By James Booth, VP, Head of Payment Partnerships EMEA at PPRO
2019 has certainly been a memorable year for the FinTech industry with the final implementation of the second Payment Service Directive (PSD2) and Strong Customer Authentication (SCA) continuing to set the agendas for online retailers, banks and third-party providers (TPPs). Now, as we look at the year ahead, we can expect to see the payments industry further evolve in-line with consumer demand.
The evolution of the UK market
The UK is very different from many other EU markets. Contactless payments, and payment methods tied to credit and debit cards such as Apple Pay, have become ingrained in the habits of the typical UK customer. However, this is a stark contrast to other markets across the continent, where only half as many consumers use card-based payment methods compared to the UK.
Consequently, I expect to see a change in how people carry out transactions next year, both online and in physical stores. The adoption of mobile payments will encourage the biggest shift in the payments industry in 2020. Those at the tail end of Generation Z (born post-1995) are now entering full-time work and have a far different outlook and expectation of the online world, compared to previous generations. Many younger people, including millennials, are relying more heavily on mobile payments and are far less likely to use credit cards compared to older generations.
One of the reasons for this shift in attitude is a perceived fear of debt harboured by younger generations. Rising student fees are plunging younger people into considerable debt before they’ve entered the workplace. Paired with a lack of capital, younger generations are facing increasing levels of debt and are avoiding added debt through the use of credit cards.
As a result of the decreasing number of credit card users, we are seeing a shift towards mobile payments linked to current accounts. This form of payment has already become a preference for Generation Z. It won’t be long before mobile payments will become the dominant payment method in the UK market.
The changing role of TPPs
Due to the market shift to mobile payments, how consumers carry out online payments and interact with points of sales (POS) will become more personalised than ever before. Payment methods such as Apple Pay, Klarna and many others will soon be available at all checkout points across the world to cater to all preferences. However, merchants shouldn’t just stop there. Data insights from recurring and loyal customers can be used to offer tailored promotions or product suggestions based on their shopping history.
To provide personalised shopping experiences many retailers and merchants are turning to third-party providers (TPPs). Many have already begun outsourcing the management of their checkout processes to payment service providers (PSPs), to provide expertise and access to relevant local payment methods (LPMs). Checkout pages that are hosted by TPPs negate the need for retailers and merchants to purchase and install payment gateways or secure socket layers (SSL) certificates, further reducing the cost-saving benefits to retailers.
This shift in how the retailer and TPPs work together will see the role of payment service providers drastically change – those that are unwilling to take on such responsibilities from merchants will struggle to survive.
Banks – how far will trust take them?
Banks have been integral to our lives for hundreds of years, but they are now under threat from upcoming online-only challenger banks, with mobile-first strategies. However, they do still possess a strong unique selling point; trust. Consumers share strong relationships with traditional banks and entrust them with their money.
However, as new challenger banks gain greater market share, fewer traditional and high-street banks will be required. Challenger banks are growing in popularity, largely since they are easy to access via mobile and set up for varying age groups. With younger people now reaching an age where they are entering workplaces, the number of online banking services available will inevitably rise and evolve to cater to the modern customer – creating a huge problem for high street banks. Even by next year, we expect to see more people move to alternative online providers like Monzo.
Consequently, I believe we are only a decade away from seeing a dramatic turn in attitude towards banking, as consumers turn to new challenger banks, who will take market share from traditional banks.
Banks need to wise up and fast, or they will become irrelevant. It still sounds far-fetched to think of a high street without a bank branch situated on it, but that could soon become a reality unless banks expand their offerings to provide a mobile-first experience. Soon enough, alternative banking providers will enjoy the same level of trust that banks currently enjoy. Being more transparent and more inclusive to offer simplified financial solutions by collaborating with FinTechs, are just some immediate steps that banks must take.
The issue that rumbles on – SCA and PSD2
Secure Customer Authentication (SCA), under PSD2, is just one of the biggest issues the e-commerce market faces today. PSD2 has dominated the headlines in recent years and will continue to do so for the foreseeable future, as some key hurdles remain to be overcome.
We’ve already seen the deadline to be compliant with the SCA requirements, as part of PSD2, extended to March 2021, beyond the original deadline of September 2019. The Financial Conduct Authority (FCA) stated that implementation in the UK would divert to a phased approach, over the course of 18 months, to meet the revised deadline. However, I would not be surprised if this deadline is extended again, beyond this date.
Merchants are expected to continue to push back against SCA’s full implementation, largely because many are still not ready to adopt its requirements into their payment and checkout systems, as per PDS2 guidelines. However, even if the deadline is extended further, the marketplace will continue to be a relatively safe place for consumers to conduct transactions, despite the threat of data theft or fraud.
However, I have full faith that the introduction of SCA is a hugely positive step forward to creating a truly secure payment ecosystem. People have increasingly fallen victim to payment fraud for the best part of a decade, and action must be taken. Yes, transactions may take slightly longer to carry out as the new SCA requirements will mean customers need to provide additional methods of authentication at online checkouts. However, the additional step will see sensitive data more robustly protected and reduce the payment fraud crime rate that has afflicted so many, for so long.
