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The Big Boom of Open Banking payments — where next?

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By Michael Lane, Vice President – Sales, Token

 

Open Banking is taking off, with payments leading the charge.

The Open Banking Implementation Entity (OBIE) recorded nearly 625,000 additional payments in January 2022 compared with December 2021. HMRC’s incorporation of a ‘Pay by bank’ option into the self-assessment process was a significant development – a seal of approval by the tax authority that helped propel the total number of Open Banking payments to 3.86 million.

Open Banking payments are fast and secure, with no cards and no data entry. They’re the future. This year, I’d like to see the industry shift from conversations about ‘use cases’ toward talking about Open Banking payments as simply a way to pay. Hopefully, the way to pay, which will start to erode the dominant market share of cards and mainstream wallets.

On the right trajectory

Having worked in the payments industry for two decades, I’ve seen many different payment methods rise and fall. But they generally all follow the same trajectory.

There are the early adopters, always hungry to find new ways for customers to pay. It’s the iGaming, FX and – most recently – Crypto verticals. If you consider the original shape of PSD2 – single, immediate payments – it’s only logical that loading a wallet or account were an obvious fit.

After a new payment method conquers these early pioneers, they migrate to traditional e-commerce. And, because refund capabilities are beginning to become available through regulation and innovation, that’s where Open Banking payments are headed next.

We’re seeing major payment gateways being asked by their customers for Open Banking payments. This is when we’ll start to see the big boom: account-to-account (A2A) payments on hundreds of thousands of e-commerce websites across the UK and Europe.

Then what’s next? Customer present, that’s what!

QR codes for payments, in store payments, links generated by customer service staff and sent to the customer’s mobile, and – of course – NFC (near field communication) payments.

QR codes are particularly interesting. Who would have thought this would be a likely way to pay in the UK and Europe a few years ago, but the attitude has now changed due to the pandemic. Many restaurants, for example, now prefer you to peruse a digital menu accessed via a QR code. Using WeChat and Alipay’s success in China as a yardstick, there’s definitely potential for merchants to use QR codes on terminals or tablets to accept Open Banking payments.

Lining up for the final strike 

When it comes to e-commerce, it’s the e-tailers that really have the power to propel Open Banking payments into the mainstream. There are household names like Amazon, but each country also has its stars – think Tesco, Argos and Sainsburys in the UK.

The question is: when will they adopt? First, they need to be confident in three things – stability, user experience and conversion.

In the early days of Open Banking, stability was the first pin the industry had to knock down. Thanks to advances in APIs, we’re now virtually assured of the stability of Open Banking connections in the majority of Europe. When a consumer initiates a payment, it doesn’t time out or break. It simply works. So we’ve ticked that first box. 

Let’s say a customer needs to be exposed to a new payment method three times before they ‘switch’ to it. Think of it as a 1-2-3 approach, where the third time’s the charm. Of course, a large e-tailer would prefer to let customers encounter 1 and 2 with other shops. And this illustrates the importance of the entire Open Banking industry working together to drive mass adoption – getting Open Banking payments on as many checkouts as possible is crucial.

In terms of delivering the best user experience, we need to move further beyond single, immediate payments. For A2A payments to capture a portion of cards’ share of checkout, they need to be moved behind ‘Buy Now’ buttons. As a consumer, once you’ve used that single-click checkout button, irrelevant of the payment mechanism behind it, you won’t want to go back to a checkout experience with the merest hint of friction. 

Variable Recurring Payments (VRP) capabilities can power this switch. From July 2022, the Competition and Markets Authority (CMA) will mandate sweeping services by the largest UK current account providers. But I’d like to see faster progress. We have to open up what’s allowed under VRPs from its current, somewhat limited, scope.

We need all the banks to offer it. And we need all Third Party Providers (TPPs) to offer it to their payment service users. We need to work out competitive pricing and agreements on who’s liable if something goes wrong. These are all things that card schemes worked out over decades, but we need to do this within the next 12-18 months.

And then last, but by no means least: conversion. It’s important to all merchants, but especially to the largest e-tailers. A single fraction of a percentage of movement costs or benefits them to the tune of tens or hundreds of thousands of Pounds or Euros. Once Open Banking payments have permeated checkouts and recurring payments are in place, conversion rates will naturally rise.

