By Jaco Prinsloo – Financial Planner at Alexander Forbes
As the year unwinds and we head into the holiday season, I know what you are thinking. Now is the time to spend and spoil yourself for a year of hard work – however this time of the year gives you a chance to take a moment and think about savings and ways you can invest your hard-earned money.
Saving vs Investing
One reason you should be saving is it allows you to spend more in the future. Saving is delayed spending to fund near future expenses and short term goals. Investing is aimed at growing your wealth by investing in income-generating assets allowing you to accomplish bigger life goals in the long term future. The question should you save or invest, is the choice between what you want now and what you want in the future.
Save to spend
To save you have to spend less than you earn. The difference can then be saved in a safe place for upcoming events like a wedding, deposit on your first home or an emergency fund. Your savings need to be easy and quickly accessible as savings are normally for goals you want to tick off the list in the next 1 – 3 years or unexpected expenses. Because of the shorter savings period, the savings growth will be lower compared to a long term investment but the growth will be stable and predictable. Savings is a great place to park your money for a while but if you leave your savings for too long you might find that you can buy a whole lot less in the future due to the eroding effects of inflation. To get inflation-beating returns you need to invest.
Invest to grow
At some point, all of us want to stop working or maybe become our own boss. By investing you are buying assets that can generate an income in the form of interest, dividends, rental income, and profits. To earn an income you invest in bonds, stocks, property or business. The cost of higher long term investment growth is short term uncertainty as economic conditions change and prices move up and down over the short term. With a longer investment period, you get higher returns because of the power of compounding growth over time. Investing requires patience and tolerance as your investment might be locked up for a long period as wait for the magical effects of compounding to grow your assets.
Why you need to save and invest
To illustrate the case that you should save for the short term and invest in the long term to let’s compare an R10 000 investment in a savings account at an annual interest rate of 6% to the same investment in a local share portfolio over the past 3 years. After 3 years you would have had R11 910 in your savings account and your share portfolio would have have not grown at the same rate as the market has barely moved over the last 3 years. However is we extend the investment period to 20 years the money in your savings account would be
R32 071 compared to R105 450 in the share portfolio at an assumed growth rate of 12.50%. That is why you need to both save and invest, save for easy access to your money and invest for long term inflation-beating returns.
The savings and investment plan
You can turn spending into saving by deciding what your goals and planned expenses are for the next 1 – 3 years and what you want your life to look like in 10 or 20 years. Looking at your short term goals start by saving 10% of your income towards an emergency fund big enough to cover 3-6 months’ worth of expenses. You can use a savings account or a money market unit trusts fund to store your savings. Once you have sufficient savings in place you can start investing. Depending on your goals you can start investing in your child’s education or your retirement. For long term investment, you can use tax-free savings accounts, low-cost property unit trusts or retirement annuity funds.
The great thing about savings and investing is you don’t need to earn a certain salary to start, anyone can do it and you can start today. The goal of saving and investing is to put enough money away so you can spend without going into debt and have enough assets to be financially free. If you are planning on starting, why waste time? There is no time like the present.
WHAT DOES 2020 LOOK LIKE FOR P2P LENDING?
By Roberts Lasovskis, Investment Platform Lead, TWINO
It’s a new year; time for resolutions and forward planning, positivity and drive. But the peer-to-peer industry would do well to engage in a bit of introspection as well; a look back to the year gone by, which serves as a more than useful reminder of what can happen in less propitious times, even for the well-intentioned.
2019 saw two major failures in the European peer-to-peer market, with both Lendy’s collapse in May and FundingSecure in October putting investor capital at risk. Between the two, a combined £240m of savers’ money was put at risk, leading to the inevitable questions of regulators. On top of the two lenders failing, the well-established Funding Circle came into difficulties with its new withdrawal processes raising investor concern. But in all three stories from last year is a sign of how peer-to-peer can succeed in 2020, providing last year’s lessons are learnt.
There is one aspect of the two peer-to-peer collapses last year that stood out for much of the criticism from both media and investors. Both Lendy and FundingSecure came advertised as ‘approved by the FCA’, yet in collapse, both displayed structural faults and warning signs that should perhaps have been noticed earlier. Managing credit risk is an expensive learning process, but should be taken very seriously, and using as many data sources and as much testing as possible. Inevitably, these high-profile failures will cause a tightening of regulation across the industry, which should be welcomed.
The industry should embrace the ongoing development of its regulation – it is not something to just be tolerated and survived. Higher levels of scrutiny from administrators lead to better industry structures and more robust business models that generate greater trust from consumers. This is an inevitable step for a maturing industry, and now is the time for peer-to-peer to ensure its regulations are fit for purpose, and that investor money is not put at unnecessary risk.
But regulation is about more than just stopping the high-profile failures and helping to build consumer trust in the sector. When implemented properly, regulation encourages the development of better products; companies are forced to innovate and adapt to meet the new challenges, eliminating the number of shortcuts or ‘easy options’ that are taken when developing a product for consumers. Ultimately, this creates safer and more sustainable returns for investors.
Transparency is key
One of the major lessons the past year has taught us is the importance of transparency, particularly when communicating with investors. But whether it’s investors, borrowers or other industry partners, transparency and clear communication are key to rebuilding trust in the P2P sector, and even as specifically as in individual products or companies. Take Funding Circle as an example. It is undoubtedly one of the most successful businesses in the sector, and yet has been suffering a recent crisis in trust, which has been largely caused by customers not fully understanding what procedural changes are going to mean for their money.
