Post Covid Reshapes: Which Trends in Digital Payments to expect in 2021?

2020 was a difficult year for many, blockchain and fintech industry has also went through an evolution. We can observe higher levels of digitalization in all aspects of everyday life with a rise in use of digital payments as well as greater financial freedom through decentralization and transparency. In this article by FAS | Fintech Advisory Services we will discuss tokenization of payments, embedded payments, QR and NFT adoption, as well as DeFi applications, Central Bank Digital Currencies and Security Tokens.

2021 is expected to continue with the same trend, with greater adoption and technological advancements. Many of the sectors mentioned above will become more common and potentially a part of our everyday lives, to the point where it may even become the new norm for financial industry. With a vaccine developed and steadily implemented, COVID-19 may become a threat of the past, however it propelled the need for new digital solutions to a new level.

Tokenization of payments

Tokenization of payments is becoming more widespread in the world due to its advantages in terms of cybersecurity. Essentially, credit and debit card data are being replaced by a “token” thus making it unnecessary to share sensitive payment information becomes encrypted.

Adoption of these new kinds of digital payment systems will continue to grow all over the world. According to some estimations, in 2019, around 2.1 billion consumers used a digital wallet, which is a 30 percent increase compared to 2017, according to Braintree’s 2018 Global Payments Report. Statista also estimates that e-commerce will account for the movement of $4.8 billion globally in 2021.

Payment tokenization generates a unique token which will be the only thing visible to others during a transaction. They are unique for each payment platform and device, and they substitute customer’s primary account number (PAN) to a numeric value which is called a token. This value is the only thing on display, which prevents illegitimate use of a real PAN of each customer.

Embedded payments

Embedded payments are revolutionizing how customers are paying online by providing seamless direct in-app purchases. Customers only need to press a few buttons to confirm their payment, essentially alleviating the pain of putting your credit card all the time to make a payment. This system is being used by apps such as Uber and Lyft among the ones widely known.

The venture firm Andreessen Horowitz estimated that embedded finance will increase the profitability of a customer by over 2 to 5 times of the original revenue stream. Since embedded finance makes purchases easier, users stick to those solutions for longer time due to not having to be redirected to a third-party website to complete the payment. Moreover, companies can gather valuable data to improve their user retention rates.

Chinese companies like Yizhibo or Kuaishou now allow their users to purchase goods they see on livestreams with a click of a button, Google recently announced that their users will be able to find and pay for parking inside the app. Tesla has included their own insurance plans on their websites. Nevertheless, according to J.P. Morgan, embedded payments are only at 10% penetration as of today, and it is expected that 2021 will become a very favorable time for those payments.

QR and NFC adoption

QR codes have been around since a while but were not as widespread in digital payments as they are now. The biggest example of QR payments would be Tencent’s Wechat, which is universally used payment application in China. Lately, more companies started to explore QR codes as a means of payment. For example, PayPal made an agreement with CVS which will become its first adopter of QR code technology, and it plans to roll it out to 8200 US stores in the near future.

COVID-19 has sparked a new wave of contactless payments. Now customers do not want to use cash or physical credit and debit cards, instead they prefer NFC and QR code methods of payment, and they aim to leave stores as quickly as possible. Stores are also interested in this type of technology in order to partially protect their employees. The PYMNTS and American Express study has found that about 30% of American citizens created mobile wallets and contactless purchases during the first stages of the pandemic. By July, this number has increased to more than 50% of U.S. based consumers. About one-third of shoppers now say that contactless payment options are their go-to method for making purchases. It is expected that this trend will become more prevalent in 2021 as the pandemic is still present and will likely not disappear quickly.

Central Bank Digital Currencies

Potentially, Central Bank Digital Currencies are going to be the ones that will bring Blockchain technology in our everyday lives without general understanding from the public that Blockchain is even used. A technology can be considered as mass adoption when most people use it and don’t bother to know how it works because it’s simple and it works well.

CBDCs have started to rise after a clear need to make payments cashless partially due to COVID-19 outbreak. 2020 has been a year of many initiatives all around the world which aimed to develop their own digital currencies. Currently those countries are in various stages of development of their CBDCs and we can expect great progress in 2021.

