By Prabhat Agarwal, Senior Director of Research & Trends
Whether we live and interact increasingly in some futuristic virtual world or metaverse remains to be seen, but what is certain is how we transact in the future is transforming. The move to a digital economy where cash is no longer king and digital currencies are the preferred and only transaction instrument isn’t too far into the future. CTA monitors this shift as a part of its work on the Nasdaq CTA Global Digital Payments Index™ (WALLET™).
This briefing discusses the factors generating and propelling the digital currency wave and why we’re just beginning to pave the road on this journey.
E-Commerce Just Reaching Teenager Status
Did you know that e-commerce is forecasted to account for only 12% of global consumer spend by 2025? And in the US, e-commerce still represented only 14.5% of the total sales pie at the end of Q2 2022[1], despite the plethora of online stores. Globally, while e-commerce is forecasted to slow in the APAC region due to ongoing COVID impacts, growth is expected to continue in both LATAM (19% CAGR) and in the MEA (Middle East and Africa) regions (20% CAGR) through 2025.[2] These territories offer substantial upside development opportunities where the primary vehicle for e-commerce transactions is digital money.
COVID Accelerated Consumer Digital Banking
A silver lining of the pandemic was the expansion of digital payments, particularly mobile payments within developing countries. Globally, slightly over three-quarters of the adult population now have a bank account or are set-up to perform mobile transactions, which is up from 68% in 2017. In developing countries, it’s 71%, up from 57% in 63% in 2017.[3] This uptick in banking led many to electronically transact for the first time over the pandemic when face-to-face business contacts and transactions were curtailed and the need for virtual or electronic transfers spiked.
As banking expanded so did the use of digital payments, which topped the 50% threshold as 57% of adults began using digital payments in 2021, up from 35% in 2014.[4] It’s notable to point out that a barrier to deeper adoption was the inability to validate one’s identification and thus open a bank account. This unfortunate circumstance handicaps many in developing countries and represents a robust area for innovation. But despite this challenge, among low and middle-income economies, over 40% made in-store or online payments for the first time since the beginning of the pandemic. In India this accounted for over 80 million adults who made their first digital payment and in China, it was above 100 million adults.[5]
Cryptocurrency – Another Pandemic Beneficiary
The combination of investors spending more time in front of home computers during the pandemic and cryptocurrencies deemed to be opportunistic investment vehicles led consumers and businesses to dive headfirst into crypto. In 2021, worldwide transactions reached $6.1 billion with almost 13% of U.S. adults owning crypto, the majority of which were for long-term investments, but 10% of owners were used to conduct transactions.[6] However, consumer-to-consumer and consumer-to-business volumes will likely grow over the next five years especially as a mounting number of small and medium businesses, big-box and online retailers and restaurants begin accepting it as legal tender. These efforts will have a snowball effect as Wall Street, government regulators, technology innovators increasingly add to the momentum pushing transactional volume to $16.2 billion by 2023.
B2B Transitions to Digital
The global business-to-business (B2B) payments market is expected to reach $2.5 trillion by 2030 from $1 trillion in 2021, growing at a CAGR of 10.8%[7], but the industry remains paper-friendly, with about one-third of expenditures processed electronically. However, the demand for digital accelerated during the pandemic with OEMs looking for faster throughputs at lower costs as supply chains expanded to other regions of the globe. Digital payments offer benefits including quicker processing times in cross-country and multi-currency transactions, real-time status updates, and transaction transparency, which reduces risks.
Robust Fintech Investment
As if the listed drivers weren’t enough, venture investment continues to flow into financial technology (fintech). In the first half of 2022, global fintech investing edged above $50 billion, roughly $2.5 billion more than what was invested in all of 2020, the first year of the pandemic. And during COVID’s peak period of 2021, fintech investment, including digitization of the payment industry spiked to $121.6 billion.[8] Funding is diversifying into areas such as B2B, cross-border payments and addressing unbanked populations across Africa and Latin America.
With transaction volumes expected to expand globally over the next five years, the opportunity for companies to build capacity and scale capabilities organically or through mergers and acquisitions will lead to momentous opportunities not only for businesses but also for consumers across the globe through faster transactions and increased payment method. A win-win for all stakeholders.
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[1] https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
[2] https://worldpay.globalpaymentsreport.com/en
[3] https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments
[4] https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments
[5] https://www.worldbank.org/en/news/press-release/2022/06/29/covid-19-drives-global-surge-in-use-of-digital-payments
[6] https://www.insiderintelligence.com/content/crypto-transaction-value-crosses-10-billion-mark
[7] https://www.globenewswire.com/en/news-release/2022/07/25/2485330/0/en/B2B-Payments-Market-Size-is-projected-to-reach-USD-2-515-Billion-by-2030-growing-at-a-CAGR-of-10-8-Straits-Research.html
[8] https://www.protocol.com/newsletters/protocol-fintech/fintech-q2-vc?rebelltitem=5#rebelltitem5
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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