The changes in question are not necessarily the full problem. The model is no less safe, and the business is no less high-profile. Nor do investors automatically object to the idea of a delay before they can access their money (look at fixed-term savings accounts for example). As with all peer to peer lending platforms, it is simply a question of understanding risk – customers misinterpreted the changes as a sign that their money was under threat and understandably rushed to protect it.
The customer is king
Fintech exploded as a sector in the wake of the 2008 financial crash, as a reaction to bad practices in the financial services industry. The industry was created with a promise of ‘customer-first’ products; solutions to fix the shortcomings in finance and financial services, and to pivot them back to a consumer-focus. From product development to marketing and communications, peer-to-peer must remember where it came from and ensure that the customer always comes first.
This is particularly important should another economic downturn materialise, as many are predicting within the next couple of years. Fintech businesses emerged as the success stories from the last downturn by creating solutions that focused on their customers. They should do so again.
For all the perceived problems in the P2P sector, the fundamental market for the products have not changed; investors who want to generate good returns still need to be connected with those seeking convenient loans. By remembering where it came from, and the problems it set out to solve, the sector can still thrive in 2020, even if the predicted economic downturn does transpire. To avoid the pitfalls other providers have fallen into, peer-to-peer must embrace regulation, communicate with transparency and focus on leveraging their expertise to provide trustworthy customer-centric solutions.
WHAT ARE THE PAYMENTS TRENDS FOR 2020?
By Sunil Dixit, VP of Product, Adyen
There are some big changes in store in 2020, some obvious, some less so. In the payments landscape, it’s all about user convenience and customer experience, whether that’s through increased security for card users, or new ways to pay. Fragmented payments systems and services, from online to in-store, will move towards a unified centralised payment stack. We think there are a few trends to watch in 2020.
Ecommerce is continuing to expand and it’s supporting the rise of the subscription economy and innovative platform business models. With more sensitive card data than ever being shared to complete payment at the checkout, protective steps must be taken to secure this information by all parties. To combat the rise in fraud, tokenisation will become an increasingly common way to protect payment details. In the first half of the year 140,344 fraud attacks were recorded by RSA’s Fraud and Risk Intelligence (FRI) team. That represents 32 attacks every hour and is an increase from 86,344 in the last six months of 2018. So, what is tokenisation, and how can it help?
Tokenisation is used to safeguard a card’s payment card number (PAN) by replacing it with a worthless, unique string of numbers – a token. Payment tokens are generated per card, per merchant. This means that the customer’s sensitive PAN is substituted by a token and not transmitted during the transaction, making the payment more secure. The beauty of network tokenisation is that it helps protect businesses and customers from the financial hits of data theft. Even if hackers manage to steal tokenised data, they cannot use the stolen tokens to pay online since they are unable to link the token to payment information stored securely by the payment partner. Furthermore, network tokens are always up-to-date. If your payment card changes after a loss or theft, the token can still be used to pay, ensuring you can continue to enjoy streaming services without disruption.
Strong Customer Authentication (SCA)
The implementation of the second Payment Services Directive (PSD2) will continue to roll out across Europe in the new year, with certain transactions requiring authentication for purchase. 3DS 2.0 uses the full capabilities of mobile devices to create a more secure way to identify the customer, without adding friction to their checkout experience.
Some banks are expected to launch SCA in a gradual fashion over the course of 2020, with others not going live until the end of this year. This is due to the European Banking Authority announcing a delay in the deadline of PSD2 enforcement to 31st Dec 2020. There is still a lot of ambiguity for merchants looking to ensure they are able to support the new directive. With the possibility of EU regulators enforcing PSD2 at different times, businesses will need technology that can dynamically apply SCA to ensure payments aren’t declined due to SCA not being active.
Biometrics take centre stage
2019 saw the first biometric fingerprint credit card issued by a UK bank – expect 2020 to see more of this kind of payment innovation. With smartphones unlocking themselves through facial recognition and fingerprint scanning, biometric security is already ingrained into most of our lives. As payment providers look to increase security, both in response to PSD2 regulations and the increasing sophistication of fraud tactics, biometrics data is going to become an incredibly important tool for purchases. Beyond the UK and Europe, Australian and Brazilian banks are getting on board with 3DS 2.0, ahead of the decommissioning of 3DS 1.0 over the coming years.
Transactions through 3D Secure 2 already incorporate biometric authentication such as fingerprint and voice recognition or facial scans into the process. Even better, 3DS 2.0 can use data collected in checkout to authenticate a transaction without intervention from the customer. This creates an improved customer experience for mobile transactions that require strong authentication.
Expect to see your personal features becoming a more secure way to pay as banks and merchants look to step up their fight against fraudsters.
The payments landscape moves fast to support on-the-go customers carrying smart mobile devices. Self-service kiosks in quick service restaurants, endless aisle inventory in retail, apps that can be a hotel key card as well as a mode of booking and paying for an overnight stay. All these experiences offer exciting possibilities for improving customers’ lives and provide unprecedented levels of data and insights for businesses. Make sure your payments stack is ready for 2020 to deliver the experiences your customers deserve.
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