Good article sharing: retail payment industry trend analysis and research

I. Introduction

On January 19, local time, the World Economic Forum's 2024 Annual Meeting closed in Davos, Switzerland. The World Economic Forum's Chief Economist Outlook warns that uncertainty will increase and the global economic outlook remains subdued. The report also said that the global economy is still grappling with headwinds from tight financial conditions, geopolitical divisions and rapid advances in generative AI. At the same time, despite lowering expectations for high inflation in all regions, the report has a mixed outlook for regional growth, with no region expected to achieve very strong growth in 2024. According to the United Nations Department of Economic and Social Affairs' "World Economic Situation and Prospects 2024", global economic growth is expected to slow from 2.7% in 2023 to 2.4% in 2024. Judging from the above report, the global economic outlook in 2024 is not optimistic, but in the medium and long term, the trend of digitalization, intelligence, virtualization, and low-carbon is developing rapidly and iteratively, and we have reason to remain optimistic about the sustainable growth of the global economy.

The retail consumer market is an important engine and barometer of global economic growth, and as a practitioner in the payment industry, it is even more necessary to grasp the certainty in the midst of uncertainty, follow the development trend of the times, and take the initiative to promote industry reform, so as to win development opportunities.

2. Analysis of retail payment industry trends

In October 2005, the People's Bank of China issued the Guidelines for Electronic Payment (No. 1), stipulating that electronic payment refers to the act of units and individuals directly or authorizing others to issue payment instructions through electronic terminals to achieve monetary payment and fund transfer. From the perspective of business essence, the form of retail payment has not separated from the scope of electronic payment, which is an upgrade of electronic payment in the digital era, but it also presents new characteristics, and it is necessary to grasp the development trend from the same. The details are as follows:

The virtualization process accelerates. Starting with physical cards and ending with payment terminals, everything will eventually go virtual. From a micro level, the retail payment market has entered the post-card-based era, where digital avatars of physical bank cards are ubiquitous, and digital payment methods such as QR code payment, in-app payment, and NFC payment have become the mainstream. From a macro perspective, with the rapid development and application of new technologies such as virtual reality/augmented reality, artificial intelligence, and blockchain, concepts such as the metaverse and WEB3 are gradually becoming concrete, and the human economy and society are rapidly entering a digital virtual society. As a native digital virtualized payment tool, digital wallets are already leading the global retail payment market (Source: Worldpay, FIS's Global Payments Report 2023) and will play a key role in this process.

Diversified account services. In addition to traditional bank accounts, prepaid accounts and credit accounts of third-party payment institutions have significant advantages in the field of small-amount and high-frequency payments, effectively improving the penetration rate of digital payments;

Payment processing intensification. Moore's Law states that "the performance of microprocessors doubles every 18 months, while the price drops by half". In fact, with the in-depth application of new ICT technologies such as cloud computing, big data, artificial intelligence, smart terminals, clean energy, and green computer rooms, the total cost of ownership (TCO) of payment transaction processing, including merchant acceptance, acquiring, transfer and clearing, and account services, has dropped significantly. In addition, according to the overall operation of the annual payment system in 2022 announced by the People's Bank of China, UnionPay and Netlink handled a total of 1,018.839 billion electronic payment business (source: based on bank accounts, excluding payment accounts operated by Tencent, Ant, etc.), with an amount of 702.45 trillion yuan, far exceeding the transaction scale of Visa (source: according to Visa's 2022 financial report data analysis) and MasterCard (source: according to Mastercard's 2022 financial report data analysis) in the same period. The domestic retail payment market is characterized by ultra-large-scale, high penetration rate and low acceptance cost, which is mainly due to the breakthrough application of innovative payment technologies such as QR code payment and cardless fast payment. In the medium to long term, in a fully competitive multilateral market environment, the transaction processing revenue directly obtained by all participants in the retail payment market will be close to low cost for a long time, especially for debit transactions of debit accounts, traditional electronic payment service providers may be close to free of charge due to the competitive strategy with emerging payment methods such as digital currency. Players in the retail payment market need to work together to drive industry change and restructure business models.

Interoperability (interoperability) is challenging. Since the beginning of this century, innovative payment technologies such as QR codes, NFC, biometrics, and cardless transactions have been integrated and innovated with mobile Internet and the Internet of Things, which have greatly improved the convenience and efficiency of our capital transfer, and mankind has entered the era of digital payment. At the same time, major payment players in the retail payment market continue to expand a variety of scenario applications and strive to build their own payment ecosystems. Top digital wallet players inevitably turn to the "Walled Gardens" model for factors such as monopolizing data and maintaining competitive advantage. Between different digital wallets, between digital wallets and traditional banking apps, between digital wallets and bank card networks, between traditional networks and blockchain networks, and between overseas and domestic, there is a fragmented and closed state, and it is difficult to move data and funds, resulting in a fragmented experience.

