Introduction

The payments industry was alive with activity in 2021. Reflecting on the past year, some of the significant trends we tracked included:

* Massive funding rounds. Payments companies raised more than 40 funding rounds of $100 million or greater in 2021, according to S&P Capital IQ Pro.

* Significant M&A activity. Buyers spent over $45 billion on payments targets globally across more than 150 transactions, according to 451 Research's M&A Knowledgebase and S&P Capital IQ Pro.

* A surge of public debuts. It was a record year for public exits of payments companies, with IPOs and direct listings that included Marqeta Inc., Affirm Holdings Inc., DLocal Ltd., Paysafe Ltd., Toast Inc., Nuvei Corp., Paymentus Holdings Inc., Flywire Corp., BTRS Holdings Inc., Wise PLC, One97 Communications Ltd. and Remitly Global Inc.

Another busy year is upon us, with continuing transformation underway in the payments market and an array of strategic opportunities coming into focus. Below, we discuss five high-impact trends we expect to unfold in 2022.

Evolution is apparent across practically every pocket of the payments industry. Disruptive forces like cryptocurrencies and buy now, pay later, or BNPL, are now mainstream topics in payments, and in 2022 all eyes are on the incumbents as they formulate their responses to these trends. We are also closely watching how the industry is adapting to the evolution of the distribution model in payment processing. Software-as-a-service, or SaaS, platforms continue to play a more direct role in payments, and this will have profound implications on how and where processors secure transaction volume in the years ahead. As merchants digest key learnings from the COVID-19 pandemic, another trend we're following in 2022 is payments modernization efforts. Business executives have more pressure than ever to drive growth, and we expect they will play a more influential and direct role in driving payments optimization strategies forward within their organizations. As these opportunities come into focus, they're creating the basis for further competitive differentiation, M&A and startup activity in the New Year.

Investment in payments infrastructure modernization is set to accelerate

We expect key learnings from the pandemic will spark an enhanced focus on payments infrastructure modernization in 2022 as merchants look to accommodate operational shifts (e.g., accelerated e-commerce growth, expedited fulfilment) and new customer demands (e.g., contactless payments, curbside pickup) that have continued to accelerate over the past 18 months. Growing investment in payments infrastructure was a prominent theme in 451 Research's Voice of the Enterprise: Customer Experience & Commerce, Merchant Study 2021. More than one in three respondents (37%) say their businesses are planning to make investments in payment processing over the next 12 months, positioning payment processing as a top four area of commerce technology investment for merchants. Savvy merchants recognize that payments are about more than cost and ultimately should enhance their organization's agility and adaptability.

The broader investment theme we are observing is a shift away from interim improvements and toward more strategic, long-term payment-modernization efforts. For multinational merchants, those with more than 50% of sales occurring online and those generating more than $500 million in annual sales, "quality of tech platform" ranks as the No. 1 attribute they seek when selecting a payment processing partner. Perhaps to the disappointment of large, highly scaled incumbent processors, cost ranks outside of the top three for merchants sharing these attributes. Modern application programming interfaces, unified platforms, built-in optimizations, and advanced analytics and reporting are several examples of the tech-centric capabilities that more sophisticated payments teams are increasingly demanding.

Merchants must approach investments in payment technology with the same level of scrutiny and rigor as any other large enterprise IT investment. Seeking out clear return on investment and mapping processor capabilities back to well-defined business outcomes is a sound starting point to ensure payments transition from commodity to competitive advantage. To succeed in 2022, payment processors should be able to tell a compelling story around how they can help merchants enhance their customer experience, drive growth and create operational efficiencies — something we call "the payments trifecta."

Cryptocurrency permeates payments industry

The payments industry began to get serious about cryptocurrency in 2021. Throughout the year, we saw M&A activity — including PayPal Holdings Inc. acquiring Curv Inc. and Nuvei acquiring SimplexCC Ltd. — as well as new partnerships, cryptocurrency feature launches, significant funding rounds and dedicated cryptocurrency teams built out within incumbents. A meaningful trend is taking hold, and payments companies do not want to be left in the dark.

In 2022, we anticipate cryptocurrency will be an unmistakable theme across the payments industry. We expect to see payments companies with venture arms injecting more capital into the cryptocurrency ecosystem and incumbents padding their head count with cryptocurrency talent. Any payments company that has not begun to take this market seriously by the end of the year is likely to be at a significant disadvantage.

Several areas in the market where we envision activity in the year ahead include:

Merchant acceptance. While accepting cryptocurrency at checkout is not a new phenomenon — Microsoft Corp., for instance, has accepted bitcoin for digital goods since 2014 — acceptance remains severely limited. We believe growing consumer hype is sparking renewed merchant interest. Airbnb Inc. CEO Brian Chesky, for example, said offering cryptocurrency payments was its No. 1 customer suggestion in a recent poll. In 2022, we expect more merchants to test the waters with cryptocurrency — if nothing else, for marketing and PR purposes. Payments providers helping to streamline acceptance, such as ACI Worldwide, Inc.'s new partnership with RocketFuel Blockchain Inc., could help to drive this trend further.

Financial apps. Cryptocurrency trading is becoming a must-have feature in financial apps. Block Inc., formerly known as Square, sold $1.82 billion in bitcoin to Cash App users in the third quarter of 2021, turning a $42 million gross profit in the process. PayPal and Venmo LLC turned cryptocurrency trading on last year, and we would not be surprised to see more payment apps follow suit. We also expect to see at least one major financial institution or brokerage launch the capability in 2022.

