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Is the dust settling? Or is the payments industry just getting revved up for 2021?

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Is the dust settling? Or is the payments industry just getting revved up for 2021? 1

By Stefan Merz, Chief Operating Officer at PPRO

It has been a year of momentous change for the payments industry. Previously emerging trends have seen a massive acceleration as a result of the pandemic. Cash, for instance, waned even further this year amidst rumours that handling cash could spread infection. In March, ATM withdrawals in the UK plummeted by 60%, leading to predictions that cash payments will fall to just 9% of all transactions by 2028. According to McKinsey’s 2020 Global Payments Report, by the end of 2020, we can expect a drop of four to five percentage points in the share of global transactions made with cash.

The pandemic – while undoubtedly awful – has been rocket fuel for digital transformation, providing an opportunity for the payments industry to innovate. This year, for example, online payments via bank transfer have continued to proliferate, whilst ‘buy now pay later’ (BNPL) schemes have been named as the fastest growing online payment method for the UK and worldwide.

So, after a year of such rapid transformation, what can we expect to see in 2021? And how will permanently altered consumer behaviours shape online payment preferences?

Buy now pay later (BNPL) will be the new payment method of choice

It is safe to say local and alternative payment methods – any payment method other than credit or debit cards – have seen huge growth over the last couple of years. These local payment methods (LPMs) continue to play a key role in accelerating cash substitution, particularly in developing countries. In China, for example, LPMs generated $43 billion in revenue in 2019.

In 2020, consumers have been more inclined than ever to try different payment methods such as mobile payments, bank transfers and e-wallets, in a search for greater convenience and heightened security during national lockdowns. According to Paysafe’s LiT research, 56% of global consumers mentioned that they used a new local payment method in the first month of the pandemic.

The payment method that has taken the world by storm is the interest-free ‘buy now pay later’ (BNPL) concept, with payment providers such as Klarna and ClearPay leading the charge. In fact, Klarna reported a 43% jump in the value of transactions in the first nine months of the year.

Research from Kaleido predicts that BNPL value will reach over 12% of total global e-commerce spend on physical goods by 2025. What’s more, Europe will be responsible for $347 billion of e-commerce spend via BNPL mechanisms by 2025, representing 30% of total e-commerce spend in that year.

Ongoing furlough measures and job losses have seen consumers face unprecedented financial strain this year, resulting in a reliance on ‘pay later’ schemes over traditional payment methods. With the economy not expected to recover to pre-COVID-19 levels for some time, this is a trend we see continuing into 2021. As such, this is certainly a payment method online merchants need to offer. Now.

Staying competitive in an increasingly digital age will be harder

It’s no surprise that the figures from 2020 reflect a massive boom for global e-commerce. The ‘quickening’ effect, as coined by McKinsey, describes a 10-year shift in e-commerce experienced in just 90 days. During the month of June 2020, amidst the height of the strictest lockdowns for many countries, e-commerce sales grew 34% year-on-year – the highest growth rate reported since March 2008. And consumers were not turning to their trusted brands during this critical period. Many shoppers branched out to new retailers.

Disruptions in brand loyalty have created a wealth of opportunities for businesses big and small, pushing them to take their operations online and across borders. Facebook even launched its own shopping feature to enable growing businesses to sell to customers.

Across Europe’s three largest markets (France, Germany and the UK), up to 80% of shoppers are now making at least half of their purchases online. What’s more, research from Visa reveals 74% of UK consumers think they will continue to prefer online shopping even after the lockdown restrictions start to lift. In 2021, it won’t be adequate for merchants to only support card transactions online.

According to PPRO’s own research, 44% of UK consumers will abandon their baskets if their payment method is not available at checkout. Recent findings reveal that the global average rate of cart abandonment is as high as 75.6% – causing brands to lose up to $18 million a year in revenue. We expect this demand to continue, putting pressure on retailers to expand current payment offerings.

Seamless payments have to meet stricter security standards

As digital payments head towards a global tipping point, the need for greater regulation and security will only continue to grow. For Europe, the second Payment Service Derivative, also known as PSD2, has been a topic of discussion for some time now. And, despite being delayed for a second time to allow adequate preparation time following COVID, the new September 2021 deadline will come around soon enough.