High-yield bonds will help, not hinder, businesses’ recovery
By Jesse Chenard CEO of fintech MonetaGo,
One of the best indicators of stock market growth is high-yield bonds. The junk bond market is more important than ever as we recover from coronavirus – allowing companies to raise vitally needed capital and giving investors the opportunity for returns that will fuel speculation and drive growth across the whole economy. Junk bonds, or ‘high-yields’ to give them a less derogatory name, will drive the recovery just as surely as the rebounding stock market will.
Companies who have suffered with low liquidity under the pandemic need to raise capital and return to viability. According to J.P. Morgan Chase, bond-issuance has already reached $238 billion – almost double this time last year. It is clear that high-yield bonds are going to drive economic recovery and allow viable, but cash-strapped, companies to regain losses caused by Covid-19.
Companies striving to boost their capital, improve liquidity and rebuild after the pandemic need systems around issuance to be quick, effective and secure. Yet, the issuance process remains slow, costly and encumbered by legacy systems.
Avanade’s research found that up to 80% of IT budgets are allocated to keeping legacy systems running. Technology can help reform the process and give companies the funds they so badly need.
According to Bloomberg, global corporate bond issuance is on track to reach a historical high in 2020, as total capital raised neared $6.4 trillion (June)— already 71% of 2019’s total.
But the process of issuing bonds is unbelievably slow and largely manual. It takes an average of 30 stages with human intervention at each point, including physical paperwork and contact between multiple parties and intermediaries.
The fact that so many of these processes are still multi-step and using people and paper is archaic and inefficient in normal market conditions.
During the lockdown, it looks positively stone-age. And then there is the risk of data leakage and security, which are horribly compromised by existing processes. Two years ago, I visited Credit Suisse’s office on Madison Avenue where they told me that they send 20,000 to 30,000 faxes a day to carry out activities that could be very easily automated and digitized: a scary thought from a data security perspective.
It seems odd that in a world where we are used to securely accessing our personal finances at the click of a button, the same cannot be true for business finance.
This is a massive, liquid market. It needs modernizing. Add to that the fact that volumes have ballooned as crisis hit firms work to raise working capital and return to viability. That process should be entirely digitized and speeded up. Companies recovering from the pandemic deserve better than outdated, unsecure systems.
There is no question that technology is the key here. There are solutions to digitize the entire process, allowing businesses to greatly reduce their time to market and their banks to provide a vastly improved service to their corporate customers.
When normal ways of working are disrupted, it brings to light the inefficiencies in document workflows that cost businesses thousands of dollars in fraud each year, not to mention the other cost of lagging behind due to outdated processes.
There is now an opportunity to take the lessons learned from the pandemic and digitize processes that have shown they need it. Covid has forced financial services to digitize in many ways but the high-yield bond market is lagging behind. We need to bring this crucial sector up to speed. Companies deserve fast, efficient and secure issuance systems to stimulate their recovery and kick start the global economy.
Finance leaders must act against increasing fraud
By David Thorley, Director of Customer Development, FISCAL Technologies
The COVID-19 pandemic has resulted in a whole host of increased pressures on both business and individuals, worsening issues and vulnerabilities that were already present, as well as shining a light on new issues, never witnessed before. With this in mind, retaining and protecting cash has never been more important and therefore the role of accounts payable and the procure-to-pay function are crucial. These functions need to work together and do so proactively in order to succeed in the current climate.
It is also key that AP teams have all the right financial controls in place to minimise errors, maximise visibility of transactions, and streamline processes – especially with so many people now working from home and the various compliance challenges this creates. In essence, it is about taking a more forensic approach to AP activities.
According to fraud experts, each company has around a one in three chance of experiencing internal fraud this year, with enterprise organisations averaging losses of $1⁄2m. These attacks typically claim payments which are under the financial risk review threshold, hiding within the hundreds of small invoice transactions until found by AP Audit software or internal audit routines.
Finance ERP and P2P systems – often described as the heart and lungs of a company – have a complex relationship and are known to have vulnerabilities, opening them to fraud. This is especially true in enterprise organisations where the adoption of artificial intelligence (AI), complex system integration and automation delivers a touchless-AP process, but may lack in the controls of traditional processes.
Additionally, centralisation or de-centralisation of the P2P function and systems, acquisition or mergers also creates a higher vulnerability to duplicates, errors and fraud. When systems are being configured and resources are stretched, errors and omissions occur, processes take time to adapt and this allows sophisticated fraudsters to target these types of transformation projects.
Missed historical data creating risk
As migration projects typically copy only open transactions to the new system – historical transactions seen as being of little value – transaction history can be lost. Spotting irregularities relies on comparing transactions with historical data so that the validation of duplicate payments is hindered.
During ERP migrations the Master Supplier File (MSF) is frequently left untouched and copied in its entirety from the old to the new system. This creates heightened risks as supplier reference changes in the new ERP’s MSF make historical look-ups impossible and the opportunity to remove unused, out-of-date and duplicate suppliers – a hotbed for fraud – is removed.
