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What does 2023 hold? Predictions in payments for the year ahead 

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Jane Loginova, CCO, BPC Banking Technologies 

 

Consolidation

With more restricted access to funding, the rising cost of funding, and major cost-cutting in the tech industry, the focus will be on what actually works and generates profit. There will be less focus on innovation (especially for the sake of innovation), and instead, we will see the consolidation of the best solutions among players in the market and the strengthening of the developed products and solutions that actually work.

Payments as a bridge will thrive as an enabler of the digital economy (which is not going away and only strengthening). Again, the focus will be on the tools that actually work and are necessary. Many players with weaker propositions for the tough times are likely to be taken out or acquired. The crypto industry has shown a vivid example of this over the past year.

BaaS, PaaS to… CaaS

The rising cost of living is driving a significant increase in credit card reliance in the UK. With a 12.9% annual growth rate in spending, the UK credit card market is experiencing its highest level since 2005, according to Bank of England data. This growth has not gone unnoticed by fintechs and non-financial players.

The advent of open banking, SaaS-first platforms and the openness of financial institutions to sponsor fintechs and retail organisations will see newcomers bringing a better credit card experience to both consumers and businesses. This will require existing players to deliver new credit card launches as a service: fast, secure and with plenty of value-add and loyalty offerings.

Embedded Finance

Now that about a third of global card spending currently takes place online, many businesses rely on software solutions for payment fulfillment. Open-bank innovation, supported by European Union mandates, has also allowed third-party fintech leaders to access consumers’ banking data and carry out transactions on their behalf.

Embedded finance, where businesses create financial services for their customers integrated into their product ecosystem, will only increase. This new form of offering financial services in the channel where the customer is will redefine how consumers and businesses interact with financial services, and its transaction value is set to double to $7 trillion by 2026.

Ecosystems and marketplace

At the same time, consumers also return to physical shopping experiences post-pandemic, yet the way they purchase goods and services has evolved, with a strong and increasing preference for frictionless payment methods. These include mobile and digital wallets, one-click payments, and in-app payments – with online and offline payment methods through ecosystems and marketplaces becoming more merged than ever. Businesses are predicted to process $8 trillion in frictionless payments by 2024, over double the $3.9 trillion processed in 2020.

Consequently, composability (a system design principle referring to inter-relationships of components) is expected to become a core business strategy pillar. The data required for seamless digital experiences are often stored across multiple systems, with the average organisation now using 976 different applications – many of which are not properly inter-connected. Gartner has estimated 60 per cent of firms will consider composability a top strategic objective.

E-Commerce experience

Through thick and thin, eCommerce grows, with the market estimated to reach $8.1 trillion by 2026. Next year, forward-thinking businesses will continue evolving innovative solutions for consumers, such as a variety of shipping and pickup options, a broad range of payment and checkout options, and self-service options, such as chatbots, to deal with order-related queries.

There may also be more financial institutions recognising cryptocurrency as a legitimate form of payment. Mastercard recently shared its intentions to make crypto an ‘everyday way to pay’ while Google has announced a partnership with Coinbase, allowing customers to purchase selected cloud services using cryptocurrency in early 2023.

Payment Orchestration 

Although Payments represents the most invested segment of fintech and has led to the boom of the most highly-valued companies in fintech like Paypal, Stripe and Payout, funding for Payment Orchestration startups has still not taken off – although next year might be when this could shift. We will likely see increased interest from merchants in investigating their Payment Orchestration options as they strive to make sense of the increasingly complex array of available options.

Payment Orchestration refers to an integration layer between a merchant’s front end and the

payment companies, representing a centralised hub for all of a merchant’s payment methods and payment providers. These days, the ability to offer multiple payment methods is crucial for merchants and adding alternative payment methods such as BNPL, wallets, and Open Banking has become necessary. Payment Orchestration focuses on smart routing to enhance transaction succession and sales conversion instead of fixating on processing or collecting.

While all of this takes off, there are also warning signs. Consumer protection and regulation will move in on services like BNPL, which previously were viewed kindly as ‘lending options’. Increasing interest rates and inflation put nearly everyone in the spotlight regarding aligning spending and income.

As a result, planning (rather than plainly encouraging spending) and offering true support around debt management will move into the payments value chain. With the data residing in the transaction flow, payment service providers are well-positioned to take responsibility in this field and invest in compliance, fraud, financial planning, refinancing and more.

