Ten Things Will Define the Digital Transformation in 2022
Just about everyone has their own prediction for what three, four, five or ten things will happen each time the calendar turns its page to a new year. So many of those views are fluffed-up restatements of the obvious, which sort of wastes the opportunity to take a few calculated risks when predicting how the landscape might evolve.
In January 2021, I published six trendlines for the year we just ended. I took some risks, but I was pretty much on the money. My framework, then and now, is the connected economy and its pillars, which I introduced two years ago. It is not only alive and well, but at the core of the digital transformation we have witnessed in the two years since.
With that in mind, here’s my take on the ten trendlines that I believe will chart the connected economy’s course in 2022.
Spoiler alert: Some of these are not without controversy – but you only live once, so once again I’ll take some risks.
Second spoiler alert: It’s long. Grab a big cup of coffee, maybe two.
Proximity will no longer be a barrier or a competitive business advantage.
Picking a place to shop used to be based on how convenient it was from the home or the office. Not so much anymore. Consumers are shopping more online for retail products – some 30 percent of them, according to the latest PYMNTS study.
Picking a place to get carryout was once about how long it took to drive and get it. Aggregators and restaurant delivery services eliminate that concern. More consumers are ordering more takeout from restaurants for delivery at home – some 74 percent of them, up from 66 percent since June 2021.
Consumers don’t have to always drive to the theatre to see first-run movie releases or to a venue to watch a concert. Pixar’s announcement that it will release Turning Red directly to streaming on March 11 instead of the theatre is further proof that studios, particularly now as Omi ravages the country, recognize that many consumers increasingly trade the in-person movie experience to pay to watch a first-run movie in the comfort and safety of their own home.
Consumers are using Instacart to buy groceries from grocery stores they never before shopped because they were too far away – millennials do it the most. Subscriptions are also taking a bite of retail store and grocery store CPG spend as consumers enjoy the ease and convenience of having staples and the high-quality products they like from brands they can’t find in a store most convenient to them just show up as directed.
People used to decide where they wanted to work based on the length of their commute, and select a fitness instructor the very same way.
The reality of the digital shift is that consumers are no longer constrained by how far away something is: the item they want to buy, the service provider they want to engage, the employer they want to work for, the trainer they want to buff them up, or the concert or movie they want to watch. Or just about anything else they want to do.
Technology is making once-physical interactions immersive digital experiences – sometimes complementing the physical world, and sometimes replacing the activities once done there.
For businesses, this is both a threat and an opportunity – an undeniable dynamic driving the evolution of the connected economy. In retail. In grocery. In entertainment. In work. In banking. In just about everything — including many healthcare services.
Proximity is no longer a barrier, and those who wish to make it a competitive advantage now have to one-up the digital alternatives that consumers find easier, more convenient and less wasteful of their precious time.
Logistics will become the core competency of the connected economy winners.
Logistics dominates the news cycle today as supply chain challenges lay bare the economic importance of efficiently moving goods between endpoints domestically and cross-border. In a connected economy where the digital transformation of industry sectors is as much as the transformation inside of those sectors as it across them, logistics is about something different. It is about efficiently enabling the movement of money, information, products and services between endpoints, and it will become a core capability of connected economy winners, whether they provide it in-house or assemble it from outside. Logistics and mobility will become the linga franca of how enablers help to streamline, perfect and manage those flows.
The world according to the digital-first consumer is now divided into two parallel streams: what they need right now and what they can wait to get. In payments, it’s reliably and securely moving money in and out of consumer or business accounts from and to any given endpoint at any given speed – with any given payment modality – and monetizing those choices. In banking, it’s delivering services once only done in person in a digital-first way. In healthcare, logistics is about integrating data and diagnostic connected devices into the online experience to make the digital visit as informative as the physical one. For retail, it goes beyond mastering the logistics of delivering goods to eliminating the line between the physical and digital channels.
The internet gives consumers access to almost perfect information about what retailer or service provider has what available and when – and digital gives consumers more choices for who gets their business. Their decisions will be based on how long they’re willing to wait to be serviced, how much they are willing to pay for on-demand access and who can make either of those options easy, friction-free and secure.