Rapid advances in AI technology bring new opportunities. In the past year or so, generative AI technology represented by LLM (large language model) has seen a blowout development, and it has increasingly shown characteristics and trends such as system generalization and intelligence emergence. An important application area for generative AI technology for the payments industry is to combat fraud. Compared with traditional risk models, LLMs are expected to significantly reduce transaction fraud rates by analyzing and learning more data, and intelligently identify and even predict various risk events in real time. Another example is that the cloud LLM provides digital assistant support for digital wallets, replacing consumers with intelligent interaction with the surrounding environment, and truly realizing safe and credible non-inductive payments. At the same time, generative AI will transform the way we work, increase productivity, and improve products, services, operations, and infrastructure.

3. Reshaping the value chain

With the acceleration of virtualization, the diversification of account service subjects, and the intensive characteristics of payment processing, the retail payment market is accelerating from the traditional "quadripartite model" of bank cards to the new "quadripartite model" of electronic payment. In the new "quadripartite model", including payment network service providers, digital wallet service providers, account service providers, acquiring service providers and other market players, the existing market players will gradually fade out of the market or evolve into new roles. At present, market players need to find their own positioning, actively embrace changes, and strive to obtain the ticket to the second half of the digital payment revolution.

Payment network service providers. Focusing on the role positioning of "the network of networks", we will continue to reduce the TCO cost of transaction processing and the transaction fraud rate through digital technology, continuously improve cross-network and cross-border interoperability, actively embrace the transformation of the digital economy, promote the integration of digital payment infrastructure with digital payment, digital identity and digital credentials as the core, explore and build a new business value model around the data value chain and payment value chain, and cooperate with all parties in the industry to promote the retail payment industry to further become intensive, digital, virtualized, and Intelligent development, jointly build an open, unified, intelligent, efficient, safe and credible digital payment ecosystem.

Digital wallet service providers. Focus on the role positioning of "digital trust connection tools", abandon the "garden wall" model, break the closed and fragmented state, continuously improve the level of interoperability, security and intelligence, enrich the digital wallet functions with digital payment, digital identity and digital credentials as the core, and promote the construction of an open, unified and intelligent digital wallet ecosystem.

Account Service Providers. Focusing on the role of "consumer money steward", we continue to enrich account functions and related products and services, continue to reduce the cost of consumer funds, and provide consumers with rich, convenient, safe and efficient digital account services.

Acquiring Service Providers. Focusing on the role of "merchant digital steward", we use digital technology to continuously optimize key links such as transaction processing, merchant settlement, and risk prevention and control, promote comprehensive solutions such as digital retail stores, merchant credit product distribution, and consumer loyalty programs, and provide retail merchants with online and offline integrated, customized, efficient, high-quality, and compliant omni-channel acquiring services.

Fourth, the future outlook

Runaway is a sci-fi movie that you'll remember as an NPC (non-human player) bank teller in Liberty City (an online game) and Millie as a real-world programmer and game designer who team up on an adventure to save the virtual game world. Of course, in the end, good triumphs over evil, and NPCs become self-aware and fall in love with human players, adding an element of technological romance. The movie "Runaway Player" is of course fictional, but with the rapid progress of new ICT technologies such as artificial intelligence, virtual reality/augmented reality, and blockchain, it is foreseeable that in the near future, human society will enter a digital virtual world where the physical world and the virtual world are closely intertwined, and cross-sovereign digital currencies represented by Facebook Libra may make a comeback at any time. Facebook's parent company is none other than Meta, the "metaverse platform company", which undoubtedly has a strong metaphor. At that time, whether the business models of Visa and Mastercard with high merchant deduction rate, high revenue and high profit margin built by relying on reinforced concrete can be sustained?

At the same time, China's bank card organizations, clearing institutions, and commercial banks, together with WeChat, Alipay, Douyin, and other new Chinese forces, are making great progress in the direction of digitalization, virtualization, intelligence, and intensification, and may be able to create a new digital future. At this time, Visa and Mastercard chose to cooperate may be the best strategy.

About the author: The author of this article is a practitioner in the payment industry, who likes tea, coffee, reading, thinking, and cycling in his life [email protected]