The final pins are being knocked down, and the big e-tailers are starting to come to the party. Time to forget about use cases and let’s just talk payments!

 

Banking

Is traditional business banking the best option for SME finance squeezes?

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Airto Vienola, CEO, AREX Markets 

The pressures facing business and personal finances alike have been well documented.

Stories are now starting to emerge about how smaller enterprises around the UK – which make up well over 90% of the companies in the country – are coping with that mounting stress. The picture starting to emerge suggests, not well.

Personal borrowing is bridging gaps in business books

One survey released recently suggested that one in five of the country’s small businesses have taken out personal loans by the business owner to try to cover gaps in their incomes and profit margins. A further 43% said they were considering doing the same. This rush to secure additional funds by any means may be understandable for businesses feeling the pinch, but it’s neither sustainable nor savvy. Many of these enterprises are already burdened with additional debt from the Covid relief scheme, and given rising interest rates, soaring energy costs and rising cost of goods, taking on additional debt is not an attractive prospect. Add to that the fact that rates from traditional business banking providers are proving steep, smaller enterprises could be forgiven for looking to personal means to shore up the balance sheet. A recent study from members of the Federation of Small Businesses found that one in five small businesses are struggling to find business lending rates under 11%. To help these companies to survive, something clearly has to give.

Not all Alt-Fi options are equal

Alternative finance services have been proliferating in recent times, and yet almost half of small business operators have concerns about pursuing this option, despite actively seeking additional funding support. Clarity over terms and conditions is an often-cited reason for this reticence, which is only natural when undertaking proper due diligence on financial lending. This is a wise choice, especially as it has become so easy for business owners to quickly and simply access new services through embedded finance services, just a few clicks away on existing digital accounting and bookkeeping services. Many of these are still not clear about any detailed fine print, lengthy contract terms or potentially high fees, and yet these too can look like accessible and viable options to business owners facing mounting financial issues.So, it can be hard to pick the right provider without a lot of research. Those wary of the long tail of taking on debt should be particularly careful when it comes to business Buy Now Pay Later or BNPL offers, which are currently entering the UK market, though that isn’t to say that other alternative financing services won’t suit their specific needs whilst mitigating fears over risk.

A fresh perspective on an established technique

So, if debt should not be an option, and embedded finance can have downsides, where should SMEs turn if they don’t want to kick the can of cashflow problems just a few months down the road? One area to reevaluate, which has seen a tremendous shift given the fresh thinking from alternative finance is invoice financing or spot factoring. No longer the imbalanced option of last resort it was traditionally perceived to be, the option has become much fairer to the SME, in addition to providing a swifter and more flexible alternative. In years gone by, invoice financing was the purview of the banks, which led to low rates of return for businesses looking to unlock the value in their organisation, and often much better value flowing back instead to the lender taking on the risk. This is no longer the case. Likewise, invoice financing earned a bad reputation among some for tying businesses into lengthy contracts – another area which current services in the market have since addressed. Our service for example allows businesses the flexibility to access cash back on just a single invoice of their choosing – which could be the difference for struggling SMEs between dipping into loss or keeping the lights on.

One answer to the late payments problem?

Perhaps the most important area which services like invoice financing assist is overdue invoices – the bane of the British SME. Barclays claimed earlier this year that over a quarter of SMEs are finding late payments to be on the increase, and this was an already notorious issue for many business owners. Estimates show that SMEs on average have £6500 in unpaid invoices at any given time. Financing these invoices ensures that the cashflow of these strapped SMEs is healthier, gets the money back into the business without the concerns of lengthy payment terms or endless chasing, and certainly in our case, has no impact on the relationship with the other organisation. Our platform acts as a marketplace between SME and likely investors, with extensive insight provided to make sure that those investing in the invoice are matched to the right businesses. We take on the intermediate risk – removing any suggestion or potential concerns around unwanted debt collection, for additional business owner peace of mind.

While the pressures may be mounting on the SMEs around the country, one thing is clear. No business should rush into making long term financial decisions simply as the cashflow is drying up. Any savvy business would be well advised to make sure they understand the implications, short and long term, of any lending solution they look to employ. However, knowing that there are options and the business’ bottom line does not simply have to rely on traditional banking services, should provide business owners with a lot more options at their disposal to help them to face the coming months with greater cash liquidity confidence.

