Following last week’s Visa outage, Duncan Barrigan, GoCardless, explains why, as we move towards a Cashless Society, businesses need to make payments reliable or risk losing customers – and why, because of open banking, bank to bank payments might be the answer.
Payments are not only the backbone of the economy; they are the basis of brands’ relationship with customers.
In a Cashless Society, it’s more critical than ever for payments to be reliable and go uninterrupted. When they don’t, such as during the recent Visa outage, businesses feel the impact: whether that’s in terms of lost time, lost revenue or lost customers.
When this impacts a significant percentage of the business economy, it reduces confidence in the system and hurts everyone.
This is particularly critical in the Subscription Economy, where a failed payment can result in a disrupted service: creating unhappy customers and, worse still, customer churn. Consider for example, that among Software as Service businesses, 30% of customer churn is involuntary – the results of unintended payment issues. For a business doing 100,000 transactions a month, with an average value of £10, that could mean a loss of c. £15m over 5 years.
In this context, the value of bank to bank payments is increasingly clear: with fewer intermediaries, there are fewer points of failure and payment success rate is increased. Average payment failure rates for Direct Debit through GoCardless in the UK, for example, are less than 1% (we process £5bn each year); while industry benchmarks put failure rates for cards anywhere from 5-15%, depending on the sector and business.
The rise of bank to bank payments
But, just how common are bank to bank payments today in Europe?
Direct Debit is the most common means of collecting bank to bank payments across Europe and in 2016 it made up 20% of 122 billion cashless payments (source: European Central Bank, Payment Statistic for 2016).
In the UK, Direct Debit volumes reached 4.2 billion in 2017, more than double what they were at the turn of the millennium (source: Bacs Payment Schemes Ltd, 2017), while in Germany, more than 50% of non-cash transactions are made by Direct Debit. In the Netherlands, bank transfer system iDEAL makes up 60% of online transactions.
The rise of bank to bank payments has been driven in part by macroeconomic trends like the growth of the Subscription Economy, which has seen businesses moving to recurring revenue models and seeking out payment solutions more suited to this (e.g automated ‘pull’ payments with low failure rates). Floor care products business Vax for example, started to allow customers to pay for its products in instalments by Direct Debit and in doing so, managed to cut failure rates by 74%). While
EU-wide regulatory changes have also played their part: the credit card surcharge ban for example has led low-margin businesses (e.g. in retail and travel) to look for cheaper alternatives to cards.
Growth has also come about from the actions of commercial providers like GoCardless who have opened up Direct Debit to small businesses for who it was previously unavailable. Integrations with major accounting software platforms like Sage and Xero and a simple sign up and onboarding flow allow these SMEs to make it simple to access the benefits of improved cash flow and reduced admin.
Our work to build a global bank to bank payment network also means that Direct Debit is becoming an increasingly attractive proposition for global subscription businesses, from SurveyMonkey to Receipt Bank, TripAdvisor and Box.
We’re reaching a tipping point for bank to bank payments – and open banking might just send us over the edge.
Open banking: A renaissance for bank to bank payments
There are two important elements of the pan-European PSD2 legislation, which work in the favour of bank-to-bank payments: the creation of (i) Account Information Service Providers (AISP) and (ii) Payment Initiation Service Providers (PISP).
Until now, banks have been the sole owners of financial data like account details, balance and payment history. Under PSD2, payment providers and other organisations can apply to become an Account Information Service Provider (AISP).
Businesses and consumers will be able to tell their banks to share relevant banking data with an AISP. For GoCardless, being an AISP will mean we’re able to make payments that are smarter and less likely to fail (for example, they could be triggered when money is in a customer’s account). We can also make bank to bank payments more secure by authenticating new mandates through customers’ online banking accounts.
Under PSD2, payment providers can also become Payment Initiation Service Providers (PISPs), meaning they can trigger instant ‘push’ payments from a customer to a merchant. Unlike Direct Debit, these payments are immediate but, like Direct Debit, they carry much lower fees than credit and debit cards.
We are already seeing these kind of merchant-initiated ‘push’ bank to bank payments in the Netherlands with iDEAL and in Germany with SOFORT. We will start to see much greater usage of these types of payments in the next few years.
Could bank to bank rival credit and debit cards?
The opportunities for bank to bank payments are significant, leading some analysts to predict that they will become an everyday reality for consumers, capturing 20% of customer spend away from existing card schemes.
For businesses that take recurring payments, the new-world proposition for bank-to-bank payments is a compelling one: a global network, offering low transactions fees, high security, low payment failure rates and the ability to accommodate instant payments – all with a single customer mandate.