Cards. The card networks are not sitting still in crypto. Visa Inc., for instance, has about 60 cryptocurrency partners set up to issue Visa cards and generated $3.5 billion in volume through those partners in its fiscal year 2021. In 2022, we anticipate not only more cryptocurrency cards but more issuers experimenting with cryptocurrency rewards. This includes earning cryptocurrency "cash back" for purchases and exchanging rewards points for various cryptocurrencies.

Stablecoins and central bank digital currencies, or CBDCs. The past year saw monetary authorities around the world — from the European Central Bank and the National Bank of Kazakhstan to the People's Bank of China — deepen their exploration of and progress toward CBDCs. Nigeria went live with its CBDC, the eNaira, in October. In the private sector, PayPal is exploring the launch of its own so-called stablecoin. We expect the momentum to pour over into 2022, with numerous CBDC and stablecoin pilots, and perhaps a handful of launches.

SaaS platform payments opportunity heats up

The on-ramps into the payments industry are multiplying and shifting. Large SaaS platforms such as Shopify Inc. and MINDBODY Inc. have evolved into operating systems for their customers and are now leveraging their trusted positions as beachheads into financial services. They are starting by embedding payment processing into their software to accomplish three key business objectives: enhance the user experience, increase customer stickiness and capture a new revenue stream. Some are beginning to take this another step further by offering merchants adjacent financial products like loans and payment cards — a trend we expect will pick up momentum in 2022.

SaaS platforms have already become a meaningful small-business payment acquisition channel. According to a fourth-quarter 2021 custom 451 Research survey of global payments decision-makers, more than one in 10 merchants are now using an integrated payment processing service from one of their primary software vendors. We expect this figure to grow significantly in coming years, especially considering the past 12-14 months alone have seen payment launches from SaaS heavyweights salesforce.com inc., Adobe Inc. and HubSpot Inc. Payment processors will need to get serious about enabling SaaS platforms for payments in 2022 if they wish to secure and expand future transaction volumes.

Few will dispute that Stripe Inc. has been at the forefront of this trend in recent years, offering SaaS platforms the option of a flexible, hybrid deployment model and a suite of banking-as-a-service capabilities to boot. Legacy processors also participate in this trend, but most still lack a streamlined means of enabling SaaS platforms for payments and ultimately off-load significant operational responsibilities onto them. The complexity of enablement and operation via legacy processors has opened the door to startups that aim to abstract some of the operational and resource burden, such as Finix Payments Inc., Payrix Solutions LLC and Infinicept Inc. We would not be surprised to see a legacy processor acquire one of these payment facilitator enablement startups to bolster its position in this market segment.

C-suite looks to payments as final frontier for growth

Executives are up against mounting pressures to drive top-of-funnel growth and increase customer lifetime value. They have looked across their organizations for optimization opportunities and are running out of places to target. One area that has historically been overlooked is payments. We are seeing evidence in our research that payments are now coming into focus, and in 2022, we expect senior business leaders' emphasis on payments optimization to become more pervasive.

One proof point of executives placing a stronger emphasis on payments comes from our Voice of the Enterprise: Customer Experience & Commerce, Merchant Study 2021, in which 72% of C-suite respondents stated that modernizing payments infrastructure — such as adding new payment gateway/processing capabilities — will have a highly transformative impact on their business over the next three years. This outpaced the nonexecutive respondent average of 58%. Anecdotally, we have seen more decisions around payments strategy and partnerships move into the boardroom, and we are seeing a greater variety of executives serve as champions for various payments technologies. Chief marketing officers, for instance, are increasingly looking at BNPL as a customer acquisition tool. The emerging chief customer officer role is exerting greater focus on fraud prevention, and chief digital officers are starting to get savvy in payment processing.

There are few functions within a business where several strategy and technology changes can drive a 10% revenue lift practically overnight. Payments is one of those areas. Tactics like local acquiring, transaction retry and routing logic, card account updater services, alternative payment method acceptance and machine-learning-driven fraud prevention capabilities enable the acceptance of more "good" transactions — meaning a reduction in false declines — while helping to promote more repeat business. The impact of these approaches is not trivial. We estimate U.S. shoppers abandoned $16.3 billion in purchases due to false declines and $20.1 billion due to limited payment options over the past 12 months. This year, we expect the C-suite to play a more influential role in reclaiming this money that has slipped between their proverbial couch cushions.

Banks go big on BNPL

We see a growing intersection between BNPL and banking, where BNPL is becoming part of a broader suite of financial services. BNPL providers such as Klarna Bank AB (publ) and Square are enhancing their value propositions by layering on banking services such as checking accounts and debit cards, putting pressure on traditional financial institutions. We anticipate that this trend will spark more direct participation in BNPL from a growing number and variety of financial institutions in 2022.

Banks taking advantage of the BNPL movement early on have primarily been working on the back end of financing installment loans, such as Cross River Bank financing Affirm, or targeting existing cardholders post-purchase, as with Citi Flex Pay and JPMorgan Chase's My Chase Plan. This is expected to change as more banks opt to defend their turf and develop their own BNPL financing strategies. For example, Barclays PLC announced in April that it plans to launch its own white-label BNPL financing option for merchants in partnership with Amount Inc. Citizens Financial Group Inc. has taken another approach by partnering with Jifiti.com Inc. to offer BNPL under the Citizens Pay brand at checkout. The Goldman Sachs Group Inc. has taken the M&A route, acquiring GreenSky Inc. for $2.2 billion in September.

Aside from defending their core business, we anticipate more banks will directly offer BNPL financing options in 2022 as a strategy for attracting younger, harder-to-reach demographics. Gen Z and millennials have embraced BNPL at greater rates than their Gen X and baby boomer counterparts. BNPL can serve as a low-cost customer acquisition tool for financial institutions, creating an inroad to cross-sell other products such as checking accounts and long-term loans to enhance and deepen the customer relationship.