To consumers it is irrelevant how it happens or how much work is required to make it so. But meeting their needs will require a single infrastructure that allows companies and ecosystems to move at the speed of the consumer – fast, slow or somewhere in between – and orchestrates those experiences in a way that improves the lifetime value of the customers they serve and the economics of the businesses they operate.
Luxury brands will reinvent reCommerce and use BNPL and subscription plans to do it.
According to The RealReal’s Q3 2021 earnings, 772,000 consumers spent an average of $486 buying used luxury designer clothes, handbags and shoes for the preceding trailing twelve months, an increase of 25 percent and 10 percent respectively from the prior period. They also reported that 84 percent of those shoppers were repeat buyers – shoppers lured by the opportunity to buy someone else’s gently used Chanel, Dior, Hermes, Givenchy or Christian Louboutin’s from what they describe as the world’s largest authenticated luxury resale marketplace.
2022 will be the year that luxury brands strike back and use payments to help them reinvent the reCommerce experience.
Consumers thirst for luxury, and holiday sales show just how much of a penchant that has become. Luxury sales exploded in the 2021 holiday season, according to Mastercard Spending Pulse. Globally, luxury goods hit $309B and are expected to climb to roughly $383B in 2025. A Bain & Company report on luxury retail released in November of 2021 estimated luxury resale to be roughly $3.3B, a little more than 10 percent of overall luxury sales. Demand for both is driven by Gen Z and millennials.
Luxury brands have historically traded on exclusivity and limited accessibility – that was before secondhand marketplaces gave anyone with an extra $486 the chance to buy a luxury item and snap a picture wearing or holding it on Instagram. The smart luxury retailers will set aside their disdain for the democratizing of their luxury brand and use it as an entry point to build the next generation of brand loyalists – on their terms.
I think they’ll do that by creating their own closed-loop marketplaces for those goods and use payments as the engine to do it. In the process, they’ll also change the shopping dynamic and frequency for how people buy couture clothes.
Buying pricey couture clothes in their stores could be done using a one-time payment plus installment plan where they get a one-time credit towards the purchase of the next pricey couture jacket at the end a year or even two. The trade-in jacket is sold on their own resale marketplace only once or twice, creating a higher quality resale marketplace where fashionistas flock to buy items that aren’t six or seven seasons old but one, two or three. BNPL providers power those installment payments, and subscription providers support the design of special privileges and perks for top-tier customers.
As more brands reclaim their luxury status in this way, someone will reinvent the entire experience and aggregate all of them into a single marketplace of luxury brands, with the distinction that these products are in great condition and new. Today’s reCommerce marketplaces will, over time, become more like discount sites than luxury resale as the high-quality goods move to these designer-owned and branded marketplaces.
Payments providers will compete for the consumers and luxury brands as they court and cultivate the next generation of luxury buyers with brand affinity.
Real-Time Payments momentum will start to create a credible threat to debit transactions.
The US has been heavily criticized for being late to the real-time payments party. It’s a criticism that ignores the complexity of having something like 11,000 FIs in the country, and the challenge of enabling a new payment modality across every single account at every single one of them.
The pandemic has changed things. So has growing access to the RTP rails by banks and FinTechs and use cases that leverage those rails and consumer demand for instant payments. Consumers are now more aware of real-time payments and want to receive more of their payments that way, and senders have obviously gotten the memo. PYMNTS’ latest study of consumer disbursements shows that three times as many consumers received instant payments in 2021 as they did in 2020 – and that a third of consumers who receive disbursements want more instant payments directly to their bank accounts, and are willing to pay to receive money that way.
Over time, RTP rails will become the single set of rails capable of moving money between bank accounts instantly – subject, of course, to the terms the sender and receiver agree on. This shift will likely include a business model that monetizes that choice and speed.
As RTP use and adoption grows by consumers and businesses, innovators will build more use cases on top of those rails. RTP’s account-to-account instant payments capability will become a plausible alternative to debit-card rails – the interoperable account-to-account network powered by RTP rails and the banks for making payments to billers, other businesses and even merchants. Banks, of course, are in the catbird’s seat to do this because they don’t have to ask consumers for bank account details – they already have them.