IMF lifts global growth forecast for 2021, still sees ‘exceptional uncertainty’
By Andrea Shalal
WASHINGTON (Reuters) – The International Monetary Fund on Tuesday raised its forecast for global economic growth in 2021 and said the coronavirus-triggered downturn in 2020 would be nearly a full percentage point less severe than expected.
It said multiple vaccine approvals and the launch of vaccinations in some countries in December had boosted hopes of an eventual end to the pandemic that has now infected nearly 100 million people and claimed the lives of over 2.1 million globally.
But it warned that the world economy continued to face “exceptional uncertainty” and new waves of COVID-19 infections and variants posed risks, and global activity would remain well below pre-COVID projections made one year ago.
Close to 90 million people are likely to fall below the extreme poverty threshold during 2020-2021, with the pandemic wiping out progress made in reducing poverty over the past two decades. Large numbers of people remained unemployed and underemployed in many countries, including the United States.
In its latest World Economic Outlook, the IMF forecast a 2020 global contraction of 3.5%, an improvement of 0.9 percentage points from the 4.4% slump predicted in October, reflecting stronger-than-expected momentum in the second half of 2020.
It predicted global growth of 5.5% in 2021, an increase of 0.3 percentage points from the October forecast, citing expectations of a vaccine-powered uptick later in the year and added policy support in the United States, Japan and a few other large economies.
It said the U.S. economy – the largest in the world – was expected to grow by 5.1% in 2021, an upward revision of 2 percentage points attributed to carryover from strong momentum in the second half of 2020 and the benefit accruing from $900 billion in additional fiscal support approved in December.
The forecast would likely rise further if the U.S. Congress passes a $1.9 trillion relief package proposed by newly inaugurated President Joe Biden, economists say.
China’s economy is expected to expand by 8.1% in 2021 and 5.6% in 2022, compared with its October forecasts of 8.2% and 5.8%, respectively, while India’s economy is seen growing 11.5% in 2021, up 2.7 percentage points from the October forecast after a stronger-than-expected recovering in 2020.
The Fund said countries should continue to support their economies until activity normalized to limit persistent damage from the deep recession of the past year.
Low-income countries would need continued support through grants, low-interest loans and debt relief, and some countries may require debt restructuring, the IMF said.
(Reporting by Andrea Shalal; Editing by Shri Navaratnam)
Leon Black step downs as Apollo CEO after review of Epstein ties
By Mike Spector and Chibuike Oguh
NEW YORK (Reuters) – Leon Black said on Monday he would step down as chief executive at Apollo Global Management Inc, following an independent review of his ties to the late financier and convicted sex offender Jeffrey Epstein.
While Black, whose net worth is pegged by Forbes at $8.2 billion, will remain Apollo’s chairman, his decision to step down illustrates how doing business with Epstein weighed on the reputation of one of Wall Street’s most prominent investment firms. Black co-founded Apollo 31 years ago.
Apollo said it plans to change its corporate governance structure, doing away with shares with special voting rights that currently give Black and other co-founders effective control of the firm.
The independent review, conducted by law firm Dechert LLP, found Black was not involved in any way with Epstein’s criminal activities. Black paid Epstein $158 million for advice on tax and estate planning and related services between 2012 and 2017, according to the review.
Black, 69, said that although the review confirmed he did not engage in any wrongdoing, he “deeply” regretted his involvement with Epstein.
“I hope that the results of the review, and related enhancements … will reaffirm to you that Apollo is dedicated to the highest levels of transparency and governance,” Black wrote in a note to Apollo fund investors. He will step down as CEO no later than July 31.
Apollo co-founder Marc Rowan, 58, will take over as CEO.
Rowan has often kept a low-key profile compared with Apollo’s other co-founder, Joshua Harris, 56, and spearheaded many initiatives that turned Apollo into a credit investment giant, including the permanent capital base the firm enjoys through its ties to reinsurer Athene Holding Ltd.
The revelations of Black’s ties to Epstein took a toll on Apollo, which Black turned into one of the world’s largest private equity groups. Apollo executives had warned in October that some investors had paused their commitments to the buyout firm’s funds as they awaited the review’s findings.
Apollo shares are down 1% since the New York Times reported on Oct. 12 that Black paid at least $50 million to Epstein for advice and services, when most of his clients had deserted him.
Over the same period, shares of peers Blackstone Group Inc, KKR & Co Inc and Carlyle Group Inc are up 19%, 10% and 23%, respectively.
“We think a large number of (Apollo fund investors) took a ‘pause’, and we believe the outcome (of the review) and changes today will cause most of them to return to allocating to future Apollo funds,” Credit Suisse analysts wrote in a research note.
Apollo shares jumped 4% to $47.65 in after-hours trading on Monday.