While the year ahead will undoubtedly see many of these challenges, those willing to embrace agile thinking and adaptability will likely have the most resilience and see the most significant rewards.

Finance

Demonstrating fintech resilience in 2023

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Melba Montague, Head of Financial Services, Genpact 

 

Despite ongoing economic turmoil and a slowdown in investment, the UK has managed to retain the top spot as Europe’s financial centre, and London, as the Silicon Valley for fintechs. While 2023 looks uncertain still, fintechs are known for swift innovation and reinvention. UK fintechs in particular, will ride this wave, capitalising on the $28.2 million in capital invested in the industry in H2 2022.

However, the fintechs that come out on top will be those that focus on, and demonstrate to investors, one word: resilience.

To do this fintechs must remain laser-focused on operational basics to prove their worth. This is even more vital as the world watched the collapse of cryptocurrency exchange FTX and lender BlockFi in 2022. And with growing industry concerns around alternative finance, there is also no doubt that regulatory complexities will increase in the coming year, especially with a greater presence of Buy Now, Pay Later (BNPL) products on the market.

Access to capital will diminish sooner than you think

According to the latest Innovate Finance report, global fintech investment reached £75.6bn ($92bn) in 2022, a decrease of 30% from the previous year. The drop is the result of the macroeconomic and geopolitical disruption, but despite this, the UK fintech industry received £10.5bn ($12.5bn) in investment – only an 8% drop from a record-high 2021. This demonstrates great resilience in this space. Further, the report shows that the UK is still receiving more fintech investment than all the next 10 European countries combined and remains second in the world only to the US.

That said, for rapidly evolving fintechs looking to continue their scaling journeys across the UK and beyond, access to capital and a global slowdown in venture capital (VC) investment will test their durability in the market. Even as the cost-of-living crisis drives demand, inflation has hit BNPL companies, bringing down valuation as Klarna announced that it had closed its major financing round with an 85% decrease of its valuation, down to $6.5bn in the latter half of 2022.

This year, investors will want to see fintechs lower their reputational risks, follow regulatory advice to maintain compliance, keep customers well-protected, and make use of innovative technology to accelerate and scale their processes.

Regulatory complexities will increase

While the UK government cultivates a strong culture of innovation and boasts a strong reputation for financial services, it needs to be more proactive in its regulatory stance. This is especially true for areas of alternative finance, such as BNPL.

BNPL’s resurgence in recent years has made it an attractive alternative to traditional spending, but not without major risks. At present, BNPL is an unregulated, decentralised industry, and presents major risk to consumers borrowing beyond their means without adequate financial advice or safety nets. Arguably, BNPL has made it easier to create debt, with figures showing that 4 in 10 people will even use additional lending to pay off their BNPL debts.

With urgent calls for the FCA to advocate for new government regulations from the UK Treasury and consumer champions alike, this will begin to establish concrete guardrails for both fintechs and for shoppers looking to manage their finances. While waiting, providers must step up and protect customers as more structured regulatory models are finalised.

BNPL providers have also made growth commitments to investors. They will be expected to keep those promises this year, as well as maintain operational stability, all the while customer experience is not adversely impacted. It will be crucial for fintechs to take the high ground and look for innovative ways to both educate and protect their customers whilst preparing for regulations recommended by the FCA come into play this year.

Resilience will be critical

The FCA is expected to introduce new requirements to perform credit checks this year, fintechs, neo banks, and BNPL companies now hold a greater responsibility to identify those at risk and support them with appropriate measures.

This presents growing opportunity for fintechs to promote financial resilience to improve their valued customers’ financial health. For example, with open banking-enabled solutions, they can provide insight to customers looking to monitor and consolidate spending.

As the industry awaits these incoming regulations, the onus will remain with fintechs to ensure their products are not at risk of endangering consumer debts. As such, it is critical that a proactive approach to educate the consumer is taken to avoid exacerbating an already fragile cost-of-living crisis. This could be done in many ways, from improving financial education in schools and boosting financial literacy across the board, to turning the onus of accessibility on banks to ensure that customers can receive tailored, personal support and counsel on their finances.

BNPL providers must also ensure their collection process engages empathetically with its customers navigating through financial hardship. Providers should leverage data-driven insights and segmentation from data, technology, and AI (artificial intelligence) to align with BNPL users’ specific communication preferences and chosen payment methods.