The main difference that Central Banks Digital Currencies will have from standard decentralized cryptocurrencies is that they are centralized and are issued and mainly managed by the central bank. Not all utilize blockchain technology to the fullest due to centralization specifically. CBDCs will also bring more convenience in cross-border transfers and will make them faster and more secure. One of the downsides is potential for tracking how people spend their money with great precision, which is why it is important to incorporate privacy into the system, but not all governments will be doing that since they would prefer to have more control.

Among the countries that initiated the development of CBDCs, China is the forerunner with their Digital Currency Electronic Payment (DCEP), which actually does not utilize blockchain and is fully centralized by the People’s Bank of China. DCEP already had test trials in 4 cities: Xiong’an, Shenzhen, Suzhou, Chengdu. The trials will continue in more cities in the coming future.

Many of G20 countries are either developing, exploring or testing their CBDCs, while non-G20 nations such as Sweden, Norway, Switzerland and Cambodia have also said they are considering digital currencies.

A collaboration between the Bank of England, Canada, Japan, US Federal Reserve, the European Central Bank and Swiss National bank are aiming to avoid barriers for transferring various currencies in their digital form, however China was not included in that collaboration.

Security Tokens

Security Tokens are a new way to tokenize assets which allows quick and easy transfer of ownership along with a possibility to fracture assets which otherwise would be impossible to sell in smaller parts thus highly raising the liquidity of those assets. Security tokens can be applied to multiple types of assets such as stocks, real estate, art, luxury cars and etc.

For example, if a high-class luxury hotel was to be sold, it would have to be sold at once to an individual or organization for it to go through, but with security tokens it will be possible to sell it to multiple individuals at once. The asset is fractured in pieces and is sold to the ones interested, and buyers will be granted partial ownership rights and potential dividends from this property.

2020 was a very productive year for blockchain industry as a whole, and Security Tokens have also become more widespread. Nevertheless, we should expect a higher progress in security token offerings in 2021 as the basis of development and more acknowledgement is now present in the industry. The infrastructure for the adoption has been laid down by now with establishment of various issuance standards, exchanges and crowdfunding platforms.

Polymath, one of the current leaders in security token issuance, will release its own blockchain specifically for issuing security tokens. As the creators of a very common standard for security tokens called ERC-1400, we can expect that the new blockchain will further promote and simplify the process of issuance of security tokens with all standards in place. Potentially, issuing security tokens will become even more seamless and will gain wider adoption in the coming years.

The future of DeFi Applications

Decentralized Finance is a trend that quickly gained traction in 2020 with projects like UniSwap entering the market and providing various banking solutions in decentralized fashion, mainly being controlled by financial institutions in the past. As of today, there are $16.24 billion worth locked in DeFi applications, and it was at $1 billion in June 2020.

DeFi could be an answer for 2008 financial crisis where multiple authorized regulators made poor decisions thus creating a problem in financial markets. With COVID-19 financial crisis, we can see how DeFi applications can help us transition into a more decentralized economy. 2021 will continue with an upcoming trend according to many industry experts.

Highlights

COVID-19 has brought a lot of changes in how payment systems work worldwide, bringing more value to digitalization and decentralization. The pandemic accelerated the transition to a more cashless society and the trend is likely to stay after it is gone. 2021 will still bear hardships brought by the virus, however we will see wider adoption of fintech solutions and blockchain in the coming year.

Next year we expect to see the rise of blockchain technology driven both by the virus and a upcoming trend on the market (Bitcoin breaking all time high in December 2020). Security tokens will gain more traction with the current infrastructure and regulations being more stable and reliable. Central Bank Digital Currencies are likely to start coming into everyday use, however it depends on the speed of development and testing. DeFi is still on the rapid growth with nearly 2000% increase in this year alone, so 2021 will be an exiting time for the industry.

Fintech solutions will revolve around digitalization and simplification of user experience, making it seamless to shop online for goods and services. QR and NFC technologies will be more common in the west, while before that was mostly used in Asian countries, especially China.

Overall, 2021 could potentially be a very exciting time for both fintech and blockchain industries. With COVID-19 being studied and vaccinated already, we should see a gradual comeback to more physical interactions, however the changes that happened in 2020 made it clear how much value can fintech and blockchain bring to financial systems.