What’s New In Digital Payments?

April 18, 2023


When it comes to lucrative investments, the opportunities across all parts of Egypt’s digital economy are undeniable. The Ministry of Communication and Information Technology said on its website: “Objectives entail developing the ICT infrastructure; fostering digital inclusion; achieving the transition to a knowledge-based economy; building capacities and encouraging innovation; fighting corruption; ensuring cybersecurity; and promoting Egypt’s position at the regional and international levels.”

An indispensable part of any digital economy is the ability to securely and conveniently process online payments. “Given the key role … digitization plays in the financial lives of more and more of the world’s population, electronic payments are at the epicenter of this transformation,” said a PricewaterhouseCoopers (PwC) report forecasting digital payment trends through 2025.

In Egypt, digital payments are booming. MasterCard’s New Payment Index (NPI) 2022 flagship statistic is that in 2021, 88% of Egyptian consumers “have used at least one emerging payment method.” Meanwhile, 15% “indicated they used less cash.”

Understanding international digital payment trends will be essential for local players to capitalize on the country’s dynamic young, tech-savvy consumers. “Egypt is a fertile ground for all that is innovative and digital,” Adam Jones, MasterCard’s country general manager, wrote in the NPI report. “Consumers in Egypt [are] adopting different payment options and discovering more of the digital economy’s benefits.

Local landscape

At the same time, cash still rules. A July 2021 report by Electronic Payments International, a research company, stressed Egyptians remain “wedded to cash.” It estimated fiat currency transactions accounted for “74.7% of overall payment volume in 2020.”

However, MasterCard’s NPI 2022 report said an increasing number of Egyptians are open to using more digital tools “with comfort and security key to growing adoption.” It calculated that “64% of Egyptian users (compared to 61% globally) increased their use of at least one digital payment method in 2021.” Meanwhile, Egyptians with e-wallet apps executed 26 million transactions in 2021, up from 9 million in 2019. The value of those transactions jumped from EGP 88 million to EGP 268 million.

Those percentages will only grow as youths get more comfortable with such tools. “In Egypt, Gen Z and Millennials are less likely to make in-person purchases and payments,” the MasterCard report said. “They are proactively seeking new payment methods, with 40% of Gen Z and Millennials likely to have obtained a new touch-free payment method compared to [the older] Gen X.”

MasterCard said nearly 35% of those using digital payments used “tappable smartphone mobile wallets, 27% a digital money transfer app and 24% QR codes.” The rest make payments via left-field channels, such as social media apps. “Adoption of a broader range of digital payment methods is accelerating in Egypt, and the technology fueling the future of payments is already here,” the report said. “Consumers in Egypt are increasingly and actively using these solutions.”

The report also noted Egyptians are more open than ever to using third-party payment services that require sharing bank account details (aka open banking). It is estimated nearly 71% of locals know about open banking and use it to pay bills, do their banking, secure or refinance loans, and make installment payments.

“Most consumers are open to … linking their accounts to a merchant site for future purchases,” the MasterCard report said. Meanwhile, over 80% of those who saved their payment card details on sellers’ websites “maintained or increased their usage” in 2021.

Over two-thirds of Egyptians surveyed in the MasterCard report said they would pay bills digitally. However, their bill-payment preferences are split almost evenly among those who preset dates for automatic payments, those who change payment dates each month, and consumers who select different installment plans every time a payment is due.

MasterCard found 61% of respondents in Egypt “feel safe using apps to send money to people or businesses from their phones.” Meanwhile, 42% said they were “willing to share financial data information with apps to have access to payment tools that help them manage their money.”

 Pushing digitization

Accelerating the digitization of Egypt’s economy and payments, the Central Bank (CBE) announced new incentives to promote cashless transactions. However, they are valid only this year.

The key incentive exempts pound-denominated online transactions from all fees and commissions. Additionally, fees on transfers and payments made via the CBE’s Instant Payment Network — accessible via the Instapay smartphone app — won’t apply this year.