In addition, machine learning, AI, and automation of complex manual processes will enable secure operations with consistent quality and controls, while finding new ways to pre-empt risk and meet compliance and reporting obligations.

Persevering in today’s financial landscape

Not only do fintechs need to demonstrate resilience to their investors this year, but they must encourage and enable financial resilience amongst their customers. Fintechs participating in BNPL schemes must be made aware of the potential pitfalls that come with unregulated short-term lending, as practice shows that it increases individual risk as consumers borrow beyond their means without sufficient financial advice and regulation.

Implementing advanced technologies, such as AI/ML and data analysis into fintech operations also improves efficiency, enhances the user experience, and saves cost, particularly vital during a time when companies are confronted with record-high inflation and a volatile stock market.

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Banking

E-commerce marketplaces have become more than third-party platforms

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By Luke Trayfoot, CRO, MANGOPAY

 

E-commerce marketplaces have become an essential driver of e-commerce growth. As found by Ascential in their annual Future of Marketplaces Report, by 2027, third-party sellers using marketplaces will capture 59% of global e-commerce sales. A trend accelerated by the pandemic. Marketplaces are helping more brands cater to the ever-changing needs of consumers.

As businesses are continually being challenged to provide a seamless shopping experience, marketplaces can support this venture. Without the added costs of warehousing, supply chain and logistics for additional products, marketplaces can help to alleviate some of those pressures, especially as consumer demand grows.

Now, marketplaces need to further evolve their offering through payments infrastructure, whilst remaining compliant with payment regulations.

 

The marketplace offering – lowering barriers to entry

 Beyond access to the best deals, seamless checkout and quick deliveries, marketplaces also exceed consumer expectations for an intuitive one-stop shopping experience. Through marketplaces, retailers can continue to evolve their proposition, collecting data on what their customers want and need and continually refining their offerings at the right time and in the right place (web/app).

Marketplaces can also support businesses entering new markets or competing with bigger players in their respective fields. Entering a marketplace network allows small businesses to quickly gain influence, benefiting from larger audiences and quickly generating high sales volumes.

With multiple sellers, many with an international presence, implementing a sophisticated payments environment is much more complex than building one for an e-commerce website. Trading globally has different rules and regulations to adhere to per country which means payments environments must be multi-layered, accepting various forms of payments, which can be an inhibitor to businesses scaling at pace. Marketplace’s innate customer-centredness must be maintained end to end, including the purchase journey, so a sophisticated environment is essential.

 

Building the right payments environment

 A crucial part of the customer experience, it is important that merchants provide a choice of payment methods at checkout. As payments have evolved, marketplace operators should consider what options they provide to sellers, and subsequently, their end consumers.

The number one expectation is of course payment security, which is a key step in building a long-term relationship based on trust. Increased control points, however, generally means more friction being introduced into the payment process, so this is a balancing act.

As the retail landscape continues to grow, so does competition and as new players enter the market, businesses must find new ways to innovate, and the creation of payment options is one of the most important avenue to do so.

 

Considering regulation at every step

 Increased marketplace activity has led to the introduction of regulation for the platform economy. In the UK, HMRC has implemented changes to VAT reporting requirements for digital marketplaces and their third-party sellers, especially for overseas sales. Across Europe, KYC (Know Your Customers) regulations intended to protect customers from data breaches on a marketplace and identify the persons (legal or natural) with whom the marketplace does business, as part of anti-money laundering and terrorist financing directives, have also been enacted.

As online platforms continue to play an increasingly significant role, the implementation of the Digital Services Act supports creating a safer, online experience for citizens. This regulation enables the expression of ideas, communication, and online shopping by reducing exposure to illegal activities and dangerous goods. Regulation can seem extremely daunting, especially for those looking to enter the market. However, its purpose is to protect both the business and users.

Marketplaces need to work with payment infrastructure specialists that can support providing methods for local users, as well as options that are familiar and trustworthy for a global audience. Additional flexibility also needs to be built in to adapt to different demographics to ensure that a variety of consumers are appropriately catered for. If a brand wants to establish itself in a new market, varied payment methods are not a nice to have, but a must.

Despite the current economic climate, global e-commerce will continue to grow in the years ahead. Those that will be able to stay ahead of the curve will ensure that their customers’ experience is balanced with greater choice and varied payment options, in tandem with regulatory compliance.

 

 

 

 

 

 

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