What’s missing that could potentially ignite this faster and further is the important feature that debit cards have – the alias that sits between the sender and the receiver and guarantees consumers against fraud and disputes, which debit cards provide today. Banks will create something that’s bank-branded in 2022 to accomplish that.
Crypto strategy will shift from FOMO to focused.
Watching four- and five-year-old kids play soccer is very much like watching how the world has been playing around with crypto: swarms of people chasing something fascinating all over the playing field, having lost sight of where the goal line is. The risk, just like those little kids playing soccer, is not only missing the chance to score, but lacking the basics to know how to score, play and win the game. And having regulators make rules for the game that determine who gets to take the field and how many goals they get to score.
You saw evidence of this in the last two years as never-ending news accounts of companies using crypto to make what they do seem more relevant. It doesn’t help that innovators create alt coins out of thin air just because they can, lacking any real purpose other than to keep the bubble of speculation alive and legions of PR people busy. It also doesn’t help that people use the term cryptocurrency to describe everything from Shiba Inu to Central Bank Digital Currencies to stablecoins and everything in between.
The hype is starting to fall on deaf ears because so much of now it lacks any serious context related to its relevance to payments and financial services – or a way to evaluate whether what we are observing is a fad or something with great potential. Even with all of the talk of crypto’s growth, it remains a speck on a pebble in an ocean of financial transactions today. Its use case today is largely for making speculative investments, just as it has been for more than a decade.
That’s not to say that the blockchain and stablecoins aren’t important technologies with the potential to solve real problems in payments and financial services – in fact, they likely will be.
We see evidence already. FIs are starting to use blockchain in trade finance to reduce fraud related to duplicate invoicing. FIs and corporates are using cross-border payments over private blockchain rails and settlement tokens to enable faster, cheaper payments between bank accounts. There are experiments using smart contracts to enable payout when specific milestones are validated. Consumers are sending cross-border remittances over public blockchains using stablecoins so that senders and receivers get their money faster and cheaper. Cross-border payroll for 1099 workers using blockchain and crypto is helping receivers get the same benefit.
2022 will be the year that businesses use a framework for separating activities spurred by a fear of missing the wave to a focused examination of the technology and its relevance in solving the pressing payments and financial services problems people and businesses have today. The business risk if they don’t is the distraction that comes from chasing FOMO.
As everyone in payments already knows, igniting any new payments network is hard, and building one from scratch is even harder. And new isn’t any more a value proposition than crypto for the sake of crypto.
Current proposals to regulate Big Tech will largely fail to shrink their powers.
The regulatory wagons are circling around BigTech everywhere in the world and on a variety of fronts. Whether it is an effort to regulate data, algorithms or other business practices, the intent is clear: do as much as humanly possible to make Big Tech a lot smaller.
What we’ve seen so far is how little these efforts have done to shrink or hobble the behemoths. Consumers in the EU almost always use Google to search, even after the search engine was fined billions and forced to change how it displays results. Even regulators can’t make consumers like Bing.
You might think that one exception is Facebook, where 2021 is expected to show a growth of less than 1 percent year over year. But that’s mainly because the coveted teen audiences are moving to other channels like Snap and TikTok. Analysts report that Facebook’s teen audience dropped 13 percent since 2019 and is expected to decrease 45 percent by the end of 2023. The slowdown isn’t so much because of what regulators are doing, but what consumers are doing themselves. That may be the undoing of Facebook – not the regulators.
One of the most popular proposals gaining favor by lawmakers here in the U.S. and in other jurisdictions is one that would prohibit Big Tech companies from buying any company without proving it won’t hurt their competitors if they do. I’ll spare you the lecture on how complicated it is now to define the competition these days when Amazon and Google both compete with Facebook for ad dollars and Google and Amazon both face competition from other marketplaces over where consumers start their search for what to buy.
But it’s real, and we see it unfolding in real life in the case of the U.K.’s recent challenge to Facebook’s $400 million acquisition of Giphy. Giphy is a platform that makes it easier for consumers to find and share animated videos. How this could be anticompetitive is a head scratcher – perhaps the regulators basically don’t want any Big Tech company to buy them.
