Shifting priorities: Payments from cars to cards
- Providers have really started to dig around for innovative ideas in the payments space. But innovation doesn't always translate into commercial viability.
- In North America, commercial payments account for 56% and retail payments account for 46% of the total value.
Recently Mercedes announced in-car payments for its customers in Germany through a partnership with Mastercard. Through this service, riders will be able to make payments at service stations using biometrics integrated into the car’s infotainment system.
Having locked onto the ubiquity of payments, providers have really started to dig around for innovative ideas in the space. But innovation doesn't always translate into commercial viability. At the moment, in-vehicle payment system market size is about $1.12 billion. Compare that to P2P payments which hit $2.21 trillion in 2022.
While in-car payments haven't found their footing yet (could it be because you still have to get out of the car to fuel your car?), the general shift seems to be in the favor of non-cash transactions, which are growing at 16.6% YOY globally, according to a new study by Capgemini. In North America, non-cash payments are expected to increase by 6.5% CAGR.
State of digital payments
Globally, consumers prefer to pay each other through account to account transfers over cards. Over 45% of executives rank A2A as the most preferred method for C2C payments. A2A payments are popular for customer to business payments, as well. 40% of executives rated A2A as the preferred method for C2B payments, followed by digital wallets, demoting card-based payments to third place.
Regulatory troubles and costs on the mind
Compliance and risk are narrowing the budget that can be spent on offering new and innovative products. Execs report that risk management and regulatory compliance contribute to 36% of business costs, followed by another 27% that is spent on managing legacy systems. With all costs subtracted, firms are left with only 11% to spend on innovation of their payment products.
At the same time, as the payment landscape changes, less money is coming in than before. Instant payments have cut down on float income, and interchange fees are on the verge of change as regulators seek to cap them. While BNPL and credit cards have contributed quite a bit to payments firms’ fund income, the dent in consumers’ financial wellbeing and lack of regulatory clarity on BNPL are threatening the profitability of these channels.
These pressures are pushing FIs to consider what types of payments are the most profitable. In North America, commercial payments account for 56% and retail payments account for 46% of total payment value. Globally, one in two payments execs see commercial payments as more profitable than retail ones. This is also reflected in the attention the SMB sector has been garnering recently, with banks like Amex acquiring fintechs and building new products for cash management and B2B payments for SMBs and middle market businesses.
Spurred on in part by the entry of fintechs and challenger banks that focus on the SMB sector, digitalization of commercial payments is increasingly becoming table stakes. 74% of execs globally, report new entrants as the reasons for volume growth in the space. The other reason for digitalization is the macroeconomic environment. High inflation environments are not check-friendly and 60% of execs globally rate commercial cards as the leading channel for these kinds of payments.
While auto makers are excited about the potential of locking customers in the retail payments sector, it's the commercial payments ecosystem that seems to be the priority for FIs.