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USE REAL-TIME INTELLIGENCE TO ALLEVIATE THE TRADE CREDIT RISKS OF BREXIT

By Michael Feldwick, Head of UK and Ireland at Tinubu Square

 

Nothing could be more certain at the moment than that we face uncertainty. The outcomes of the UK’s exit from the EU will affect every one of us and for businesses, frustratingly, there is a limit to what can be done in the short term.  Alarm bells are ringing across the insurance industry as the outlook for trade credit risk becomes more and more difficult to predict, and the Association of British Insurers has said that ‘a no deal Brexit is an unforgivable act of economic and social self-harm’.

 

Uncertainty reduces pockets of resilience

At the end of January, trade credit insurer Euler Hermes published its latest annual insolvencies report, which indicated that the UK would ‘remain highly vulnerable to a disorderly Brexit’. The company believes there will be a sharp rise in the number of UK business failures in 2019, regardless of whether a Brexit deal is agreed before the March 29 deadline and in an article in GTR, Ana Boata, the company’s European economist said: “Overall, the prolonged high Brexit uncertainty has significantly reduced the pockets of resilience in the economy.”

 

Other insurers agree, with Coface saying the magnitude of the slowdown in growth in 2019 will depend on the final outcomes of Brexit and Atradius, in its January economic update saying: “GDP growth is forecast to rise to 1.7% in 2019, from a historically low growth of 1.3% in 2018. However, this outlook is subject to uncertainty as it is based on the assumption of a smooth Brexit, including a transition agreement.”

 

UK businesses, however, still have to trade, and unless they take the plunge, up-sticks and move overseas, which in itself is a risk, consideration needs to be given to how they can protect themselves amidst the uncertainty.

 

Planning ahead

Caution is the best approach. Against the backdrop of expected increased failures and the growing demand for domestic and export credit insurance, it’s reasonable to expect that rates will increase, so companies need to factor this into their calculations. This goes for receivables finance too, where the demand for non-recourse factoring is likely to increase as an outcome of Brexit uncertainty.  It makes sense for companies to seek the comfort and protection of insurance when they could be faced with the possibility of non-payment of invoices in established markets and new markets at any time but especially now, when future trading conditions are so unclear. After all, the supply chain is only as good as its weakest link and this may not be visible to the seller.

 

It is important to remember that whilst UK traders are at the mercy of the sterling exchange rate, those that export and import have been embracing globalisation with increasing success for years. Many already have processes in place to manage sharp increases in costs and duty and changes to trading regulations. Because exporting is not like turning on a tap, they are prepared to continually assess their positions as they invest in developing markets or consolidate existing ones.

 

Getting power from intelligence

The key to keeping these assessments rooted in reality is intelligence. Insurers and receivables financiers cannot expect to make informed decisions about their level of exposure if they don’t have good aggregation management systems in place that deliver a complete picture, and the same goes for businesses.  Insight into the complete financial ecosystem of a market or a geography can be a hugely powerful tool when it comes to making important decisions about the levels of credit that should be offered.

 

Turning to software solutions that can deliver the level of in-depth intelligence needed to calculate risk in relation to every division, company, sector and country where an organisation has exposure is a good counter-measure for the uncertainties of Brexit.

 

In addition, having a full financial picture delivered in real-time mitigates against the risk of different stakeholders using different systems that don’t talk to each other. In many industries buyers, banks, receivables finance companies, credit insurers and suppliers use widely disparate financial solutions that cannot communicate. This increases exposure to risk because the entire portfolio can so easily be miscalculated or misunderstood.

 

Of course, whilst leveraging dedicated intelligence platforms will transform processes, they should not be viewed as just a quick Brexit-busting approach. Trade credit management solutions will impact not just the finance department, but all operational areas, and these changes need to be part of a strategy to protect the broader business. The net result is that projects planned now, when we are unsure of the Brexit-effect, and later when the dust has settled, will be based on accurate intelligence and this will ensure that risk is managed within the particular parameters that suit the organisation, regardless of the external economic situation.

 

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Finance

WHAT’S NEXT? PAYMENT TRENDS IN 2021

CEO at Paysafe Group

 

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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