Unveiling the Convergence of Financial Services and the Digital Age

State of the Payments Industry

In the rapidly evolving digital landscape, the financial services industry has experienced a significant transformation. As consumers increasingly embrace the convenience and efficiency of the digital age, traditional financial institutions are being challenged to adapt and keep pace with emerging innovations. Marqeta's latest market report delves into this dynamic landscape, analyzing key findings that shed light on the convergence of financial services and the digital age.

Marqeta’s State of Payments report is out. You can scroll down to read our summary or check out the pointers below:

Key Points:

• Consumers view embedded financial services as valuable tools in their everyday lives.

• Traditional banks struggle to provide the convenience and user experience that modern financial tools offer.

• Consumers balance loyalty to traditional banks with the convenience of embedded financial services.

• Traditional institutions are addressing the challenge through acquisitions and product development.

• Digital providers are expanding into mature financial services.

• The competition between traditional banks and digital providers is intensifying.

• Non-financial brands leveraging embedded finance pose a significant challenge to traditional banks.

Image: WEF

The report highlights the growing tension between the traditional practices of the financial industry and the seamless user experience that consumers have come to expect from the digital era. It explores the adoption of embedded finance, P2P apps, and other modern financial tools, revealing the value they bring to consumers' everyday lives. While consumers may still have reservations about completely abandoning traditional banking services, they are equally reluctant to give up the convenience and advantages offered by embedded financial services.

Marqeta's research showcases the delicate balance consumers have struck between loyalty and habit, as well as the desire for convenience and superior user experiences. Traditional and digital banking options are not mutually exclusive but serve different purposes in consumers' financial lives. The report examines the factors influencing consumers' preferences, including technology advancements, user experience, and financial incentives.

Furthermore, the report investigates how traditional financial institutions are responding to the evolving landscape. Strategic acquisitions and product development initiatives are explored as incumbent institutions seek to bridge the gap between legacy systems and emerging players. Conversely, digital and modern providers are venturing into more traditional financial services, aiming to shed the perception of being merely "lifestyle" solutions.

The report delves into the ongoing competition between traditional banks and emerging fintech players. It also raises questions about the ability of incumbent institutions to match the agility and innovation of digital disruptors, as well as the potential for non-traditional players, such as popular brands, to leverage embedded finance to offer seamless experiences and capture customer loyalty.

Digital Payments Ecosystem: Embedded Finance Maintains Momentum

The increasing preference for a unified payment solution is driving the adoption of embedded financial services, which refers to integrating financial services into non-financial products. This trend is evident in various sectors, such as ride-sharing apps like Uber and Lyft, Buy Now, Pay Later providers like Klarna, and retailer's apps that allow users to order and pay from their phones.

The popularity and demand for embedded finance have been steadily growing. Research shows that 47% of consumers globally would consider getting financial services from a non-financial provider, indicating a 2% increase from the previous year. Embedded finance aims to make the payment process seamless for consumers, eliminating the need for transitions between different providers during checkout.

Businesses see significant potential in embedded finance and consider it the next payments revolution. McKinsey estimates that embedded finance will be worth $40 billion in the next 3-5 years in the United States alone. Consumers are increasingly using embedded finance, with 76% of survey respondents reporting making purchases through a retailer's mobile app, up from 69% in the previous year.

While embedded finance offers convenience, older generations tend to be slower in adopting new technology compared to younger digitally native generations. Geography also plays a role, with US respondents being more likely to have made purchases via a retailer's mobile app compared to the UK and Australia.

A frictionless checkout process has become crucial for businesses in the digital age. Consumers have numerous options at their disposal, and businesses must ensure a seamless user experience, including payments. Research shows that 42% of consumers have abandoned a purchase because it required them to download a new app or payment method. Streamlining the checkout process can significantly increase conversion rates for e-commerce merchants. 

Both male and female respondents express a willingness to abandon a purchase due to a disjointed payment process, but male respondents are more likely to do so. Businesses need to focus on retaining prospective buyers by providing a smooth payment experience, as consumers increasingly shop directly from brands.

P2P Payments on the Rise

The popularity of peer-to-peer (P2P) apps is on the rise as consumers seek integrated solutions. According to a survey, 75% of respondents have used a P2P payment app in the last 12 months, which is consistent with the previous year's usage. Among the well-known options, PayPal was used by 88% of respondents, Cash App by 39%, and Venmo by 28%. 

