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Finance

LIFE IN 2022: HOW A GLOBAL PANDEMIC CHANGED PAYMENTS

James Booth, VP Head of Partnerships, EMEA at PPRO

 

It’s January 2022. Countries around the world are teeming with life again. Roads and trains are packed with employees commuting to work. High street retailers are seeing foot traffic, and restaurants are gearing up for flocks of hungry patrons. After a continued global effort to flatten the curve and months of social distancing, COVID-19 is finally in the rear-view. People around the world are relieved to be back to life as it was, but will things ever truly be the same?

COVID-19 shook the global economy as the largest pandemic since the Spanish flu in the early 20th century. Social distancing drastically shifted consumer behaviour and introduced a new set of challenges to stores and shoppers alike. But, as humanity has always done, we came together, adapted, and innovated.

We’ve entered a more stable 2022, adjusted to a new normal, and now we’re pausing to reflect on what we’ve just overcome. Let’s take a closer look at how payments and global commerce have changed in the last 18 months.

 

Monumental (and Permanent) Changes in Shopping Habits

COVID-19 was a major accelerator in the shift to digital for most of us; how we take classes, do our jobs, connect with friends, and definitely how we shop. Online shopping had already been the norm with Gen Z and Millennials, but COVID-19 served as the inflection point for older demographics and slow adopters. Gen X and Baby Boomers are often reluctant to change their habits, but 2020 disrupted the status quo for nearly all aspects of life. Throughout 2020, discretionary spending dropped due to a surge in unemployment rates, but e-commerce is now enjoying an all-time high thanks to its inherent convenience.

COVID-19 revealed a structural problem in our reliance on big-box retailers. At first, consumers suffered shortages of goods and frustrating checkout experiences, but big businesses responded with unprecedented agility. They quickly made improvements to overcome the new challenges of the market. Because of social distancing, many brick-and-mortar retailers were forced to go online for the first time. This was enabled by various e-commerce plug-and-play platforms that allowed small retailers or sole traders to sell online in a matter of days.

The market became a cornucopia of choice for the consumer. Millions of people who had previously resisted e-commerce – particularly for fast-moving consumer goods such as groceries – signed up with e-commerce sites. Post-pandemic, few of us have gone back to old shopping habits.

 

A Flood of Fierce Competition

The rapid, sustained increase in online shopping created an interesting challenge for merchants. More consumers meant higher earning potential, but it also meant more competition in the marketplace. To stand out, merchants are applying new rigor and attention to customer and user experience. Brick-and-mortar stores have largely become showrooms or click-and-collect points. Retailers have invested in connecting digital experiences to the physical using robust augmented or virtual reality and immersive experiences.

As a result of the increased quality in the market, consumers (who were already insisting on intuitive user journeys pre-pandemic) now have zero tolerance for sites that are not at least easy to use. When it comes to that all-important payment experience – the make or break moment of conversion – it’s critical to have checkout flows that feel invisible for digital natives, yet inspire trust for those late-adopters.

 

Local Payment Methods Continue to Drive ‘Glocalization’

In 2020, COVID-19 drove consumers to look outside their immediate geography for goods and services. Major drivers of this included price point, quality of products, and availability due to global supply chain challenges. The opportunity for merchants to sell across their borders became even greater, and acted as a solution to bridge revenue gaps and increase reach to an entirely new, global audience. Now, in 2022, most large and medium-sized retailers are selling across borders.

While it’s become easy to navigate logistics around the world, collecting funds in other markets is still an entirely different story. Like all aspects of culture, payment preferences vary from country to country. Surprising to Americans and Brits is that not all e-commerce is paid for with big brand credit cards. In fact, over 70% of global e-commerce is powered by over 450 local payment methods (which is why the misnomer ‘alternative’ has swapped for ‘local’ in recent years). Indeed, e-wallets like Alipay, WeChat Pay, and GrabPay dominate payments in Asia – now more than ever.

Offering local payment methods (LPMs) has always been a critical part of boosting conversion across borders. During the pandemic, as consumers clung more tightly to their money, the demand for payment methods that were familiar and trusted only increased.

 

How the Local Payments Landscape Changed During COVID-19

The payment needs and preferences of global consumers still vary from country to country. In fact, they are more diverse than ever. Still, a global trend has been the accelerated shift from traditional cash and card payments toward digital payment methods at the point of sale. Out of social distancing necessity, the pandemic led to increased use of contactless, digital payment methods like mobile e-wallets, bank transfers, and QR codes. Many retailers, particularly in the US, who have long resisted installing contactless technology due to processing fees have now been compelled to offer it.

When it comes to shopping online, installment payment methods like Klarna and Afterpay have surged in use, as they enabled shoppers suffering from the economic impacts of COVID-19 to defer payments and still buy what they wanted. Before the pandemic, apps like these were primarily used by younger demographics to break up payments on big-ticket items, luxury goods, and travel. Many consumers now prefer a ‘buy now, pay later’ option.

