Seven themes shaping the future of payments in the year ahead
By Tony Craddock, Director General, Emerging Payments Association
To do your job well, you need to know what’s going on.
But with social media everywhere, newsletters and bulletins daily, and a flurry of conferences, presentations and podcasts, how do you draw all this into a cohesive set of conclusions about what is really going on in payments?
To find out, I have gone walkabout. I have met spoken to many executives from our 150 member organisations. And I have identified seven themes for you about we are seeing across the industry.
They are my personal distillation of the views of our members, and do not represent everyone or the EPA’s formal viewpoint; that’s what happens when you have a community as diverse and colourful as ours. But I hope they prove to be though-provoking and help you better understand our direction of travel in the start of the next decade.
The themes are:
- The fluctuations of Fintech funding
- The blending of lending
- The resetting of the regulator relationship
- The trials and tribulations of technology
- The slow burn of open banking
- The shifting plates of power
- The social impact of payments
1) The fluctuation of Fintech funding
a) On the one hand, new ‘Fashionable Fintech’ stocks will attract those who are obliged to invest
One US analyst estimates that there is between £2,600bn and £3,200bn of investors’ money looking for a home. That’s a lot of ‘dumb money’ chasing risk assets. If it were to go into Fintech, that’s £500m for each of the world’s 5,200 Fintechs.
So as VCs struggle to know where to put their money, new Fintechs will look very appealing, especially those with a B2B proposition rather than a B2C one (how many more Revolut’s can the market take?).
b) On the other hand, investors already in Fintechs will seek profits rather than just growth
Current Fintech valuations will be reset to normality in 2020 and that means many companies will struggle to complete the next funding round. Those heading for land-grab will start to run out of money, and nervous investors will head for the hills.
In 2019 we saw at least two EMIs fail, Loot and Ipagoo. In the next 12 months we will see at least two more EMIs fail or merge, and at least one Challenger Bank will run out of money and be taken over by a larger bank.
This will largely be due to the challenger’s limited access to lending capital, preventing them from earning money through lending. This limited access to lending capital occurs because they have small deposit balances.
c) Fintechs that use other sources of value, such as data, will be more valuable
Data is one of a range of highly prized assets in many FinTechs , enabling growth through behavioural insights and cross-selling, contributing to revenue multiples that have risen and could continue to rise. The value of transaction processors, for example, has risen in 2019 from 8x – 9x at the start of 2019 to 12x – 13x currently, according to one of our Patrons.
d) Investors willing to invest time and effort in understanding payments will be rewarded
Capital that is patient for its returns, and takes time and effort to understand the rapidly changing payments landscape, will be rewarded with investing in better quality assets at the right time and price.
2) The blending of lending
a) Open banking-enabled companies will fill the gap created by the demise of payday loan companies, before the loan sharks do
Following QuickQuid and Wonga’s demise, the balance of regulation and the ability for businesses to make profit in this space has tipped too far in favour of the regulator. We need to reduce the cost of poverty for three categories of short-term borrowers:
- Crisis borrowers: Can be solved by Credit Unions
- Chosen borrowers: Can be solved by Open Banking enabled lenders
- Mismanaged borrowers: Can be solved by Cashflow Management Service Providers
So, in 2020, AISP solution providers will enter the market, enabling people to receive loans on favourable terms in light of their spending history.
b) Payment account providers will promote lending to boost their profit margins
We will see disruption from the Challenger Banks and EMIs who need to demonstrate profitability, by providing loans and overdrafts to their customers. But sadly, the lack of credit funding available will restrict growth. Obtaining access to good quality, well priced lending-related capital from institutions will become an important priority for account providers, however they are regulated.
3) The resetting of the regulator relationship
a) The UK regulator will move from ‘policing’ to ‘partnering’ in 2020, helped by the payments industry
The FCA needs more resources to support industry in complying with new regulations. As our regulations are policy-based rather than rules-based as in the US, this can be achieved by a ‘partnering’ rather than purely a ‘policing’ model.
And regulated payments companies want more support to ensure they can comply with the regulations.
Currently EMIs and PIs pay no annual fee. If the FCA were to provide greater support, then I believe the industry would support the idea of paying an annual fee to receive that support.
A little pain now is better than more pain later. The will result in fewer fines and a higher standard of compliance, as well as a more profitable and thriving paytech industry.
b) The implementation of current regulations will take priority over the adoption of new ones
We are still in the thick of implementing PSD2, the RTS and SCA. The benefits of open banking and PSD2 have not yet been fully realised and we are seeing a flood of new propositions forming as a result of these regulations.
In 2020, there are few new regulations requiring wholesale changes to operating practices, so we will see a focus on bedding in the current regulations in 2020.
4) The trials and tribulations of technology
a) The payments industry will pay the price of frequent outages
Resilience will take centre stage in 2020. Outages are increasingly common but processors do not seem to care very much.
This is a big area for the FCA, following some very high-profile IT failures in 2019.