Those exemptions should increase the value of online transactions, mainly via Instapay, where transfers made last year reached EGP 45 billion, with 1.2 million Egyptians using the app since it went online in March 2022.

Micro, small and medium-sized enterprises also get exemptions if they activate and promote e-collection services for customers.

E-wallet transactions are still subject to fees. Moving funds between two e-wallets offered by the same provider costs a maximum of EGP 1. If the wallets belong to different operators, the maximum fee is EGP 15.

The CBE also aims to train youths and employees to use fintech technologies. Fintech Egypt, a regulatory sandbox created by the CBE in 2019, launched the National Digital Academy in January. It will provide accredited virtual and in-person training primarily to bankers. Those enrolled in the first intake should start the initial course during the second quarter of 2023.

The academy is the latest CBE effort to raise awareness of digital payments and fintech. Efforts started with FinYology training in February 2020 in cooperation with the Egyptian Banking Institute and 25 public and private universities, banks, and fintech startups.

 Global acceleration

Local fintech companies are significantly affected by international developments in the sector and the change in use patterns caused by global crises, such as the COVID-19 pandemic lockdowns and war in Ukraine.

The lack of physical borders in the digital space and low industry entry barriers mean local consumers might use fintech services developed by overseas companies. They also could easily switch to a new domestic player. As MasterCard’s report on Egypt stressed: “The majority of consumers are seeking greater agility to optimize … payments, prioritizing control, flexibility, convenience, and integrated payment technologies.”

Accordingly, keeping up with the latest global payment trends is increasingly vital. “Underneath the shift to cashless [transactions] lies a larger, more profound change,” the PwC report said. “Not only are traditional ways of paying for goods and services … set for radical transformation, but the entire infrastructure of payments is being reshaped with new business models emerging.”

Those trends shape new technologies and services, such as instant payments, bill payments, request-to-pay services, plastic payment cards and digital wallets. Those evolving trends also will impact the services on offer. That includes buy-now, pay-later (installment) options; digital and cryptocurrency availability; and central-bank-backed digital currencies.

 Trend 1: Payment plumbing

The PwC report stressed that behind-the-scenes processing — the “plumbing” of payments — is changing as consumers reduce their use of cards and traditional accounts in favor of digital wallets and smartphone apps. The PwC document attributed the transition to “regulators forcing the industry to strengthen, or build up, domestic infrastructure for payments.”

That entices digital payment providers to outsource their infrastructure to cloud developers. The PwC survey accompanying the report found 80% of financial services organizations expect to have outsourced such infrastructure by 2025.

That makes the interoperability of e-wallets among local and overseas bank and non-bank operators essential, the PwC report said. Using e-wallets avoids “frustration with the traditional correspondent banking model, [which is] both cumbersome and costly in a world of instant, low-cost payments.”

Meanwhile, the advancement of peer-to-peer technologies where transactions are executed outside the official banking sector makes transfers more accessible, scalable and secure. A case in point is Finland, Sweden, Norway, Iceland and Denmark, which use the same instant online payment system. That means all five don’t need to worry about delayed transfers, despite each country having a central bank to settle and clear transactions.

Central banks acknowledge the noticeable shift away from conventional banking and are developing their own versions of instant online payment apps. In addition to Egypt’s Instapay app, the Federal Reserve created Fednow, which will come online in May, according to news reports.

Another trend changing the “plumbing” of digital payments is the proliferation of smartphones. Clearly Payments, a developer of online payment solutions, noted the “greater emphasis [is currently] on digital and mobile payments.” That comes from more companies building smartphone apps to give their target consumers access all the time, everywhere they go. “This also is driven by changing regulations and standards, which include mobile technology that is being adopted by payment technology providers.”

Meanwhile, the proliferation of near-field communication and QR technologies on smartphones allows secure payments. Those two technologies also make transactions contactless, which Clearly Payments described as a “more convenient and faster checkout experience.”