During the pandemic, cash obviously circulated less as brick-and-mortar retailers closed or implemented digital payment methods to avoid contact. In 2022, the markets that have remained predominantly digital are markets that had low cash use before the pandemic: the US, UK, Western Europe, and large parts of Asia. Cash-based payment methods remain popular for some economies around the world (especially places in Latin America, where there are high percentages of unbanked consumers). But make no mistake: We are closer to a completely cashless society in 2022 than we have ever been.

 

Innovation in a Time of Crisis

Even before 2020, the proliferation of local payment methods was only set to increase. Now, in a world that faced a pandemic that made e-commerce a necessity, we’ve seen an explosion of new fintechs, local payment methods, and product functionalities. Legacy providers struggle to keep up as new players create integrated, easier-to-use, and more secure options for consumers.

But while there’s more competition than ever, there’s also a new spirit of cooperation and collaboration. Rivals have joined forces to innovate for global consumers. COVID-19 incentivized businesses to provide simple solutions for people stressed by a pandemic. ‘Coopetition’ fueled complex advancements in payments tech.

Despite the havoc wreaked on the global economy, it’s come out stronger than before. In 2022, e-commerce continues to be a powerful force for good. Many consumers have new ways to shop, and retailers now have access to larger, global audiences. Small merchants have a bigger share of the local market and are now able to compete on the same level as big-box retailers.

Before COVID-19 upturned life as we knew it, 2020 sounded so futuristic; there were endless thought pieces in January 2020 on how the internet and AI were taking over. But, as it turned out, technology has become one of humanity’s greatest gifts, enabling us to connect, keep working, and get access to the goods and services we need.

Finance

WHAT’S NEXT? PAYMENT TRENDS IN 2021

Philip McHugh, CEO at Paysafe

 

Undoubtedly COVID-19 is going to continue having an impact on us all at least for the next few months and maybe all of this year, but there are still reasons to be optimistic. The industry continues to evolve quickly, and that in mind, here’s five of our predictions to watch out for in payments in 2021:

 

1. New consumers to online change the digital payments landscape

As more consumers headed online during the first wave of COVID-19, businesses noticed that their customers were also paying differently. Three quarters (76%) of the businesses we recently asked for our Lost in Transaction research report series said that consumers were using different payment methods during the pandemic, with the increased use of digital wallets being the most common. Having more customers that were new to eCommerce, and customers now shopping regularly with businesses that they were not comfortable sharing their financial details with, were key reasons for this.

Consumers confirmed this was true. When we asked in April, 18% of consumers told us they shopped online for the first time during the pandemic. With 38% of consumers telling us they are planning to shop online more even when COVID-19 is no longer a factor in their lives, we should see this shift to alternative payments continue.

 

2. SCA will drive mass adoption of biometric authentication 

Perhaps the first factor to shake up the payments industry in 2021 is going to have the greatest impact of any trend we will see in the coming year. That is because, after a series of extensions, the deadline for PSD2 Strong Customer Authentication is fast approaching. From December 31 2020 any transaction that isn’t verified by multi-factor authentication will be automatically declined.

One of the inevitable consequences of this is going to be a huge increase in the use of biometrics to verify payments. With the growth of mCommerce that we have seen before and during COVID-19, it seems very likely this will accelerate beyond predictions made at the initial SCA deadline in 2019. Juniper Research has already predicted that biometrics will be used for more than 18 billion transactions in 2021, with a value exceeding $210 billion in 2021.

 

3. A renewed focus on 5G

The importance of 5G and the growth of the IOT was another prediction we made for 2020. But while the impact of the pandemic has been to accelerate many of the trends we expected to see, perhaps one area where the pandemic has actually slowed adoption is the growth of 5G. With consumers spending so much time at home, appetite for personal 5G-enabled devices has been limited.

But at the same time, the need for the in-store shopping experience to be as frictionless as possible is now more important than ever. Almost half (46%) of businesses told us that they had lost sales in 2020 because their checkout times were too slow. So the use of 5G technology to overhaul the checkout will be back at the top of retailers’ agendas.

Almost half (47%) of stores told us that 5G will mean the end of the traditional checkout, and more than half (53%) believe that Amazon-Go style frictionless checkouts are the future of retail. Omnichannel experiences where consumers shop in a store and then pay via a digital checkout on a smartphone app are also on businesses’ radars.

 

4. A surge in subscription models

Almost one fifth (18%) of stores told us that they had launched a subscription services during the pandemic, and this is not only a result of business need but also customer demand. Overall, 27% of consumers told us that they were already planning to increase the number of subscriptions they had in the future, and this rose to 37% for consumers aged 18-34.

The growth will not be limited to digital either. Pret A Manger recently launched the first in-store coffee subscription service in the UK, and we expect to see similar models populating malls and independent stores soon.

Also, only the initial purchase of a subscription is subject to PSD2 multi-factor authentication. So for some businesses, launching a subscription service may be a way to reduce friction in the online checkout.

 

5. AI and machine learning as the cornerstone of fraud prevention

We’ve known about the importance of artificial intelligence (AI) and machine learning to financial services for years, but in many cases the industry has been slow to implement the technology. With the sophistication of financial crime increasing, and the growing concerns of consumers of being a victim of fraud, it is no surprise that adoption is now accelerating rapidly.

