The Emerging Payments Association (EPA), who represent 130+ members from across the payments industry, wishes to thank the CBI for inviting it to contribute to its research into Economic Stimulus policies to fuel industry recovery following COVID-19. We appreciate the steps the CBI is taking and the policy areas being developed and encourage the Government to act on your recommendations. These will benefit consumers, businesses and society. Our members are drawn from right across the payments industry including the largest and smallest businesses. Our response is structured inline with your six questions.
1. What are the top concerns for your sector now and/ or later in the year?
i) Concerns around lower revenue and profitability
The payments sector encompasses a wide and diverse range of players, both on the consumer / account issuance side and the merchant / payment acceptance side. The COVID 19 pandemic and the effect of lockdown on the UK economy, most notably through the loss of trading volumes, have materially impacted both sides of the ecosystem. Our industry has high fixed costs and low margins (thanks to regulatory pricing intervention) and so the significant drop in transaction volumes has hit the profitability of the majority of payment services providers hard.
Whilst some sectors of our economy have done well during the pandemic particularly grocery and merchants whose business model was to primarily sell through online channels, UK retail sales were generally down 5.9% Y-o-Y in May, and UK GDP is predicted to drop by 8.3% this year. Those who had online sales channels alongside physical outlets were able to maintain some revenues but far lower than normal levels. Other market sectors such as hospitality, travel, entertainment and tourism have seen catastrophic declines in new sales volumes, coupled with unprecedented levels of refund and chargeback requests from customers, which they could not have foreseen. So the key question is when and if trading volumes recover to their pre-COVID levels – are we set for a U-shape recovery or more of a Nike swoosh, or something else?
We are therefore calling for continued support of businesses impacted from the loss of revenues and profitability due to COVID. Consumer confidence will be key and so we also on the Government to put programmes in place to communicate effectively and encourage the population to return to normal purchasing behaviours as soon as COVID infection rate declines allow. The length of time before returning to financial strength will vary greatly by type of business and so flexibility is called for in Government policy that takes into account different market sector circumstances and requirements. A variety of timelines and support options will be needed.
ii) Concerns around access to cash
Whilst the acceleration of the online economy, and the global avoidance of cash based transactions could be seen as a major advance for the payments industry, there are consequences. LINK reported a 50-60% decline in cash withdrawals in April as consumers and retailers shunned cash. Should this trend become permanent, which looks likely, it poses serious questions for the UK’s cash infrastructure as withdrawal revenues fall and ATMs become uneconomic to operate. However there are still sizeable vulnerable groups of our society who depend on cash, and could be significantly disadvantaged by any diminution in their access to cash. During the early months of COVID lockdown we saw increasing numbers of businesses refusing to accept cash due to health fears. We would not want to see this expand and become permanent. This is not in society’s interest, and needs to be addressed strategically by the banking and payments industry working with UK Gov.
We call on the Government to prevent financial exclusion by ensuring that merchants continue to accept cash alongside digital payment methods. Whilst we actively encourage payments innovation and the introduction of emerging payment technologies like contactless cards, mobile wallets and secure digital payments, we do not wish to see the unplanned removal of cash as a consumer payments option. We also request Government attention on the availability and economics of maintaining a nationwide network of free to withdraw cash ATM dispensers.
iii) Concern for FinTech businesses
The UK has been an international market leader for FinTech businesses many of whom supply payment services. These businesses choose the UK due to a supportive Government and regulatory environment, access to funding, strong network of professional services providers and the availability of a well-educated domestic and international talent pool. FinTech and PayTech businesses are helping disrupt the financial services industry, increasing competition and consumer choice, and are delivering innovation and transforming the UK into a vibrant digital economy. The UK FinTech sector is at a critical inflexion point and we would not want to see the great work in areas such as Digital Banking, PSD2 and Open Banking stalled.
Many of the businesses are still at early stages of growth and profitability. The COVID crisis has hit them hard and they will likely need additional time and funding to support them through these tough times. We would encourage the Government to introduce new support packages for these businesses including R&D incentive programmes. Many are now seeking new rounds of investment funding. It would be a great shame for them to be forced to lay off staff, delay programmes, close operations or to seek an alternative location to be headquartered. FinTech has been a UK success story, we do not want to see it disappear or move to another jurisdiction.
iv) Concerns from increased fraud attacks
Criminals have exploited the COVID crisis with an increase in their levels of fraud attempts and attacks. Phishing has become widespread and the introduction of consumer protection programmes have been delayed. Consumers and businesses have experienced growing numbers of scams and financial losses. Fraudsters have exploited changes in operating environments, procedures and working practices. An increase in ‘Friendly Fraud’ chargebacks is one area reported by our members. Our industry calls for increased support to tackle this growing problem of fraud attacks including higher prioritisation for criminal investigation and stronger police and judicial action. More cyber protection initiatives would be welcomed alongside greater centrally co-ordinated and funded consumer and business education programmes. With the acceleration to digital trading, forced on some by the COVID crisis, now is the time to step up cyber defence and fraud control programmes.
2. Are you expecting to face cash flow challenges over the next 12 months?
Generally – yes! Although our sector comprises a broad range of different sized entities and types of payment services being provided. Some well established – some early stage. And the different types of entities will face different challenges. As mentioned above our primary concern related to lower revenue and profitability. For example commercial card issuers – for so long dependent of global Travel and Entertainment (T&E) spend will face a prolonged period of depressed volumes / loss of corporate demand which one could argue render many programmes non-viable. New PSD2 Third Party Processors are facing extended adoption dates for the introduction of account-to-account payments and Open Banking services which is hitting their cash flow forecasts. Payment Service Providers (PSPs) and Merchant Acquirers focused on travel, entertainment and tourism face a particularly difficult year ahead, others with mainly online merchants could do rather well. Many will have 6-12 month challenges depending on when consumer confidence returns and revenues normalise, their ability to contain/lower their costs or the availability of investor funding. Banks and Independent ATM deployers may remove some cash dispensers from services if demand continues to fall and they become uneconomic to operate.