Developing artificial intelligence (AI) infrastructure for online payments is another rising trend affecting the plumbing of digital payments. Clearly Payments noted that AI is “increasingly being used to enhance the payment experience by offering personalized recommendations, fraud detection and real-time analytics.” They stressed that applying those technologies at scale would “change the payment landscape forever.”

AI-powered infrastructures should resolve problems that limit innovation in digital payments. “The lack of skilled workers is cited as an impediment to business growth, something that becomes especially acute as innovations in technology require a different workforce,” Karen Webster, CEO of Market Platform Dynamics, a management consulting firm, wrote in PYMNTS, a specialized news portal in January. AI has “the tools to deliver a consistent, high-quality level of service … quickly, and at scale.”

Trend 2: Digital money

Using fiat currencies will increasingly become inappropriate for fast digital payments, particularly to overseas recipients. The PwC report stressed that “private sector cryptocurrencies [along with Central Bank Digital Currencies (CBDCs)] are predicted to have the biggest disruptive impact over the next 20 years.”

Clearly, Payments agrees, adding, “The use of [conventional] cryptocurrency for payments is expected to increase … as more consumers and merchants become familiar with the technology and its benefits.”

However, PwC predicts the new generation of private cryptocurrencies would be “backed by a basket of sovereign currencies.” That, in addition to CBDCs, “could replace … non-sovereign payment systems [such as Bitcoin and Etherium],” PwC said.

Kristofer Rogers, managing director of Eden Consulting, argued cryptocurrencies would eventually fade due to their high volatility and complete independence from sovereign backing. However, blockchain technology, which they use, will “change the landscape and facilitate a longer-term digital currency marketplace.”

He added that blockchain is “one of the most exciting tech spaces and will continue to introduce incredible innovation for the entire payment ecosystem.” Global Payments, a digital payment solutions provider, said in a January note that real-time payments and open banking should benefit the most from blockchain technology, ensuring that transactions can’t be faked or unlawfully accessed.

However, Webster of Market Platform Dynamics believes “in 2023, we will see payments and financial networks get smarter without crypto and blockchains.” Additionally, third-party apps connecting various providers, the development of interoperable platforms and the increasing speed of traditional networks “will make it possible to embed instant [transaction technology] into any payment workflow at scale [allowing] businesses [to] create new cases for instant payouts.”

Webster also noted business-to-business transactions will use “software and data to make money ‘programmable,’ based on conditions and rules established by networks.” Today, that is only possible via blockchain and digital currencies.

Despite Webster’s prediction, Egypt should reconsider its legal ban on digital currencies, though not necessarily cryptocurrencies, to cope with future digital payments. A paper by the Bank of International Settlements (BIS) in 2021 said 60% of central banks are considering issuing their own digital currencies, with 14% conducting pilot tests. Global Payments said CBDCs have “found their footing because of how they meet consumer demand and solve [cryptocurrency] pain points.”

Regardless of the type of digital money, businesses and individuals likely would use them for “cross-border payments and remittances, loyalty and rewards, and digital wallet integration,” Global Payments said. Unlocking “these use cases also will need to garner the trust of stakeholders for mainstream adoption to take hold.”

Trend 3: Security, security, security

The more individuals and companies rely on digital tools, the more likely they will be vulnerable to financial crime. A 2021 report from Sift, a digital security company, said that with internet traffic up 60% during the pandemic, “attempted online payment fraud” increased 69% year-on-year.

The attempts also became more diverse. PwC said the main reason was the more “open banking [platforms], combined with a set of new players and the shift toward payment initiation and digital wallets is … opening new doors for all types of financial crime.”

Another risk is that cross-border digital money transfers on the same platform could “enable sanctions evasion and money laundering,” according to the PwC report. “In our survey, security, compliance and data-privacy risks … were the top concerns for banks, fintechs and asset managers in implementing a fully integrated [digital payments] strategy.”

A May 2020 report from BIS stressed such risks would significantly decrease if there were “greater collaboration among banks, payment providers and the public.” The downside is the increased scrutiny and detection processes likely would force digital payment developers to find a compromise between cybersecurity and customer convenience. One prominent example is real-time payments. “Real-time payments [which are irrecoverable] mean unrecoverable real-time fraud,” said Rogers of Eden Consulting.