P2P apps are attractive because they offer a wide range of services, from traditional tools like debit cards to more specialized services like stock trading, all within a single platform. The convenience and flexibility they provide are highly appealing, with 46% of respondents stating that they do more than just send money through P2P apps. Services accessed through P2P apps include debit cards, credit cards, digital banking, savings accounts, checking accounts, direct deposits, bill payments, crypto trading, and fractional stock purchases.

However, there are some gender disparities in the use of embedded investment tools through P2P apps. Male respondents are more likely to utilize P2P apps for cryptocurrency and fractional stock purchases compared to female respondents. This difference aligns with the well-documented gender gap in FinTech, where women tend to be more cautious about sharing personal or financial data with new entrants and financial institutions.

 In terms of international usage, US consumers make greater use of other services through P2P apps compared to the UK and Australia. This could be attributed to the more fragmented domestic banking and clearing system in the US, whereas the UK and Australia have more consolidated ecosystems. Consequently, 80% of US consumers surveyed reported using P2P apps, compared to 73% in the UK and 65% in Australia. 

Overall, P2P apps are gaining popularity due to their convenience and the range of services they offer. However, there are still barriers to overcome, such as the gender gap and regional differences in adoption.

Convenience vs Loyalty

Consumers are grappling with a conflict between convenience and loyalty when it comes to their banking choices. While they are sticking with traditional banks as their primary banking partners and storing most of their funds there, they are also using digital-only banks and leveraging additional financial services. The majority (81%) reported traditional banks as their primary partners, but 37% also use digital-only banks alongside them. Factors that would make consumers switch to digital banks include better mobile apps, cash incentives, modern banking features, and better security.

There are gender disparities in digital banking adoption, with men more likely to utilize additional financial services and use digital-only banks compared to women. Despite recognizing the convenience of digital banking, 44% of consumers would not consider moving all their resources to a bank without physical branches. The preference for physical branches is especially pronounced among consumers aged 51-65. However, when asked about banking transactions, most consumers complete them online rather than in person at a branch.

Regarding payment methods, while digital payment options have seen significant adoption, traditional methods like cash and debit cards are still widely used. P2P transactions and contactless payments are gaining popularity, followed by mobile payments and credit cards.

Overall, consumers are caught between loyalty to traditional banking institutions and the desire for superior user experiences provided by digital banking options. The race between traditional and digital payment methods is highly competitive.

Consumer Confidence Remains High

Consumers are increasingly confident in digital technology and embedded finance, to the point where they feel comfortable leaving their wallets at home. The convenience of mobile wallets has led to high adoption rates, with 93% of users finding it convenient to make purchases on their mobile phones. Adding cards to mobile wallets has become simpler, with 90% of users reporting an easy process. About 72% of mobile wallet users would feel confident enough to rely solely on their phone for payments, with Australian consumers being the most confident. Cash usage continues to decline, with 35% of consumers using it less than a year ago. P2P apps are challenging cash usage for informal transactions, such as small purchases and splitting bills with friends.

Conclusion: State of the Digital Payments Ecosystem

A significant shift has occurred in consumer behavior as embedded financial services are no longer seen as novelties but as valuable tools in everyday life. P2P apps and other modern financial tools are unlocking convenience, optionality, and better financial management, which traditional banks have struggled to provide.

Consumers are no longer choosing between traditional banks and embedded financial services; instead, they are finding ways to coexist with both. Loyalty and habit are balanced with convenience and seamless user experiences, as traditional banks handle serious financial requirements like bills and payroll, while embedded services are used for lifestyle spending.

Traditional financial institutions face a challenge in meeting consumers' increased expectations for user experience. Modern digital banking options are readily available, and consumers are drawn to them due to better technology, user experiences, and financial incentives.

To compete with emerging players, traditional institutions are making strategic acquisitions and developing new products. Meanwhile, digital providers are expanding into mature financial services to shed the perception of being just lifestyle cards.

The question remains whether incumbent institutions can keep pace with emerging players like CashApp, PayPal, and Starling. Furthermore, they must find ways to compete with non-financial brands like Starbucks that are leveraging embedded finance to provide a seamless experience and capture customer loyalty.