That aside, if regulators and lawmakers have their way, the likely outcome is that nothing will change. Big Tech will stay big since they will all be forced to operate under the same set of regulations and probably won’t try to buy anyone. Instead, they’ll use the money they’d spend on companies and lawyers to create their own incubators and accelerators, attracting innovators to build rather than buy. The biggest losers will be the Giphys and others like them that could end up being much smaller without platforms that give themselves and their investors a viable exit to grow and get bigger.
Traditional banks will lose their grip on small businesses to FinTechs.
For decades, small businesses have been served by the traditional retail bank with products that look a lot like those sold to consumers: a checking account, a debit card and maybe a corporate card. Getting a line of credit or loan is by no means a given, though it’s more likely if the SMB has a balance sheet that proves it doesn’t really need the funding, is willing to pledge its home and first born as collateral anyway, and is able to wait weeks for an answer one way or the other.
The SMB owner or bookkeeper has become the systems integrator for all of the services and apps necessary to run the business, get paid and pay others – keeping track of and integrating that business checking account into the accounting software, payroll provider, merchant services provider and any other business applications necessary to manage flows in and out. And doing it all mostly from their desktop.
SMBs do that because there haven't been any other great alternatives. And doing something different meant more work with time they didn’t have.
That’s starting to change as FinTechs enable a digital, mobile-first experience that simplifies access to the business banking services needed for these SMBs to run their businesses. And importantly, they’re using data and technology to give SMBs access to the one thing they really want: working capital when they need it. These FinTechs bundle business applications into a single platform, making it easy for them to turn features on an off as needed. These platforms are raising the expectations of what SMBs now expect from their business banking relationship.
There are 31 million SMBs in the U.S. and a lot of new ones that have been birthed over the last two years. Most of them bank with traditional banks – but maybe not for long. Unless, of course, the big banks buy one of them to deliver what they can’t easily enable today.
Checking out in the store will move to the cloud and create new competition for traditional payment methods.
Merchants have spent billions over the last decade to make the digital payments experience better, slicker, even invisible to consumers. After almost two years of consumers being in control of those slick digital checkout experiences, just about the worst thing now is going back to the store and waiting in line to check out. Of course, contactless and touchless payments make the experience faster and safer. But the act of checkout in the store is the same in 2021 as it was in 2019 as it was in 2010 as it was in 2000 as it was in 1985 – queuing in line before walking up to a register to check out.
Consumers want better, and merchants will respond by moving to cloud-based POS experiences that outsource checkout to the consumer.
Merchants might even be more motivated in 2022 to accelerate those plans as labor shortages and wage increases give them a reason to think more creatively about staffing the in-store experience. And as consumer interest in using mobile devices and store apps to enable that experience grows.
Cloud-based POS systems also give merchants more of an opportunity to introduce new payments methods at checkout, whether it be their own branded payments methods or those provided by third party apps wallets. Either or both is made possible via a virtual card provisioned to their mobile wallet instantly.
Moving instore checkout to the cloud will sharply increase the growth of online commerce overall. If online commerce is 20 percent now, it is conceivable that by 2025, it will be 30 to 35 percent and by 2030, 50 percent or even slightly more as more consumers use apps or wallets used to pay for something they buy from a store when standing inside of it.
The integration of physical into the digital experience will become the cornerstone for how the metaverse evolves.
It’s hard today to get a clear definition of the metaverse. The PYMNTS series on the Metaverse does a good job of trying to create the baseline understanding of what it is now – basically a blank virtual canvas – and how it may evolve over time. The gaming platforms have long paved that path by moving beyond gaming to real-world experiences – for example, giving real world musical performers a virtual stage to perform and monetize their brands. They’ve also created immersive digital experiences indistinguishable from physical reality. More entertainment than real life, people today spend their leisure time in a virtual world where brands see an opportunity to monetize.
Unfortunately, like crypto, the hype and the frivolity of some new incarnations of the metaverse understate its potential to create the virtual experiences that mimic the real world in meaningful ways. The meta and Meta platforms that are emerging look more like modern-day, new tech versions of the Sim City in 2013 – where real people live different digital lives in a world that only exists in cyberspace.
But if the great potential of the metaverse is its ability to fuse the virtual and digital worlds to fully mimic what happens in the real world, then we’re likely to see these virtual canvases improve what is done today in the physical world.