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Banking

BANKING FOR BETTER 

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By Alex Kwiatkowski, Director of Global Financial Services, SAS.

From shifting market dynamics and mounting geopolitical tensions, to skyrocketing cyber threats and a worsening climate crisis, the world faces risk and uncertainty on many fronts.
But how are these and other prevailing trends reshaping the financial services sector?
A volatile landscape  
Describing the past few years as ‘volatile’ could be seen as a slight understatement, akin to saying the Titanic had a minor mishap at sea or that Liz Truss’s economic policy was mildly unorthodox. From the COVID-19 pandemic, Russia’s despicable invasion of Ukraine and the increasingly intense impacts of climate change, the resilience of not only businesses but whole nations has been pushed to breaking point.
In many ways, the banking sector has proven remarkably resilient to such challenges and risks. In the face of prolonged disruption, profitability remained higher than many had anticipated. However, the deeper structural challenges, such as digitalisation, the emergence of fintech disruptors, the brouhaha over crypto, and the growing threats associated with cyber attacks, are continuing to gather force as we head into a new year.
A recent Economist Impact survey, sponsored by SAS, found that while banking leaders are conscious of the imminent risks and those on the horizon, many are generally optimistic about how their organisations could be reshaped over the next decade, and beyond. I believe this optimism is well-founded rather than misguided, although pragmatism is required.

Alex Kwiatkowski

Digital transformation

For some years leading up to the COVID-19 pandemic, banks had been wrestling with exactly when and how to digitally transform. Like so many other industries, the chief legacy of the pandemic was to force rapid and wholesale change on a sector not always eager to embrace new ways of operating.
Traditional banks are now on track to be digitally transformed by the end of this decade, with technologies such as cloud computing and AI becoming industry norms. When considering the next three to five years, 57% agreed that digital transformation is among their top strategic priority. Cybersecurity and data protection (55%) are not far behind.
This focus on digital transformation is understandable, given the opportunities it may bring. Respondents from the Asia-Pacific region were the most excited, with 64% selecting it as among the greatest opportunities for their organisation. This was much higher than their counterparts in North America (52%), Latin America (50%) and Europe (50%). In fact, the tech-savviness among Asian consumers has created an opportunity for banks to leap ahead in delivering innovations compared with other regions.
When asked about the role of advanced data analytics in a successful digital transformation, just under half (48%) of executives selected this as the most important digital capability that their organisation must harness. It was the clear overall favourite, followed by blockchain (35%), AI/machine learning (34%), IoT/5G (33%) and robotic process automation (29%).
However, the survey also revealed a number of hurdles that may prevent the full uptake of data analytics, such as the increased risk of cyber attacks and a reliance on legacy technology systems. In addition, functions and departments working in silos was viewed as a potentially significant barrier, with 48% noting this as a “significant barrier” to change.
Purpose-driven banking
Alongside this goal of digital transformation, a growing consensus has emerged among banking leaders that the wellbeing of customers, communities, employees and the environment ought to be at the forefront of strategy.
Termed ‘purpose-driven banking’, this shift often encompasses ESG-related activities as well as a broader commitment to customer relationships over profits.
Purpose-driven banking has broad support among the industry’s leaders, with 82% of executives agreeing that financial services organisations can pursue profit and a better society at the same time. That sentiment is even more common among C-level executives, with 91% in agreement.
Arguably one of the most interesting results of the survey is the fact that 76% of respondents believe that the banking sector has an obligation to engage with and address societal issues. An even larger portion (81%) said that their bank takes responsibility for the social impacts of its activities.
Interestingly, a clear majority felt that the financial services industry is behind other sectors in terms of progress on ESG commitments. About three-quarters (76%) of C-level respondents said this, compared with 61% of all other executives.
Establishing transparent and measurable ESG goals aligned with corporate strategy is one area where leaders feel behind, with just 38% feeling that their organisation had achieved this. Another important aspect of the purpose-driven mindset is recognising how banks are fundamentally linked to other stakeholders in society. When asked which were the “most important groups for financial services organisations to engage with in order to have the most positive impact”, the technology industry, investors and customers were the top three choices. They were followed by consumers and government or policymakers.
Growing pressure from customers, communities and other external stakeholders are likely to influence the extent to which the banking sector embraces ESG practices, however it’s clear that the banking sector looks set to transform over the next decade. And transform it must.

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