Remember the NFT hype in 2022 or the mid-pandemic struggles of 2021? Well, this is all history now, as 2023 unfolded the new hot topics such as generative AI, instant payments and changing market dynamics. As the year is coming to a close, let's see how the B2B payments landscape has been evolving, how the regulators, banks, fintechs and businesses have been reacting to the change, and what lessons we can carry into the next year. Let's dive in!
B2B payments market continues to grow
The overall trend of previous years and 2023 is that the global B2B payments market continues its growth, with its value expected to reach almost USD 1.6 trillion by the end of 2023 and almost double by 2031. This growth is driven in large part by the expansion of B2B e-commerce, which has become a primary driving industry for cross-border payments. The strong growth of business-to-business payments mirrors wider trends in the digitalisation and globalisation of commerce, showcasing the impact of technological progress and evolving business methods. This trend highlights the growing importance of digital payment solutions and the need for businesses to adapt to a rapidly changing financial environment.
Regional FinTech hubs are building momentum
Despite a noticeable slowdown in fintech sector funding at the start of the year, the industry's long-term trajectory appears promising, with several regions showing significant growth potential. North America continues to hold the title as the world’s largest financial services hub, yet the Asia-Pacific region is swiftly catching up. By 2030, it's anticipated that Asia-Pacific may overtake the United States as the top fintech market.
In Europe, the United Kingdom and the European Union represent the third-largest financial institution market globally. With the payments sector leading the charge, projections indicate a potential growth of more than fivefold in these regions by 2030.
The Middle East, traditionally dominated by established financial institutions, is also witnessing a fintech revolution. This shift is marked by a rise in both local and international fintech firms, especially in the KSA, Egypt, Bahrain, and the UAE. The growth in these markets is characterised by a rapidly increasing number of firms and significant funding activities.
The payments industry will remain a primary focus for fintech investors with a particular interest in cross-border payment solutions. The industry is expected to grow to $520 billion by 2030. Other areas that are currently attracting investors are payment automation, AI and ML in payment processing and fraud detection.
Regulatory bodies focus on instant payments, improved competition and security
Now let's delve into some of the key initiatives undertaken by regulatory authorities in the UK and the European Union throughout 2023.
Instant payments adoption
There's a focus on enhancing cross-border payment systems for better cost, speed, access, and transparency, particularly real-time electronic payments such as SEPA Instant in the EU for bank transfers in euro. Although the SEPA Instant technology has existed for years, there is still a large percentage of European banks that have not adopted it. Currently, real-time euro payments account for just 14% of all conventional SEPA transfers. The European Commission is pushing for the adoption of real-time payments, with the upcoming regulation that will require banks to offer instant payments in euro with charges equivalent to or lower than standard euro payments.
This is in line with global efforts to improve payment system interoperability and reduce reliance on intermediaries. Similar trends have been seen in other countries, such as the United States, which launched the FedNow service in the summer of 2023. This service enables the settlement of domestic dollar payments in seconds. By December 2023, over 300 financial institutions have already joined the FedNow system, offering its services to both private and business customers.
Enhanced access and fair competition
In the summer of 2023, the European Commission proposed updates to the Third Payment Services Directive (PSD3) and Payment Services Regulation (PSR1) in the EU. These revisions aim to level the playing field between banks and Payment Institutions (PIs). The EU's focus is on enabling PIs direct access to EU payment systems and facilitating easier access to bank accounts. This aims to reduce PIs' reliance on banks and increase competition, which could enhance service offerings and pricing for end-users. As a result, we should expect to see more non-bank players enter the payments market in the next few years.
Enhanced security measures
Ensuring the safety of financial transactions is a key priority in the financial sector. Thanks to ongoing efforts, significant progress has been made in creating a more secure environment for consumers. However, fraudsters continue to adapt, employing increasingly sophisticated tactics to deceive consumers. In response, the updated EU regulatory package also includes proposals to strengthen anti-fraud measures. These include mandating payment institutions to provide free-of-charge verification services for recipient IBAN and names, and expanding consumers' refund rights to cover new types of fraud such as Authorised Push Payment (APP) fraud. Similar requirements are being introduced by the PSR in the UK as well.
You can learn about APP and other common types of business fraud here.
Consumers (SMEs) embrace new technology in payments
Now let's explore some of the more evident payment trends we saw businesses embracing in 2023.
Connected workforces
The recent rapid growth of remote and hybrid work has accentuated the need for better payment solutions that will battle payment delays and high costs associated with traditional payment methods such as international bank transfers. Multiple surveys show that post-COVID, employees globally do not want to return to the offices. Additionally, businesses are encountering challenges in recruiting skilled professionals, particularly in fields like IT, data science, and finance. This has led to an increased reliance on freelancers. According to the Labor Market Trends and Insights report, 78% of companies surveyed have utilised freelancer services, and 47% plan to increase their use in the next two years.
With this in mind, we anticipate a growing demand for electronic payment methods outside of traditional banking. This includes services in currency exchange, card remittances, and fintech solutions that consolidate local payout capabilities in various global markets.
API-driven solutions
The increasing adoption of APIs (Application Programming Interface) is becoming more apparent in all the fields - from banking as a service to platform as a service, and embedded finance. A survey by McKinsey revealed that 88% of IT executives in banking recognised an increased significance of APIs over the past two years. APIs are especially attractive for technology companies with multiple counterparties, customers, or employees globally. These companies often need to manage payment processes, accounts payable, and receivable in various currencies from a single platform.
Integration of bank and financial institution APIs has a wide range of applications. For example, an online store integrating a payment processing solution can collect payments from customers via multiple payment methods globally. A travel company may automate payouts to their global ticket sales agents upon reaching specific earning thresholds. In addition, APIs are increasingly used for streamlining of internal processes by having real-time access to their cash flow across different accounts, viewing pending transactions, or assisting in payment reconciliation by automatically matching digital payments with their invoices in real time.
Conclusion: What we can learn from 2023
Some changes in the business world might feel like passing trends or sudden disruptions, but most of them are part of a continuous process, driven by new technologies that are changing the way we handle business payments. These technologies aren't just fleeting fads – they're here to stay and will continue to shape how we do business. So, here's our view on some key lessons from 2023, or rather, an action plan that will be relevant for all businesses, big or small, as we step into the next year.
Lesson 1: Cost reduction
The anticipated regulatory changes encouraging quicker payments and pushing incumbents to innovation will not happen overnight. The real implementation of PDS3 is only expected to start in H2 2025. In light of the challenging economic environment, businesses with multi-currency payment needs should already consider EMIs for reduction of costs and increasing of payment speed.
Lesson 2: Process optimisation
Educate yourself on the potential applications of payment technologies such as API, or emerging AI solutions. Understanding these tools can unlock significant improvements in the efficiency and accuracy of your business. This is particularly beneficial for smaller teams, as it reduces the workload and streamlines operations. Even the freely available generative AI options, such as ChatGPT and Bard, are capable of streamlining manual tasks like data extraction from PDFs, error detection, and information matching, enough to bring about considerable time savings.
Lesson 3: Enhanced security
It is crucial to regularly review your cybersecurity measures. This includes enforcing strict policies, conducting regular training sessions for staff, and upgrading infrastructure. Particular attention should be given to eliminating scenarios where employees might be tricked into authorising fraudulent payments.
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