Omri Orgad, Managing Director, Luminati Networks
Every market, every investor, and every business owner in the current climate is looking for signs: signs of recovery, or signs of what is to come next. In a market that frequently resembles quicksand, every economist, banker, or investor is looking for that one insight on which they can base their future strategy. In the search for certainty and a clear direction, organisations in finance are now exploring a plethora of high-frequency alternative data sources to figure out where we are and where we are going.
This lack of near-term visibility is accompanied by an abundance of contradictory signals from governments worldwide. The almost impossible to foresee series of events since March has made it much harder to make accurate valuations and is complicating risk-reward calculations. This ambiguity is driving the financial world to consume significant amounts of alternative data.
In the world of finance, the way we manage, and access money has changed unrecognizably over the past decade. Disruptive technological advances have drastically shifted our approach to borrowing and saving, managing investments, interacting with financial advisors, and more. Could the way we approach data sources undergo the same radical level of change?
So, what is Alternative Data?
Having access to data sets that reflect a minute-by-minute snapshot of the true state of the economy is all important in today’s financial markets. In a rapidly changing business environment, alternative data, also known as external data, is undergoing a rapid escalation in popularity. Alternative data is defined as data derived from non-traditional data sources, such as social media networks. It gives financial market players such as bankers and investors information and unique insights to help them evaluate loans, investment opportunities, or business decisions, which are necessary in the current uncertain business climate, as traditional data sources such as government or analyst reports simply cannot match the current pace of markets changing.
As a result of this, the alternative data market is already huge and growing. It is expected to become a $1.7 billion industry in 2020 and double year-over-year. It encompasses a plethora of varied sources, these include natively digital information, such as web traffic, online buying habits, pricing strategy, social media activity, and government publications. Other examples include pharmaceutical approvals as well as more granular indicators of financial performance, such as ocean cargo and automobile registration information.
Not your usual financial forecasts
Credit and debit-card spending can demonstrate the value of alternative data in the current times. The latest figures compiled by Opportunity Insights at Harvard University looked at spending patterns in Georgia and Florida, two of the first states to reopen. The spending patterns in these states look very similar to those in New York and Massachusetts, which have only recently begun to reopen. This suggests that being allowed to go out and spend is less important than consumers feeling confident about doing so. And that’s where the usual/traditional reports and numbers fail us. Instead, the key to forecasting the future of economy in a time of unprecedented crisis appears to lie in figuring out when people will feel confident enough to spend “normally” again – and that kind of assessment can only be delivered by Alternative Data.
Whether it is online reviews, or posts on social media platforms like Twitter – these can act as indicators for how people feel at a given moment and their willingness to spend, something that is true for any market globally. Personal spending is generally considered to be a sign of a healthy economy and represents a clear indicator of economic recovery.
Alternative financial models also consider “unstructured data,” or data which is not organised in a pre-defined manner, which can be leveraged to be understand consumer behaviour and experiences. For example, data on mobile payments and/or generated by mobile devices creates enormous amounts of information that can be used garner financial insights.
How alternative data can benefit consumer lending
The fintech sector has been a frequent user of alternative data models for credit scoring. This can ultimately provide a better approach for consumers, especially considering the immense level of financial strain much of the population is currently under.
Traditional banks are beginning to understand this as well. The current situation makes it difficult to predict what the future brings, inhibiting their ability to accurately estimate credit via conventional means. In the US, 840 companies in total (with more added daily) have stopped providing annual credit reports. Since banks and other creditors use credit reports to make lending decisions, when debts do not appear on a report, a creditor cannot accurately judge the borrower’s capacity to repay. If debts are not reported to the consumer credit reporting agencies, lenders cannot make informed underwriting decisions.
Potentially, this means a person could take out a large loan at one bank and then take out an equally large loan at another institution, even when this borrower lacks any realistic capacity to repay both. This type of losses can add up quickly, and history tells us economic consequences can result from the excessively easy provision of credit.
The way to protect the credit of consumers adversely affected by the Covid-19 pandemic is not a cessation of credit scoring. Rather, it’s by revamping the credit scoring models and adding other alternative data models. This means having a scoring system that factors in human behaviour, which is easily monitored via alternative data, allowing those harder hits to have access to credit which they desperately need.
A helping hand for businesses and consumers alike
Novel problems require novels solutions. As data is the core of almost all modern business decision making, dealing with Covid-19 and the associated economic issues it presents means that businesses may be best served taking new approach to data. This will allow them to be able to tackle the difficult financial decisions that 2020 is forcing them to make in the most agile and informed manner possible.
But it won’t just be one party that enjoys the fruits of embracing a non-traditional approach to data, everyone from struggling families looking to make it until payday, to wealthy institutional investors, to your run of the mill high street bank has something to gain from this new paradigm for collecting data.