Banks have currently spent as much as $217bn on AI applications already, and in 2021 AI and machine learning based systems will be the standard in fraud prevention.

 

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Finance

FIVE TRENDS THAT WILL IMPACT THE FINANCIAL SERVICES INDUSTRY IN 2021

Ian Johnson, Managing Director Europe at Marqeta

 

Coronavirus has shaken things up across all industries, and financial services is no different. This year, we are likely to see a much more risk averse industry, as fintechs and banks alike move into survival mode. Yet, this will also spur innovation. The shift away from cash will give a shot in the arm to digital payments, while lenders in particular will have to get creative to balance their risk against the need to dispense funds.

It’s likely to be an interesting, albeit bumpy, year. Here are five core trends that I see having a major impact in 2021.

 

Lenders will seek improved visibility to combat delinquency

An economic downturn unfortunately means higher delinquency rates for lenders. But businesses – in particular, SMEs – need liquidity to survive, now more than ever. To balance risk with need, more lenders will focus on enabling visibility and control after a loan is dispensed. Instead of issuing funds to a bank account, loans will be dispensed to virtual cards or wallets, allowing lenders to track exactly how and where money is spent. This way, lenders only release funds as they are needed – rather than in one lump sum.

Ian Johnson

They also have the power to approve or reject payments in real-time, based on whether the request is aligned with the terms of the loan agreement. For instance, if a company has secured a loan for IT equipment, but attempts to spend it on office refreshments, the lender can make an instant decision to permit or deny the transaction based on geolocation and other transactional data. So, borrowers should ready themselves to be much more transparent if they want to secure loans in the future.

 

Embedded payments to become more commonplace

Embedded payments has been around a long time – just look at pioneers like Uber, where payments are so integral to the customer experience that it doesn’t even feel like you’re paying anymore. In the next year, we will see this expand, with a wider variety of organisations making payments a core element of their customer experience strategies. This trend will be coupled with a shift towards transparency and privacy, where people willingly exchange their data for an improved, personalised experience.

This is something consumers do readily in many areas of online life already – shopping, social media, and so on. In 2021, we will see more banking and payment services operating off the back of this same exchange. In return for data, customers will be given smoother, more tailored payment experiences.

 

Use of cash to drop below 15%, falling from 23% of all payments in 2019

The UK and Europe’s departure from cash will continue to evolve into next year. Physical cards will begin to give way to a rise in digital payment methods – virtual cards, digital wallets, and the likes of Apple Pay and Google Pay. Banks will need to prepare for this shift; hopefully learning their lesson from the early months of the pandemic, where 88% were overwhelmed by demand for online and mobile banking. This means modernising behind the scenes, using technology to improve and streamline payment processing. Time and money also need to be invested into educating and supporting businesses and individuals that going cashless could leave vulnerable, such as small merchants and elderly people. Until this has been addressed, going cashless risks leaving the most vulnerable in our society behind.

 

Back-end bank modernisation set to continue

Traditional banks recognise that they need to be able to innovate faster, particularly on the front-end, to compete with the new waves of digital banks and fintech entering the market. While we will see continued modernisation on the back-end, as they try to unpick the complex web of legacy systems they sit upon, I would not expect this issue to be fixed in a year. Instead of taking on the risk of full migration, many banks will ‘hollow out’ certain services – leaving core services in place that are too risky to move, whilst shifting newer services onto more modern platforms to avoid coding them into legacy systems.

This will create the building blocks to build a standalone digital bank within a bank, allowing them to modernise the entire stack and then incentivising customers to make the switch. An example of this approach is Goldman Sachs’ digital bank Marcus, which has debuted to strong demand – it’ll be interesting to see if others follow suit.

 

Alternative lenders will open up the market to support post-COVID-19 recovery

The process of securing a loan has always been quite painful – involving lots of self-reporting, paper statements and credit reports. And it could take days to find out if you were successful and then even longer to access the funds. Thankfully, it is looking like those days might be coming to an end with the emergence of a new breed of alternative lender focused on transforming specific niches of lending. Take SME lending, which has traditionally been regarded as high risk/low rewards and neglected by traditional lenders.

New alternative lenders, such as Capital on Tap, are changing the stakes. Using data and modern payment platforms, they are able to make loan decisions in minutes, not months. We are seeing the same in Point of Sale lending with companies like Klarna – now, you can apply for a POS loan and get approved in seconds. These companies will set the standard in terms of expectations around lending, forcing bigger lenders to follow suit and helping to transform the loan experience.

 

Fintechs to continue leading front-end innovation

Fintechs hold the monopoly on defining what ‘good’ looks like in terms of features. From money management tools, to saving incentives, fintechs have the agility to create new, attractive products with a speed and creativity that traditional banks simply cannot match. However, true success stories of fintechs paving the way to long term profitability are rare. Established, traditional banks still hold all the capital and most of the main checking accounts, making it harder for fintechs to really get ahead. This is likely to continue into 2021, but we are seeing signs of convergence, with fintechs acting as the front-end for customers while banks provide capital in the background.

 

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