For countries outside of Europe, two-factor authentication is also growing in popularity. In 2019, Australia released the Card-Not-Present (CNP) Fraud Mitigation Framework, requiring Strong Customer Authentication (SCA) when a merchant’s fraud rate is above the recommended rate for two consecutive quarters. India requires two-factor authentication for all domestic debit and credit card transactions over Rs 2000. 

SCA, which falls under the new PSD2 regulation has been designed to reduce fraud and make online payments more secure. However, this will require retailers to build additional authentication into the checkout page for any transactions over €30.

As we head into 2021, payment providers and merchants must collaborate to ensure they’re prepared to adapt digital shops to these new requirements, whilst also ensuring the payments process is completely seamless for the customer. Whilst the pandemic delayed initial plans for many implementing new PSD2 processes, it also created a greater need and awareness around verifying customers remotely.

2021 will be the year for action – ensuring customers are adequately protected in an increasingly cyber world.

Payments should prepare for hypergrowth

Rather than an evolution, the pandemic has been a revolution. It’s turbocharged digital payments and changed customer expectations and behaviours overnight.

More and more customers are now online, looking for products or services that suit their very specific needs. A shopper might look across borders for what they want: better-quality products, payment methods accepted, stronger brand loyalty, and more. Merchants could reach untapped markets by offering the right mix of goods, user experience (UX), local payment methods and delivery options.

With over 500 significant local payment methods across the globe, each country will have different payment preferences. To be able to scale up and succeed in the new normal, merchants must work with payment service providers to activate as many payment methods as possible at the checkout page.

2020 has seen a huge change in relation to consumer payment preferences, but 2021 will be all about addressing that change and seizing the opportunities that have emerged. Merchants must get ready now, or else, risk losing out to the competition.

While 2021 will certainly be another challenging year for the economy, the future for local payment methods (and savvy retailers who offer them) will certainly be very bright.

Finance

The potential of Open Finance and the digitisation of tax records

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The potential of Open Finance and the digitisation of tax records 2

By Sudesh Sud, Founder of APARI 

The world is undergoing huge changes at the moment. Between coronavirus pushing the economy to the limit and a group of Redditors challenging the financial market hegemony, people are questioning the role of established institutions. If finance doesn’t work to enable the economy, businesses or individuals, then who is it for?

Before the digital revolution, financial experts were seen as a necessity. They knew how things worked, what everything meant, could provide good advice and were employed to sit at the heart of the action. Now, trading can be done by anyone online through established platforms, with a wealth of information available to hand.

Yet, as the 2008 financial crisis proved, established financial institutions have made themselves too big to fail. Simply tearing down the existing financial system would leave many ordinary people, along with businesses and government treasuries, in ruin.

However, as legendary futurologist, Buckminster Fuller, once said: “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

Traditional banking models are already being upended by technology. Through Open Banking, challenger banks are able to connect services digitally, cutting inefficiencies and costs while speeding up transactions. Now, Open Finance is seeking to build on this model to connect financial services via technology, potentially making the existing financial model obsolete.

Just as Open Banking led to greater democratisation of money, Open Finance has the potential to transfer power back to individuals. Not only would this benefit society as a whole, but it would help minimise the boom-bust cycles that cripple entire economies. No individual would be too big to fail, and bailing people out would cost far less, having minimal impact on the economy overall.

With more information available to them, Open Finance businesses will be able to use technology to make better decisions instantly. Many people struggle to get onto the housing ladder due to a poor credit score, for example, yet they have been paying rent every month of their adult lives. Why, then, can they not access mortgages? A company called Credit Ladder is addressing this through Open Banking, reporting rent payments via challenger banks like Starling to credit agencies, helping good renters to access mortgages.

While it is still very early days for Open Finance, there seems to be an endless raft of possibilities to benefit individuals, businesses and national economies. Faster, more secure, and less risky access to credit can help grow the economy, transforming finance from something that benefits a few wealthy capitalists to something that enables growth in the real economy.

So how else could Open Finance benefit society?

Using Tax Information

Every working adult pays income tax. Some of us via self-assessment while others are enrolled in PAYE. Regardless, we all have tax records with a wealth of financial information that has been verified, at least in part, by HMRC.