NAVIGATING SUDDEN DIGITAL ACCELERATION – HOW MERCHANTS CAN KEEP UP IN A NEW AGE OF PAYMENT INNOVATION
James Booth, VP Head of Partnerships, EMEA at PPRO
Recent months have brought momentous change for businesses across the globe. Needless to say, the pandemic has had a colossal impact on the retail sector in particular. For certain industries, the crisis has catapulted society further into the digital world; technology that was predicted to be adopted over the coming years is now on track to be embraced in mere months.
However, local lockdowns for example in the UK continue to force shoppers away from brick-and-mortar stores and onto online platforms to purchase a range of goods. As a result, we are seeing new user groups embracing e-commerce and digital payment methods at a much faster rate than anyone ever thought possible. These new consumer habits are taking root and are likely to become preferences that persist long after the pandemic.
As we continue to hurtle into a new digital era, there’s an unprecedented urgency for merchants to be proactive – offering a range of new payment offerings. As digital payments increase, offering preferred payment methods can unlock a whole new world of opportunities. The retailers seeing exponential growth are the ones who have tailored and localised their payments offering to a global audience.
The pandemic has propelled demand for Local Payment Methods
Today, consumers have an even greater desire and need for frictionless shopping experiences. Social distancing is facilitating the surge in e-commerce, increasing demand for digital payment methods over traditional cash and card payments.
Before the pandemic, the world was already on route to becoming a digital-first society. Some regions were ahead of others; for instance, from the PPRO Payment Almanac, 56% of online transactions in China were already conducted via e-wallets, compared to 25% in the UK. However, now we are seeing increased demand for these types of payments across the globe.
Catering for a new online customer
Whilst typically the global digital payment revolution had been led by Gen Z and Millennials, elderly consumers are set to drive the e-commerce market post-crisis. In fact, a recent study by Mintel revealed that 43% of those aged 65 and older have shopped more online since the start of the crisis. This is a stark contrast from back in May 2019 when just 16% of the same age group shopped online at least once a week.
Ongoing consumer needs for increased convenience and safety during the pandemic, have sparked a shift towards online shopping and away from brick-and-mortar. For example, groceries have seen a meteoric rise in online ordering; according to PPRO’s cross-border engine, online purchases of food and beverages are up 285% since the start of the pandemic.
With new curbside and buy online pick-up in store (BOPIS) programs, the typical cash and card payment methods will be harder to maintain. Now, merchants must offer e-commerce, and implement digital payment options at checkout. Recent data shows up to 80% of shoppers across Europe’s three largest markets (UK, Germany and France) will now make at least half of their purchases online.
We are also seeing the rise and popularity of pay-later apps like Klarna and Afterpay (Branded ClearPay in the UK) to help offer relief from the economic impacts of the virus. Just last month, Klarna was crowned one of Europe’s biggest private owned financial technology providers – with nine million consumers in Britain having used the service, and 90 million users worldwide.
Shoppers need flexible payment options. For merchants, extending many different payment options that cater to different consumer groups can provide diversification and enable growth.
Get ahead, or get left behind
This sudden digital acceleration puts merchants at a crucial crossroads. Embracing new innovations in payment methods has the power to open brands up to a wealth of new customers, whilst satisfying the changing needs of their existing customer pool. On the other hand, failure to offer a variety of digital payment methods can severely limit brands – therefore impacting future growth and success.
As businesses continue to navigate the ongoing ramifications of the pandemic, merchants will eventually face a digital arms race to create the best possible online experience. Those who understand this and make the checkout experience a top priority will succeed, and those who stick to their guns will be left behind. The failure to meet customer preferences during the payment process means many customers will abandon baskets at the very last hurdle. In fact, a study by PPRO 44% of UK shoppers abandon a purchase if their favorite payment method isn’t available.
While recent events have put huge strain on both global economies and consumers, it has also birthed a new age of payment innovation. New offerings such as the rise of Facebook owned, WhatsApp payment features or PayPal and Venmo enabled QR code checkout are showcasing the acceleration of this trend. Financial technology is helping to keep humans connected and provide access to the goods and services they need. Digital adoption will only proliferate, so merchants must act now to get ahead of the curve.
SUBSCRIPTIONS: THE NEXT BIG PAYMENT TREND
By Nick Raper, Head of UK at Nuapay
Ask the next person you speak to whether they’ve ever had a subscription to a business (the most common being a gym membership) that they forgot about, or just didn’t use, losing money as a result. Guaranteed, nine out of ten times, the answer you receive will be a ‘yes’. This is often followed by a disgruntled anecdote about how the individual kept forgetting to cancel the direct debit, using the service for much longer than he or she intended to. It proves just how sticky customers are when they are signed up to subscriptions – a trend that is rapidly increasing in the current environment.
Today, consumers are increasingly demanding ‘always on’ services that are fast, easy and can be personalised. With the COVID19 pandemic restricting consumers’ access to physical shops and driving almost all of them online, this expectation is growing the world over. Subscriptions provide a method of receiving services or products at a specified regularity and according to predefined preferences.