A consultation paper has just come out by FCA, BoE and PRA to shape policy in 2020 – watch this space for what comes next.
b) Digital identity will take centre stage in the battle to combat fraud and money laundering
We have seen much talk about digital identity, which could solve many of the issues sees around fraud and AML. So in 2020 we will see the inception of a digital identity solution that tackles these crimes without excluding financially vulnerable people. It may draw on the launch of an exciting new digital identity trial in Australia last week from EPA Founding Benefactor, Mastercard.
c) Trust in new payments technologies such as Apple Pay and Samsung Pay will increase steadily
For example, Apple Pay, launched five years ago, works very well in an SCA-constrained world and volumes are rising steadily, especially outside the US. And telecommunications companies are warming up to opportunities in a mobile-first world, too. Orange Bank just launched its mobile bank account in France and Spain. We’ll see more of this in 2020.
d) QR codes are coming
Whilst many developed markets are still wedded to their POS machines, with increased tourism from developing markets where people expect to pay by QR, we will see the gradual acceptance at leading retailers of QR-based payments in 2020.
e) There will be more friction and less fraud
Friction will increase for all transactions from overlays such as Confirmation of Payee and Strong Customer Authentication in 2020 due to regulation.
But friction will reduce in 2021 due to innovation.
So within two years, payments-related fraud will fall and move to softer targets elsewhere. This is the power of market reform to address problems of financial crime, with work by the EPA supported by the EPA’s Benefactor, Refinitiv.
f) Crypto and DLT will dominate – in niches
Despite many propositions in the FCA sandbox being based on the use of Distributed Ledger Technology (DLT), few of them have reached scale.
DLT will not gain much traction in 2020 either, and many regulators will start restricting non-KYC compliant cryptocurrencies, too.
But central bankers are coming together in certain regions to look at ways in which DLT can streamline cross border payments, making them simpler, traceable and cheaper. So DLT is not dead. It’s just becoming niche.
5) The slow burn of open banking
a) The adoption of push payments via Open Banking is slow and will remain so for a while
Open Banking has seen the arrival of new companies, new products and new business models. But sadly, few actual transactions.
In 2020 there will be heightened promotion across the industry around the following pillars as backed by the CMA to increase adoption:
- Implementation (the banks will need to complete the functional requirements to satisfy the original CMA order, and industrialise their APIs)
- Adoption by third parties (to leverage these APIs more fully and build more propositions)
- Adoption by customers (the ultimate goal).
The question to be answered by the CMA, however, is what to do with the Open Banking Implementation Entity. They have ‘Got OBIE done’. Now, what will be the remit of OBIE2 (maybe called, OBAB – Open Banking And Beyond)? Who will own it and pay for it, and how? Will it just set standards, or enable the market as well? And what role will it play in keeping a post-EU UK world-leading? Big questions, and ones the EPA will help the industry to answer.
b) PISP payments will take off, albeit slowly
The experience of SCA on cards makes some PISP payments look pretty good. And as retailers promote PISP payments to take advantage of the cost savings (lower fees, fewer chargebacks and better liquidity), we will see bank-to-bank payments becoming more popular in 2020. We will see a hockey-stick shaped pattern of adoption of push payments.
c) Smart use of data will enable lending that is better for both borrowers and lenders – unless you are financially vulnerable
There will be greater use of payments-related transaction data to make better loans at better interest rates for good customers and higher profitability for lenders.
Financially excluded or vulnerable consumers, however, who can’t demonstrate their attractiveness to premium lenders, will get lower quality, higher priced lending. The law of unintended consequences applies here – I am sure this is not what open banking was meant to deliver.
6) The shifting plates of power
a) UnionPay has grown its acceptance network in developed markets. It is now aggressively expanding its issuance, too
China’s payments scheme, UnionPay, supported by EPA Benefactor Moorwand, is launching 25,000 new cards onto the market in early 2020, the largest launch of its kind in Europe. Within five years, UnionPay will be the number three issuer in many markets behind Visa and Mastercard.
Whilst Union Pay is not the Chinese government, the implications for this are significant, given that the default settlement currency by Visa and Mastercard is the USD. The RMB could move to become a major global settlement currency within a few years.
b) The European authorities will be unable to curb the power of American payments schemes, however much they may want to
Visa and Mastercard are strong players in the UK and Europe, and some commentators say there is insufficient regulatory oversight of the card schemes. They say that the ongoing challenge from the industry and merchants around fees, fines and reporting costs seem to have fallen on deaf ears at the Payments Systems Regulator. Since moving from fixed to largely variable fees, revenues at both schemes have grown significantly, and share prices are at record highs, according to analysis by German consultancy PaySys.