This centralised repository of financial information could be put to better use, such as allowing credit reference agencies to better understand an individual’s risk profile or helping to prove income as part of a mortgage application. Unfortunately, HMRC is a black hole of information ‒ its sheer size and power sucks information in, but nothing comes back out again.

However, by Making Tax Digital (MTD), HMRC are effectively allowing individuals to keep validated tax records on the software of their choice. Software providers may then be able to use this information to enable certain aspects of Open Finance. The information doesn’t need to be protected by HMRC, it is the individual’s choice and responsibility over how to use their own information.

As MTD software develops, we will see it connected to Open Banking, allowing self-assessed taxpayers to connect their business account directly to the software, effectively getting their tax return completed for them by an AI program. They would simply check the details, add any adjustments, and click submit. HMRC would then validate the records, providing assurance for any financial institutions using that financial information.

More Growth, Lower Risk

With access to complete and validated financial information, lenders would be able to more quickly and accurately assess individual risk when considering a loan or mortgage application. This would greatly speed up the process of applying for a loan, whether for a business venture or property purchase, for example.

Take residential landlords, for example. They may own a few properties already, with equity coming out of their ears. If that landlord wants to obtain another property, they would need to get their accountant to assemble their financial information, complete a SA302, and send everything off to their mortgage advisors who would then validate the information before submitting the mortgage application.

The application can then take months to approve, slowing down the process and potentially leading to missed opportunities. Since property sales usually occur in a chain (the owner of the property you are purchasing is usually purchasing another property, and so on), these inefficiencies slow the process down for everyone and can have major impacts.

If, however, mortgage applicants could simply share validated financial/tax records, mortgage providers could use that information to make quick decisions with reduced risk. What’s more, applicants could share only relevant, high-level information, rather than expose their entire financial history.

Individual Risk Management

Currently, individuals can manage their credit score/risk profile via third party providers like Experian, Equifax and TransUnion. These credit reporting agencies use limited information, such as credit cards, store cards and loans to assess risk. Individuals need to understand what factors each agency uses in order to ‘game’ the system.

For example, someone who has always been careful with their money, kept to a strict budget and never taken out a loan or credit card will have a far worse credit rating than someone who regularly uses debt to finance their lifestyle. So, even though they may have amassed a good deal of savings, they cannot get a good deal on a loan or mortgage.

With Open Finance, these individuals would be able to quickly prove their earnings, spending, and savings, decreasing their risk profile in line with reality. Rather than crude measures of creditworthiness, financial institutions would be able to use accurate and validated information to make quick decisions based on realistic risk. This both transfers more power to individuals and contributes to faster growth while reducing overall risk.

As a centralised repository for validated financial information, MTD providers will be in a unique position to develop a two-sided marketplace for finance, allowing credit providers to match products to individuals’ risk profiles. When a customer needs a loan, credit card or mortgage, they can simply browse products for which they have already been approved, applying and receiving finance instantly.

Empowering PAYE Taxpayers

Currently, PAYE taxpayers have little, if any, visibility or control over their tax contributions. They will see the amount paid in tax and national insurance, but to claim any allowances requires them to submit a self-assessment tax return. For most PAYE taxpayers, this simply doesn’t seem worthwhile.

Yet, self-employed taxpayers can claim for things like travel to their place of work, a proportion of living expenses when working from home, even their lunch. These things are necessary for productive work yet, for PAYE taxpayers, come out of their already taxed income. Meanwhile, businesses tend to make use of every tax allowance available to them.

This imbalance could be rectified with Open Finance connected to tax software. As MTD becomes a validated system for self-assessed taxpayers, a new version could be developed for PAYE taxpayers, putting them in control of their tax and finances. Not only would they be able to benefit from Open Finance in the same way as self-assessed taxpayers, but they will also be able to claim for reasonable allowances. What’s more, HMRC/the Treasury/the government would be able to hold employers accountable for pay disparities and unreasonable tax avoidance.

Open Finance, then, has the power to speed up and reduce the cost of obtaining and providing finance. It would make the finance system fairer and most transparent while distributing financial power, and help to avoid the creation of too big to fail financial institutions and the boom-bust cycle that has become unfortunate features of modern capitalism.