Subscriptions also allow businesses transitioning into the digital space to better monetise their services. Newspapers are a great example of this; it isn’t practical to sell newspapers on a “one-off” basis online, so many publishers have transitioned to digital subscriber models. With many other businesses from fitness classes to online events providers, forced to find a viable virtual business model, subscriptions have become an attractive option. Indeed, research from Zuora has shown that throughout the first lockdown nearly 90% of subscription businesses maintained or grew memberships. And this trend shows no sign of slowing down.
Businesses looking to offer their customers the best service would do well to consider consumer subscriptions, enabled by recurring payments technology. Subscriptions can be used across a growing range of sectors, from traditional subscription users like gyms, and online entertainment and media services, to food and beverage retailers, health providers in dental and eyecare sectors, and even online matchmaking and dating services. Going forward, subscription payments are expected to grow further as Gartner predicts that by 2023, 75% of organisations selling direct to consumers will offer subscription services.
What’s the business benefit?
By employing recurring payments, businesses can attract more customers that are price driven. A £25 per month cost in return for something new each month, is often much easier to accept than a £300 lump sum for one product.
Another benefit of subscription models is the ability to drive increases in customer revenue through reduced attrition and the ability to upsell or cross-sell products and services. One-off purchases with little or no product feedback, make it difficult to develop an understanding of consumer behaviours and preferences. By building an ongoing relationship with customers businesses can gain deeper insights which can be used to inform product alterations or even bring entirely new products to market.
Data from Nuapay shows the benefit of having members signed up on subscription services from the over 700 gyms serviced by Nuapay. Of gyms that were forced to close their doors and stop collecting membership fees in April as a result of Covid, many saw a relatively quick return in their revenue over the summer. By August, on average 83% of customers were back and paying their gym memberships again, despite continued restrictions in many European countries. Additionally, these gyms only saw a +0.9% increase in cancelled payments in August, compared to pre-Covid levels, suggesting no lasting impact on their attrition rate.
The additional beauty of subscription based business models is that, Covid aside, the stability of the customer base makes it easier to predict business revenues, enabling improved decision-making as strategic planning can be informed by revenue from ongoing recurring payments.
Partnering for success
Historically, implementing a subscription based business model has been difficult for organisations given the limits of collecting via recurring payments – this is particularly so for businesses at the small to medium end of the spectrum.
Today, improved digital payment infrastructure and new providers in the Account-2-Account payments space makes it possible to set up and process recurring payments quickly and easily. Payment providers are increasingly being integrated into a range of business software and payment solutions – large and small – to ensure they deliver the speed and exemplary experience demanded by consumers.
CyberSource, Visa’s global payment management platform, recently announced a partnership with Nuapay to take advantage of Nuapay’s Account-2-Account capabilities, and deliver additional payment solutions to its merchants client base. At the other end of the spectrum, specialist software platforms, such as gym management software Deciplus, can also integrate Account-2-Account solutions into its platform, providing an effortless Direct Debit experience for payers and merchants.
New payment innovations are now starting to transform historic Account-2-Account recurring solutions, which have been Direct Debit based till now. As an example, a merchant can now use Open Banking payments to improve the Direct Debit sign up process for payers, while also helping merchants reduce their failed payments, indemnity claims, and lost payments. Additionally, new recurring payment options known as Variable Recurring Payments (VRP) is said to be the next generation of Open Banking. Currently being tested in the FCA’s sandbox, this technology enables businesses to collect payments from a consumer up to an agreed maximum amount, subject to monthly limits. As it is based on Open Banking technology, VRP will be SCA compliant, providing a secure and convenient alternative to online card payments.
With an increasing number of subscription options now available, a good payment service provider will be able to provide businesses with access to and advice on the best options for them and their situation, whether that is Direct Debits, Standing Orders, or new integrated Open Banking solutions.
Subscribing to subscriptions
Subscriptions will only continue to grow in demand as consumers increasingly flock to online environments. Subscriptions were already growing in popularity even before the pandemic came along. 71% of adults internationally used at least one subscription service during 2019, and in Europe alone spent an average of €130 per month on subscriptions over the same period.
Covid has only accelerated this trend in some areas. It is no surprise that video streaming services saw a massive increase in subscribers, with some providers seeing a 25% jump in subscriptions in March 2020 according to Nuapay data.
Players in other sectors also seem to be transitioning their business model during this time. Food and nutrition suppliers who have been actively pushing subscriptions for regular deliveries have seen their subscriber base grow as much as 3 times higher than the start of the year in everything from seafood to coffee to vitamin deliveries. Some home office suppliers who introduced subscriber models for items like printer ink, have seen growth in subscribers as high as 40% since January. Even some travel businesses have managed to pivot their business to increase recurring sales by taking a more locally focused approach.
With the range of insight-led advantages for organisations evident, it would be an oversight for business leaders not to consider sharing their products and services via a subscription based model.
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