Particularly at a time like right now, it’s crucial that organisations are able to take action in recovering missed payment errors.
Internal planned attacks
Over the past few years, there has been no shortage of stories about internal company fraud or senior finance professionals being tried in court for finance fraud. While only a small proportion of these incidences become public knowledge, as organisations fight to keep reputational damage at bay, it’s essential that companies place finance fraud high up on the corporate radar in order to protect against these threats.
According to the KPMG Fraud Barometer, there was a six-fold increase in the number of alleged procurement frauds appearing in court in 2019, usually involving fake invoices. Six cases worth over £16 million appeared in court in 2019 compared to £2.9 million in 2018.
The individuals and groups who are deceiving businesses to gain payments, usually gain some inside knowledge of the processes or systems to enable them to set up fraudulent suppliers and divert funds to their accounts. They are sophisticated and plan their attacks.
The biggest risk factor when it comes to ERP fraud is allowing users to access parts of the system that they shouldn’t be able to see, thereby enabling them to commit fraud in a variety of ways.
The most common type is the dummy company fraud, where a user sets up a false supplier, processes fictitious orders and invoices, and pays for goods or services that are never received. This is surprisingly easy to perform for a user with a little too much access. But there are many other forms of deception, including supplier bank account changes, inventory manipulation and unauthorised changes to payroll data. Proper control measures can mitigate these vulnerabilities to a large extent.
Nobody wants to believe that they are at risk of fraud, that their processes, systems and governance cannot safeguard their profits, however, invoice fraud is becoming a lucrative industry. Today’s finance leaders need help to keep ahead of the threat in order to protect and retain cash – the number one priority.
The UK Property recovery has begun
By Jamie Johnson is the CEO of FJP Investment,
The UK property sector will be integral to the country’s economic recovery from the direct and indirect effects of COVID-19. The Government certainly believes as much, with Chancellor Rishi Sunak implementing a series of sweeping changes to support property transactions amidst the pandemic. Most recently, on July 6th, 2020, it was announced that the first £500,000 of all property sales are now entirely exempt from Stamp Duty Land Tax (SDLT); including buy-to-let properties and second homes.
This attempt at boosting stimulus in the market is understandable. The real estate market is a key driver of national productivity and a big attractor of foreign investment to the UK. Thankfully for the Government, this policy has already been shown to be going some way in unlocking the stagnant demand for property that has been held back by COVID-19 uncertainty.
The boost the market needed
Mere weeks after this tax break was introduced, property journalists were already reporting a mini-property market boom. The property listing site Rightmove recorded an incredible 75% year-on-year increase for the month of July and a 2.4% rise in the asking prices of new properties on the website when compared to March levels pre-lockdown.
Whilst it is still too early to gauge how actual transaction numbers have been affected, this is a huge indicator that the Government’s policy has, thus far, been a success. After months of property price decline and housing market inactivity due to contagion fears surrounding COVID-19, the slump has finally ended, and buyers now feel confident enough to close on purchases once again.
But this demand will not be spread across the UK entirely evenly, so it’s worth examining how the continued presence of COVID-19 in our lives is shifting priorities in the minds of prospective buyers.
Stable demand, popularity shifting
With the working from home revolution seeming like it’s here to stay, it’s understandable that many of the working professionals who have found themselves having to turn their living spaces into work spaces may seek larger properties further from their employer’s traditional office space.
The aforementioned Rightmove figures support this claim. The rise in interest of London properties was just 0.5%, far behind the national average. This would make a change from the traditionally London-focused drive of the nation’s housing market; especially if we consider that this change in buyer sentiment may spur investors to look to places other than the capital when deciding where to invest in new high-end developments in the future.
Sunny skies ahead
This imbuing of market activity is likely to push up house prices for the foreseeable future. This would certainty follow expert’s forecasts, as global estate agent Savills recently stood by their prediction of 15% general house price growth in the UK by 2024. They cited the inevitable return of the buyer demand we witnessed in January 2020 once the novel coronavirus was in retreat; and it largely seems like, in conjunction with the Government SDLT holiday, this is exactly what’s happening.
FJP Investment commissioned research earlier this year which supports this projection. We found that 43% of property investors weren’t planning on making any financial decisions until COVID-19 had been effectively contained. With the virus now in retreat, it seems like confidence has risen. As a result, both investors and buyers are returning to the market in droves. Nationwide’s House Price Index for July, for example, showed that house prices have increased by 1.7% month-on-month.
Of course, I must taper this optimism with the knowledge that a second spike in cases or virus mutation could well set this recovery off-course. In short, there are still plenty of unknowns to content with.
However, as it currently stands, it seems as through the Government’s SDLT tax break will successfully encourage buyers (and sellers) to push up housing market activity for the foreseeable future. I look forward to being to a part of the UK property renewal in the coming months, and for the housing sector to provide the impetus for a strong UK economic recovery more generally.
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