Ultimately, Open Finance has the potential to help the UK and other nations recover from the seemingly unending series of crises that have plagued the early 21st century by allowing people to access finance quicker in order to grow their business and personal finances while reducing risk, inefficiencies, and costs.

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Three ways payment orchestration improves financial reconciliation

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Knowing the best alternative payment methods

By Brian Coburn, CEO or Bridge,

When Luca Pacioli, the 15th century Venetian monk, invented double-entry account keeping, managing financial reconciliations had its own unique challenges. The father of modern accounting didn’t have to deal with glitches in his book-keeping app but he did have to write with feather-based quills by candlelight. Five hundred years later the challenges are different but no less onerous.

As in the 15th century, solid financial reporting is at the heart of every successful high-transaction business. As Pacioli no doubt knew, up-to-date, well-documented accounting ensures good operational health and makes it easier to grow. And that’s never been more important.

While it might not be feather quills by moonlight, today’s environment of multiple customer channels can be time-consuming and labour intensive, with various payment methods and financial reconciliations from multiple data sources.

Understanding cash inflow through online transactions is a critical element of financial reporting. However, when these involve multiple payment processors and payment methods and a complex system of disjointed silos of payment data, this can become a cumbersome and arduous manual task.

Common issues in this fragmented payments landscape include working across different formats, managing different data owners and access as well as inconsistent process timings. The result is often increased inaccuracy and inefficiency. Procuring multiple tools and software can end up being uncost-effective and unwieldy. Though the current digital transformation is an exciting time for retailers, staying on top of the ever-changing payment options can be an overwhelming burden for many business owners.

Introducing payment orchestration presents a single, accessible, creative and accurate source of transactional data, crucial for today’s complex challenges around financial reconciliations.

Simplicity

Today, commerce is 24/7, so being able to access and analyse real-time information is vital to managing business controls. Many organisations have looked to automate these processes with account reconciliation software.

However, one key challenge is the sheer volume of transactions and the need to capture data from a variety of different sources. Payment orchestration enables transactions to be carried out by multiple payment processors and payment methods with simple and flexible plugins, centrally monitored and routed in the most optimum way.

It allows users to add or remove providers easily, knowing the complexity (detecting outages and automatically rerouting payments) is being handled by a trusted specialist partner via an intelligent platform.

Bringing disparate sources of online transaction data into one place simplifies how enterprises access and operate with multiple payment processors and payment methods. This makes it easier for businesses to remain agile.

Speed

For organisations that still depend on manual, spreadsheet driven processes, the mechanics of reconciliation can be extremely time consuming.

A payment orchestration layer creates the opportunity to automate processes and reduce manual intervention. By bringing multiple payment processors and payment methods into an integrated service layer with intelligent routing capabilities, the impact of individual outages or failed payments can be mitigated to ensure optimum payment success rates, saving crucial revenue.

Accuracy

Naturally, significant manual work brings with it the added risk of human error. The speed with which business moves today demands accurate accounting processes. Checking for error takes up valuable time that could be spent focusing on business growth.

Payment orchestration can improve accuracy and reduce the opportunity for error. Providing a holistic and central source of real-time transactional data, payment orchestration can offer improved transparency and greater visibility of financial data.

With all transactional data captured in one source, payment orchestration can present a data source to feed other applications – such as automated reconciliation tools and fraud management – automating business processes in a seamless way across the enterprise. Good practice like this will, of course, enable a consistent approach to fraud management across all channels and payment services.

Multiple payment choices can be onerous but, today, not adopting them at all is unwise. The key to success, and good financial reconciliation, is being able to streamline and manage them.

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Circular Economy must be top of the business agenda in 2021

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Circular Economy must be top of the business agenda in 2021 3

By Andrew Sharp, CEO of CDSL, the UK’s leading appliance spare parts distributor

The last year has been one in which we were all forced to change our behaviour. We have become far more familiar with the four walls of our home than we would have liked, we have had to give up the social activities that mean the most to us and we have spent much longer apart from relatives than we could have imagined.