Businesses without an effective online sales channel will need to invest to serve customers digitally. Face to face retailing businesses will have to adapt to contactless customer trading experiences to protect both their staff and consumers. New investment will be required for payment systems to support new business operations and trading models. Tax credits and other forms of incentives to accelerate investment in new technology-based systems would address cash flow issues and real operating business concerns.
The volumes of refund requests and transaction chargebacks has impacted cash flow for many businesses. When coupled with lower sales revenues these negative revenue lines are a double whammy for cash flow.
As a trade association we too, like our members, are facing cash flow pressures. Our annual two-day payments conference attended by 600+ people needed to be postponed and our industry awards ceremony attended by 700+ payments professionals is at risk of cancellation due to COVID restrictions for large public gatherings. Membership renewals have also been impacted by COVID challenges and freezing of spending budgets. We provided 70 face-to-face events for our members including education courses, networking events and conferences but are now needed to transform our association to deliver content, programmes and events digitally. We are making good progress in this pivot but it has taken significant investment in new digital platforms and impacted our cash reserves and cash flow.
3a) What demand side policies could the Government adopt now and/ or later in the year?
The range of business support provided to date to support the economy / workers has been very welcome – although frankly only right given that lockdown has been a Government imposed measure.
Government has a large role to play in re-establishing consumer confidence. Delays in consumers returning to pre COVID spending behaviours will mean the recovery phase will take longer.
Going forward a VAT reduction to encourage consumer demand and other tax breaks or incentives would be welcome. This would help drive the return of consumer confidence and provide a stimulus for purchasing.
The UK retail sector may require structural adjustment support as the industry transitions to higher levels of eCommerce activity and less frequent visits to physical shops. The COVID crisis provides further fuel for the need to adjust the retail sector trading models.
We would also encourage short-term market protection for medium and smaller FinTech and PayTech firms from M&A activity. Larger, legacy, financial services firms might be looking to exploit lower financial valuations, or needs for new investment funding by buying up their smaller new competitors in a hostile manner. We believe this would have a negative impact for consumers, competition and the transition of the UK to an advanced high productivity digital economy. UK FinTechs may also risk being taken over by large foreign firms or face going out of business.
b) What policies could the government introduce to support investment and the supply side of the economy?
An extension of the various funding schemes such as Future Fund, CBILS etc. and reviewing EIS/SEIS type schemes to encourage further investment. We support the call for initiatives that recognise the important of business dynamism and entrepreneurship.
Supply side Investment in next generation Internet and telecommunication infrastructure including 5G will help accelerate ecommerce activity and the ability for individuals to work effectively from home and increase productivity. Our members have largely shifted to home working and been reliant on robust broadband and telecommunications networks to manage IT systems, provide customer support and run their businesses. Experience from the last 3 months has proved that remote working is possible, but exposed vulnerabilities and gaps across the country particularly outside large cities. Structural adjustments are called for that address geographic gaps in the availability of fast communication networks.
Enhanced national cyber security defence capabilities and education/skills development will act as a stimulus to economic activity. Cyber protection from the actions of hostile countries is also felt to be key.
4. How can the government support employment and job creation and limit redundancies in the medium term?
Many of our members have reported that they have been trying to protect jobs wherever possible but some restructuring and redundancies have been necessary to ensure long-term business survival. The impact of the COVID crisis has led to a general slow down in recruitment activity. They are looking to see signs of sustained economic recovery and a return of consumer confidence before taking on new workers.
The Job Retention Scheme (JRS) has been a life-saver, but understandably has to come to an end at some point. Flexibility recognising the specific challenges faced by certain sectors would be welcomed as also support for part time return to work. Our members do not anticipate an immediate return to business normality. Employer tax/NI breaks could help provide a further bridge back to normality once the JRS ends in October.
5. How can government and business work together to support young people enter the workplace?
It is clear that there are particular challenges related to young people entering the workforce. University, school and college leavers are likely to have less employment opportunities in the short and mid term. Employment incentives including tax breaks for taking on young workers would help. Large financial services firms could be encouraged, through incentives, to introduce apprenticeships and COVID recovery young people employment schemes.
Young people are the early adopters of digital technology and new payment methods and their experiences are particularly value to established payment providers. Imaginative programme should be drawn up that provide both employment opportunities and the launch of transformative financial services.
Credited by Jeremy Nicholds and Mark McMurtrie
About the Emerging Payments Association (EPA)
The Emerging Payments Association (EPA) is a commercial membership association of payments industry influencers. It runs more than 70 events each year, delivers eight projects to drive change, helps to connect the ecosystem, encourages innovation and profitable business growth. The EPA’s vision is for the UK to be the global hotspot for payments innovation. As it sets out to be the most influential trade body in emerging payments, the EPA’s mission, making payments work, has the potential to improve lives everywhere. Its community is over 130 members strong and growing. Our members come from across the payments value chain; including payments schemes, banks and issuers, merchant acquirers, PSPs, retailers, and more. These companies have come together, from across the UK and internationally, to join our association, collaborate, and speak with a unified voice. Together, transacting more than £6 trillion annually and employing more than 300,000 staff, we now have a significant influence over the industry’s future.