rail, bringing collapse to all the scenarios above.
Design and choice of distribution mechanism
Payments between a consumer and a merchant will be done from one digital wallet to another, using standardized digital wallets, either via (1) instant clearing and settlement on centralized holding accounts or (2) direct transfer of digital tokens on a distributed ledger. Each citizen and merchant have a holding account with the central bank. There is no need for an account at a commercial bank, nor a payment card, to pay or get paid.
The choice of the distribution mechanism for CDBC will force banks and PSPs to transform themselves, no longer offering holding accounts and payments, to be a supplier of financing, loans and advise and operate nodes on a distributed ledger network.
Digital Identities and Use Case Scenario
Not only will there be standardized wallets for digital coins and notes, but also standardized digital identity wallets for individuals, merchants, and assets, containing the information required to ensure a trusted and verified chain of value exchange, as payments and ownership of assets will have to be tied to digital identities to ensure trust and security.
For consumers and merchants use cases on CBDC remains very similar compared with today, having payments going from digital wallets or cards. But execution of the payment will be done on a CBDC Network, rather than a banks account-to-account rail or a card network. Here, neither the banking account to account network, nor the card network such as MasterCard and Visa, will be needed.
In this use case, an individual (blue) searches and finds an apartment to rent. By mail (1) he asks the owner (red) for the cost. She replies (2) in the choice of CBDC, at which the deal is agreed, and payment (3) is executed immediately. A digital key (4) to open the apartment, can be enclosed in the very same transaction. Risk is minimized for both payer and payee. Here similar technologies as used for payments are used for digital identities and digital identification. Not only can the payer and payee identify each other, but the apartment itself can have a digital identity, all proving their existence, and availability.
Inertia
Decision makers will struggle to agree and decide on the design of the CBDC network, spending time and money to explore options and investigate risks, consequences, and potential outcomes. With its disruptive and transformative outlook, inertia for change will be very high. Banks and PSPs will resist, arguing that the payment system as it currently operates, is efficient and sufficiently safe. A process to come to a final decision will require many years, even decades, and a CDBC scenario as outlined here, will not play out until at earliest 2035 to 2040.
Final Thoughts and Reflections
Certain uncertainties and dimensions not considered
In addition to instant and card payments, there are other payment rails and methods. Some of them have been mentioned. And they are considered in the following manner: (1) As the trend for invoiced payments (giro) has a stable outlook these are considered to have an equal impact on card and instant payments, i.e., they will not shift balances regardless of scenario. (2) financed payments, such as Buy Now Pay Later (BNPL) is considered an equal competitor to card and instant payments foremost in e-, and m-stores, hence impacting these equally. (3) Payment solutions, such as “pay from your bank account”, (www.kivra.se as an example) is considered as an invoiced giro payment. (4) closed loop payments, such as PayPal are considered being included in card and instant payments on an equal split, as these types of wallets have a card or bank account as a funding source.
Using scenarios
It is important to remind oneself, that the scenarios describe possible futures, and how they may play out. There are no likelihoods to them. The timeframe is from 2024 towards 2040, possibly beyond that. The scenarios should be of value foremost for current and future actors in the payment’s ecosystem, but also for other parties with an interest in payments in social, legal, and political contexts, to:
As mentioned above, there are more possible purposes and usages.
Scenarios may follow from each other
The scenarios presented here, are not necessarily playing out in such a way that it is one or the other. One scenario can come to replace another after a while, for example:
Hence, a “journey” across several scenarios can be imagined over time if one would want to explore roadmaps to re-cover from loss of market positions.