But alongside the many reluctant changes that we have made, there have been some silver linings. Both consumers and businesses have reassessed their priorities, and we have seen a noticeable increase in the importance of sustainability and social value in everything we do.

Within this has been a rise in awareness of the power of the circular economy. Research from the Recycle Now campaign shows nearly nine out of 10 UK households now say they “regularly recycle” (September, 2020), while environmental organization Hubbub found that 43% of people are more concerned about plastic pollution than before Covid-19 (September, 2020).

The role of the circular economy in underpinning wider sustainability targets is now being widely realised by Government, consumers and businesses alike. The Ellen MacArthur Foundation recently found that circular economy policies contribute towards tackling the remaining 45% if greenhouse emissions that cannot be resolved by transitioning to renewable energy alone (January, 2021), and the circular economy can offer solutions to the 90% of biodiversity loss and water stress that traditional resource extraction and processing require.

However, reducing the impact of our current linear economy will require widespread change and every product that we use will need to be accommodated within this. One area that is yet to be fully incorporated into a circular economy model is e-waste – an area where the UK is unfortunately a world leader. Other than Norway, the UN has said that the average person in Britain discards more electrical items each year than anywhere else in the world, and the UK is also the worst offender in Europe for illegally exporting toxic electronic waste to developing countries.

1,000,000 tonnes of e-waste are produced annually in the UK, enough to fill six Wembley Stadiums. The WEEE Forum estimates that only 17.4% of e-waste was recycled in 2019 (October, 2020), meaning the vast majority of this is burnt or thrown into landfill, creating environmental hazards for years to come.

However, the good news is that 100,000 tonnes of e-waste would be avoided if we fixed just 10% more perfectly repairable appliances. As an electrical spare parts retailer, we have seen incredibly encouraging trends throughout 2020. Our leading consumer brand eSpares has seen record-breaking surges in demand over the past year as consumers look to fix appliances themselves rather than kicking them to the kerb.

We recently conducted a survey of 5,000 people and the results clearly show this growing interest among young people for repairing and recycling their electrical goods. The answers suggest that three times more young people than over-65s would try to fix a broken appliance at home and that the environmentally conscious under-35s are increasingly keen to fix gadgets rather than throw them away.

That is why we have taken steps to encourage our customers to drive a circular economy throughout the year with the campaign #FixFirst. As a business and a retailer, it is our responsibility to help educate our customers on the benefits of a circular economy. Free services like our Advice Centre, which has over 700 step-by-step articles and attracted 1.2million visits in 2020, contribute to this by offering assistance on making repairs around the home whenever and wherever it is needed.

It is up to businesses to ensure that we champion the benefits of the circular economy and ensure these behaviours are maintained permanently.

Certain sectors are already leading the charge in doing this. In fashion retail for example, Levi’s is paying consumers to bring back old pairs of jeans for sale on a second-hand marketplace. Patagonia similarly will take back old pieces of clothing to repair and refurbish them.

Plastic packaging is also receiving some tough attention from across the retail and food and drink manufacturing sectors. Tesco has announced that it has removed one billion pieces of plastic from its UK business in just one year through a policy of Remove, Reduce, Reuse and Recycle, while consumer brands like Nestle for example are testing reusable packaging to reduce the amount of single use plastics.

Consumer attitudes are moving in one direction on the topic of the circular economy and it is therefore essential that businesses also get ahead of this as a commercial priority. In 2020, Deloitte found that 43% of consumers were already actively choosing brands due to their environmental values, while 2/3 of consumers have reduced their usage of single use plastics. In direct to consumer in sectors like the one in which we operate, sustainability credentials are fast becoming a purchasing priority alongside price.

Legislation in the UK is also increasingly clamping down on businesses that do not champion circular economy in the products they create and use. The Environment Bill that is expected to be passed in Autumn will give Government powers to introduce new targets on waste reduction and packaging. Extended Producer Responsibility expected to be introduced in 2023 will also lead to major fees for manufacturers of products that cannot easily be recycled.

As the circular economy rises in priority over the next year, businesses must act fast. Robust policies on the circular economy will both drive environmental benefit and allow businesses to stay ahead of a trend that is fast becoming a priority for consumers.

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