“We continue to follow these events closely and will evaluate how Apollo addresses its issues,” the California State Teachers’ Retirement System, one of the largest U.S. public pension funds and an Apollo investor, said in a statement.
Epstein was found dead at age 66 in August 2019 in a Manhattan jail, while awaiting trial on sex trafficking charges for allegedly abusing dozens of underage girls in Manhattan and Florida from 2002 to 2005. New York City’s chief medical examiner ruled that the cause of death was suicide by hanging.
Black previously said he had paid millions of dollars to Epstein, but the exact size of his payments was revealed for the first time on Monday. Beyond the $158 million in payments, Black made two loans to Epstein totaling $30.5 million in early 2017.
Dechert said in its report that Black’s social ties with Epstein, who built his fortune by endearing himself to powerful figures in high society, went back to the mid-1990s.
Epstein won Black’s trust by resolving an estate tax issue for him in 2012 potentially worth at least $500 million, the report said. He ended up advising Black on various aspects of his personal financial affairs, from his family office and airplane to his yacht and artwork.
Black believed that Epstein provided advice over the years that conferred between $1 billion and $2 billion in value to him, according to the Dechert report. Black said in his note to investors that he had paid Epstein a fee equivalent to 5% of the value he generated on an after-tax basis, and not tied to hourly rates.
Black and Epstein’s relationship deteriorated after Epstein failed to repay $20 million of the loans and Black refused to pay tens of millions of dollars in fees that Epstein demanded, according to the Dechert report.
They severed ties in October 2018, according to the report. Black knew Epstein had been convicted in Florida a decade earlier for soliciting prostitution from a minor, the Dechert report said, but there was no evidence suggesting Black had knowledge of the other alleged crimes before they were publicly reported in late 2018, culminating in Epstein’s July 2019 arrest.
On Monday, Black pledged $200 million toward “initiatives that seek to achieve gender equality and protect and empower women,” as well as helping survivors of domestic violence, sexual assault and human trafficking.
Apollo said it would pursue a “one share, one vote” corporate governance structure that would do away with shares with special voting rights. It said the move could qualify it for listing on the S&P Global indices.
Apollo also said it would seek to give its board more authority to oversee its business, eroding the power of its executive committee led by Black.
The board will be expanded to include four new independent directors, including Avid Partners founder Pamela Joyner and physician and scientist Siddhartha Mukherjee, Apollo said. Apollo co-Presidents Scott Kleinman and James Zelter will join the board and take on increased responsibility running day-to-day operations.
Apollo had about $433 billion in assets under management as of the end of September.
(Reporting by Mike Spector and Chibuike Oguh; Additional reporting by Lawrence Delevigne and Jessica DiNapoli in New York; Editing by Sonya Hepinstall, Leslie Adler and Kim Coghill)
EU sees no cliff-edge ending for COVID fiscal stimulus
BRUSSELS (Reuters) – European governments will not need to abruptly end fiscal support for their economies after the pandemic, top officials said on Monday, noting that any withdrawal of stimulus would be carried out gradually and only once the economy has recovered.
Euro zone public debt rose sharply during 2020 and is likely to exceed 100% of GDP this year as governments borrow to help individuals and businesses survive lockdowns.
The higher debt raises concern about how to deal with it down the road and when to start cutting it again, since the EU last year suspended its rules limiting budget deficits and debt, known as the Stability and Growth Pact (SGP).
EU finance ministers are to discuss when to reintroduce any borrowing limits in the second quarter of this year.
“I believe it important that finance ministers debate and reach a common understanding on the appropriate fiscal stance by the summer. This can then serve as guidance for the preparation of their draft budgetary plans for 2022,” the chairman of the euro zone’s group of finance ministers, Paschal Donohoe, said on Monday.
“To avoid any misunderstanding, let me stress that this is not about an imminent withdrawal of fiscal stimulus,” he told the economic committee of the European Parliament.
“We all agree that our immediate priority is to shield our citizens, in particular younger cohorts and those most exposed to the crisis. There must be no cliff-edges,” he said.
Joao Leao, the finance minister of Portugal which holds the rotating presidency of the EU and therefore sets the agenda for EU finance ministers’ work until June, was equally cautious.
“We should not withdraw stimulus too early. We need to make sure the suspension clause for the SGP remains in force at least until we return to pre-crisis economic figures,” he told the committee. “We need to make sure jobs are maintained as well as the production capacity of companies.”
He said first cash from the EU’s 750 billion euro post-COVID economic recovery programme should reach the economy in the first half of the year.
“Real funding should be getting to the economy before the summer or in early part of the summer,” he said.
(Reporting by Jan Strupczewski; Editing by Giles Elgood)
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