Shopping at Selfridges in London will be done sitting in my living room in Boston, and the experience will be just like I was there in person. A patient in Africa will be treated by the best specialist in the world who happens to be in Germany without flying there. Test driving a car located in San Antonio will be done by a buyer in Boise without leaving her front porch. Businesses will meet and collaborate just as meaningfully in a virtual setting as if they were sitting around the same conference room table.
And so on.
This melding of the physical and online world is possible, and will solve many real-world problems and create new products and services. It is vital for thinking about the world ahead. We have technology to do this, particularly as 5G infrastructure rapidly diffuses through every nook and cranny of the world.
But that serious and doable vision is different from the virtual space where we wake up in the morning, put on our specs and go about our day – a vision decades in the offing, if ever.
Connected ecosystems will find their footing as embedded commerce proliferates.
Consumers want to live in a connected economy, as the PYMNTS studies of roughly sixty thousand consumers over the last 22 months consistently finds. The digital transformation of nearly every aspect of their everyday lives has made them more, not less, comfortable transacting digitally as they go about their day-to-day – how they shop, how they pay, where and how they buy and eat their food, how they live and work, how they communicate with others, what they do to have fun and stay healthy.
Increasingly, the digital endpoints that have become the consumer’s go-to for those activities have given them more options, more things to buy, more services to consider, more options for how to pay and how to access what they just bought. Products are becoming platforms. Platforms are becoming robust ecosystems. Ecosystems are connecting with products and platforms to capture more of the consumers’ attention and spend. Payments is the connective tissue that turns engagement into a commerce experience. A host of third-party enablers remove the logistics and mobility constraints to keep those interactions fluid and dynamic for ecosystem stakeholders.
In 2021, we observed the beginnings of how consumers want to live in this truly connected economy – what services and capabilities they want, how they see it evolving. We see a small but growing group of consumers who want it all – many of whom also own a dozen connected devices to provide a seamless transition across all of the places and channels where they wish to access that ecosystem. We also see consumers who want ecosystems to aggregate the information they need to make decisions, get deals, hire contractors and go out to eat. We see those who long for a simple place to store and manage their money, pay their bills and save.
Regardless of how these consumer groups see the value of a connected ecosystem, each is motivated by the simplicity of a single place that makes it easy – and, in their mind, secure – to manage what were once a multitude of separate apps. Their desire creates a foundation for connected ecosystems to go well beyond integrating payments into these interactions, instead embedding commerce into them.
Who does the consumer trust to do that? That is one of the very important details that we will see emerge in 2022.
A colleague last week wished me a Happy 2020 II – a cynical nod to how the year has begun. Admittedly, it was a week with its 2020-esque challenges. COVID patients overloaded hospitals. Businesses that need people to perform a service – airlines, healthcare providers, restaurants, retail shops – were forced to cut back or cancel services because about five million people were sick with COVID. Businesses pulled out of physical events and relaxed return-to-work edicts. Schools wrestled with whether to open or revert to remote learning. Many executives are on corporate-wide or self-imposed travel lockdowns.
Yes, this second week of the new year has the world still in the throes of dealing with the global pandemic. The digital shift that we saw ignite in 2020 remains alive and well and is moving even faster. What’s different, though, is that the routines that we once hoped we’d return to in a few short months in March of 2020 are now part of our history – to be learned from, but not necessarily repeated. Not because we can’t, but because we don’t want to.
This year, 2022, we stand as a world in awe of the resilience of the innovators across the connected economy who saw the silver linings inside the darkness of 2020 and worked tirelessly to make how we live our day-to-day lives better, safer and easier to navigate. They made it possible for everyone to experience their own digital transformation – from the Mom and Pops to the multinationals.
Many of the trends that I have presented are bold, not without controversy, even a little hard to digest. They were inspired by the hundreds of conversations I’ve had with businesses on the front lines of making the connected economy more than a vision over the last year, as well as the insights drawn from the tens of thousands of consumers and businesses who have responded to PYMNTS surveys over the last two years. My thanks to all of you for those sharp insights and the conversations they inspired.
Now, let’s see what happens over the next 11 months and three weeks!
And Happy 2022!