But in 2020, despite grumbles from some quarters, we will not see a formal regulatory response from the PSR, provided the schemes demonstrate they are not abusing their market power. And the bizarrely titled ‘Pan European Payments Initiative’, or PEPSI (which always makes me laugh), will go the way of all other attempts to curb the influence of these major players, including Monnet, EAPS, PayFair, myBANK and SEPA.
c) The lack of payment account providers due to de-risking will stimulate new solutions
Banks will continue to make it hard for regulated PIs and EMIs to access a bank account, in the UK and around the world. To help, the EPA has just launched a Guide to Payment Account Providers for regulated institutions seeking a safeguarding or operating account. But the unsatisfied demand for banking will only be satisfied by new service providers using new approaches, perhaps using crypto-currencies or Distributed Ledger Technology. And maybe by encouragement from the regulator.
d) As more and more companies at the top end merge, anti-trust authorities will get nervous
In 2020 we will see an acceleration of mergers, especially amongst large players seeking market economies and synergies. institutions like the UK’s Competition and Market Authorities will start to get twitchy, and the rest of the market should be concerned about the risk of large companies behaving in a way that is not in the interests of innovation, competition and consumers.
e) Consumer banking will become an ‘AND choice’, not an ‘OR choice’
Consumers used to consider having a single bank account, so when encouraging competition, it was sensible to promote current account switching. The reality now is that consumers in an increasingly mature market such as the UK are adopting multiple accounts. They jam-jar their funds, using different accounts for different purposes. They enjoy the benefits of multi-card overlay services such as Curve or AISP services to minimise any inconvenience they may have in appreciating their full financial status across several accounts.
As a result, the merits of the UK’s Current Account Switching Service will be seriously questioned in 2020, especially in light of the burden of cost imposed on the largest banks to run it. Perhaps CASS was a case of too little, too late.
f) Payments in Asia will become the Next Big Thing in payments
Since EPA Asia was set up over a year ago, we have seen a growing demand for insight about the payments landscape in a region that makes up 40% of the world’s population. And a growing need to connect with partners with whom to collaborate to develop new products and propositions, as well as engineer a more favourable operating environment for paytech providers.
With the support of the UK government’s Department for International Trade, the EPA in the UK is running a Trade Mission to Singapore and Hong Kong on March 21st 2019. If you are interested, contact us.
7) The social impact of payments
a) Consumer trust in institutions based on what they are will fall but trust in organisations based on what they do will rise
Traditionally, established institutions were trusted based on their role in society rather than what they did for consumers. Now, as these institutions fail to deliver, consumer trust in them is falling. As a result, consumers will invest their trust in organisations such as Fintechs and challengers that are both dependable and reliable, and deliver quality products and services across all channels.
b) The gap between those who have opportunity and choice, and those who are vulnerable or excluded, will start to close in 2020
The poorest and most disadvantaged currently pay more for financial services – the poverty premium.
In 2020 we will get better at making sure services are designed and delivered to cater for everyone. To help, the EPA has launched the Inclusion Foundation, run by CEO Anne Pieckielon, with the support of our Founding Benefactor Mastercard. They are working with the DWP to make the right payment accounts available to everyone.
c) Payments will become increasingly diverse
Finding the right talent and skills in Fintech remains a challenge. It is a highly competitive market, with banks, startups, Fintechs all competing for the same pool of people.
In 2020 we will see coordinated efforts to develop a talent pool to support the next generation of financial and Fintech companies. Given the gender diversity gaps in payments, this is a great opportunity to attract more female talent into our sector, too, promoting payments as an attractive career choice, regardless of gender, race, education or orientation. We are seeking support from a company prepared to help us deliver this change. If you are interested in being the Benefactor behind the EPA’s Project Diversity, contact us.
d) Uncertainty about the UK’s role in the EU will lead to greater focus on non-EU exports
With trade agreements being formed in a post-Brexit world, and the potential of more cross-border transaction charges because of higher tariffs, any reduced friction in cross-border payments, for instance in improved FX rates and reducing transaction costs, will be an opportunity embraced by corporates large and small. Any improvements in this space will be welcome.
The EPA community model will expand across the world, building on the success of EPA Asia as we launch EPA EU in Luxembourg in Q1 2020, with the support of the Finance Ministry and our Benefactor there, Banking Circle.
e) SMEs will be offered more and better paytech
We are seeing more and more payments services offered to SMEs and this will continue to be a growth area. It is ripe for low-cost, value-added payments services such as Request-to-Pay to deliver integrated, low cost and secure payments for all SMEs.
f) Sustainability will be discussed but little will be done
Senior executives will talk about what it takes to operate a sustainable financial services industry. This week, the EBA launched an Action Plan for sustainable finance, for example. But sadly, until this is regulated, our industry will allocate little more than verbal support.
g) Institutions governing payments will come under greater scrutiny
The growing power and influence of the payments industry will create greater demands from those institutions that serve it, including Pay.UK and UK Finance. The jury is out about whether they are up to the task.
h) Communities will become an increasingly important agent for change
As the pace of change increases and the risk of non-compliance rises, groups that bring together like-minded people and organisations will become increasingly important. Communities that focus on consumers, competition and innovation, that do not have banks as paymasters, will become increasingly influential.
The Emerging Payments Association will continue to develop its influence and scope, embrace TPPs, and focus on resetting the regulator relationship. It will also work hard to solve the problem of payments-related financial crime and encourage diversity and inclusion. Guided by our Advisory Board of leading CEOs, the EPA will continue to shape the future of payments, here and around the world. And thereby enable access to and trust in payments so people can pay and get paid more easily, cheaply and securely.
I am grateful to all those who helped me create these seven themes. If you have any more to add, or disagree with them, please let me know at [email protected] or add a comment to this blog.
All the best for 2020.