Those risks could significantly decrease when using biometric security systems. Clearly Payments noted that fingerprint and face recognition software and hardware on smartphones and PCs “is expected to become more widely used for payments … to increase security and convenience.”

Users are quickly adopting those systems with few reservations. In January, Shelley Joyce, global payments chief of Merchant Acquiring Technologies, a payment solutions company, noted, “People want faster payments or don’t want to think about payments at all anymore — biometrics is a really easy way for us to do that.”

However, for biometric systems to work correctly, users need secure and accurate digital identities “to ensure trust and security exists in the payment ecosystem,” Clearly Payments noted. “The evolution of a ‘digital identity’ will become the foundation of many systems.”

Yet, biometric security systems will not protect against all types of financial crimes. A note from Forrester, a research firm, published on the Forbes website in December said card payment fraud would be lower thanks to new technologies (biometrics) and protocols. However, the most vulnerable part of the digital payment ecosystem would continue to be “push-payment fraud,” where individuals or even companies send payments under false pretenses. “Many banks and payment service providers are not prepared for push-based payment fraud,” the Forrester paper said. “They lack advanced authentication approaches such as behavioral biometrics and haven’t educated customers on self-protection.”

 Trend 4: New ideas

The next step for digital payment solutions is to use AI to process transactions. Those systems would likely be in the industrial, farming, wholesale trade and construction sectors. Webster of Market Platform Dynamics noted such payment platforms would be used primarily to “digitize interactions [with] consumers … and [allow] businesses [to] automate their payable and receivables processes.” Using AI also should drive innovation in delivering services “like healthcare and logistics/transportation.”

Innovative AI-powered digital payment solutions should make it easier to develop a single smartphone app that could consolidate and replace multiple apps for customers or employees. Webster said that could use data about banking and payments behaviors to align credit and payments options with purchases.”

The proliferation of innovative payment systems, particularly those that use AI, will result in “traditional and tech players [acquiring other companies] to expand their scope and monetize new flows,” Webster said. “These players will look more like commerce platforms than Big Tech companies.”

 Trend 5: Tentative risks, opportunities

Forrester said the overarching risk of digital payments in the short term is the economic downturn and shift in consumer payment habits. “As consumers begin to really feel the effects, we will see a … comeback of cash,” the research firm said. When “liquid money is exhausted, consumers will stampede to ‘buy now, pay later’ options and back to credit cards.”

Developers and providers, in turn, will likely cut their investment budgets in 2023. “Dollars destined for … payment experiences, such as those in the metaverse or other blockchain and CBDC projects, will be repurposed to baseline payment infrastructure and modernization projects.”

Meanwhile, Forrester said the most innovative payment fintechs would likely struggle to survive due to decreasing transaction volumes. That would hurt their ability to raise financing from venture capital companies. Caitlin Mullen, a reporter for Payments Dive, stated in January:: “With venture capital firms tightening purse strings and startups floundering, legacy players are likely” to find opportunities.

Digital payment companies that hope to survive need to reverse the underlying business philosophy that saw them focus on short-term growth to achieve long-term profits. As Webster noted in her January blog on PYMNTS: “This year its profits over growth, whether you are Amazon or the sit-down restaurant down the street … ‘Prove it’ will become the two most important and … powerful words of 2023.”

The biggest unknown this year is the role of the metaverse. “The word [metaverse] has been co-opted by those pushing a vision of humans living life in a virtual world, rather than the application of virtual technology to improve how humans interact in the physical world.”

However, Global Payments stressed the metaverse “creates a new channel for commerce.” Its virtual reality nature means “immersive experiences that will deepen relationships with consumers.”

Digital payment integration will play a significant role in deciding if the metaverse will become mainstream. “Just as [customers] move effortlessly from the physical to the virtual worlds, [they] will expect a seamless, integrated payment experience.”