2024 Predictions: Payments Trends to Watch This Year

19 January 2024

2023 put the traditional processing model for account-based payments to the test, as evolving customer demands, intensifying competition from fintechs and shifting regulatory requirements continued to intensify margin pressures. And although 2024 stands to be another economically tough year, opportunities abound for those who seek to think differently, take control and focus on transformation.

In the first blog of our two-part series exploring the key emerging trends shaping payments in 2024, let’s take a look at why technological and regulatory momentum spanning cross-border payments, digital currencies and AI present new opportunities and challenges for banks.

1. One-leg out payments to disrupt the correspondent banking model

Changes in how cross-border payments are made has the potential to shake up the correspondent banking model as we know it. A growing number of real-time payment schemes and associated payment infrastructures in different parts of the world are extending their scope from domestic credit transfers to one-leg out credit transfers (where the debtor agent or creditor agent can be an institution outside the country / region of the relevant scheme). Most notably, the European Payment Council’s One-Leg Out Instant Credit Transfer (OCT Inst) scheme went live in December.

This creates the opportunity for correspondent banks to route and settle payments via a real-time payment infrastructure rather than the Real Time Gross Settlement (RTGS) rail, the only option previously. The advantage is lower fees and 24×7 availability.

In parallel, the inter-linking of different market infrastructures is enabling banks to use domestic real-time payment infrastructures for the routing and settlement of cross-border / cross-currency payments. Examples include the IXB initiative between EBA Clearing in Europe and The Clearing House (TCH) in the USA, as well as the Nexus project from the Bank of International Settlements (BIS) which has successfully linked Europe, Malaysia and Singapore’s payments systems.

While these developments will improve the speed and cost of cross-border payments, they also require the adoption of next generation payment systems that can process payments – irrespective of the type, currency and scheme / infrastructure. With agile fintechs already well-positioned to adapt and take advantage of the opportunities one-leg out payments present, banks will need to move quickly to implement a comprehensive strategy for adoption.

2. Banks consider their approach to digital currencies

Digital currencies continue to attract a lot of speculation, but the expectation is that within the next five years they will play a significant role in the financial system.

Many central banks across the globe are piloting digital currencies or have announced initiatives in that direction. Research shows 19 of the G20 countries are already in the advanced stages of digital currency development, and 130 countries, representing 98 percent of global GDP, are exploring. An increasing number of commercial banks are also launching a digital currency to facilitate the settlement of financial transactions or to enable conditional payments based on smart contracts. With the rollout of digital currencies, there will be a range of new payments schemes to be adopted. To profit from the benefits that digital currencies can bring to banks, a seamless integration between banks’ payment systems and these new digital currency rails will be needed.

Open solutions can make it easier to adopt and adapt the required infrastructure. I have previously talked about the benefits of using Distributed Ledger Technology (DLT) to help address the restrictions of existing financial market infrastructures and create the highly secure and reliable platforms needed to settle Central Bank Digital Currencies (CBDC) payments and other financial transactions in real-time, 24×7 and with a high availability. As banks continue to explore digital currencies in 2024, DLT can play a leading role in helping overcome the intricate technology challenges that need to be addressed for adoption.

3. Achieving a competitive advantage in AI starts with good data management

2023 was the year that generative AI (genAI) seeped into our collective consciousness. The good news is that, according to research by McKinsey, banks stand to reap the greatest benefits – with the potential for the technology to add upwards of $200 billion in value annually.

While most of the use cases to date have been related to fraud detection, anti-money laundering (AML) and chatbots, there are many more areas across the payments value chain where genAI can be used to add value for banks and their customers. Data enrichment and repair, intelligent payment routing, and automated code generation are just some examples. Yet unlocking AI’s potential in payments will hinge very much on the quality of data that bank’s AI models are trained on. We have previously explained why poor quality or incomplete data sources will lead to disappointing results when using AI. Data privacy and bias are other important considerations.

To benefit as AI capabilities evolve, banks will need to have implemented a holistic approach to data management that combines the required governance, operations, storage and privacy controls, and is communicated across the business. This will help ensure the quality of data is maintained at all customer touch points.

Arjeh van Oijen