Deconstructing banks: how APIs have developed from a mandatory exercise into a most disruptive force
While we’re fixing our gaze on open banking so as not to miss the next milestone, the corporate banking arena is witnessing some major breakthroughs
There is no question that open banking is gathering momentum. According to August 2020’s Banking Scene Report, the UK had 480 million API calls – the number of third-party providers requesting access to a client’s bank account through application programme interfaces (APIs) – in the month of July alone. Breaking down this figure, however, will paint a more nuanced picture.
API calls are currently used for measuring the uptake of the new open banking regime. But the calls can take place with a view to two rather distinct purposes: gathering account information (AIS) and initiating push payments from the client’s accounts (PIS). The former provides the foundation for account aggregation services that help the account holder save money, while the latter, more disruptive one, cuts out banks, payment cards and concomitant charges from the online payment process by connecting customers and their payees directly.
According to the Banking Scene Report, PIS calls made up only 0.2 per cent of all the requests last July. Explanations for this discrepancy range from lack of confidence in data sharing among customers to the low standard of mandatory bank APIs. One thing, however, is for sure. PIS adoption hasn’t been helped by the delay of the enforcement of strong customer identification (SCA) until 14 September 2021 in the UK, and the act’s full implementation is likely to give payment initiation services a fresh start.
In the meantime, new battle lines between incumbent banks and fintechs have been drawn. Although musings about whether established banks or fintechs and novobanks will come out on top usually end with a reconciliatory conclusion that “partnerships will prevail”, on whose terms such partnerships are forged will make a huge difference.
The ideal scenario for big banks is the kind of platform banking where fintechs join the incumbent’s proprietary platform to extend the latter’s product range and improve the standard of the services they offer to their clients. The state-of-the-art digital financial products here are more like add-ons, making legacy banks look and feel more progressive and improve their market position.
Going beyond open banking
The banking-as-a-service (BaaS) proposition is completely different in nature. It’s arguably nothing new: embedded services have been with us for some time now, in the form of loans we take out from car dealerships, or insurance policies from airlines, or when we pay for a trip via a ride-hailing company’s app, for example.
What makes it different this time, however, is that, being API-driven, BaaS makes the customer experience more seamless and hence lends the provider of the embedded service even less visibility. As they won’t be redirected to an external site or a different interface at any point, the user won’t be aware that they’ve been using the embedded service.
BaaS doesn’t stop at embedding financial services into products and the customer experience, though. Its APIs can also offer access to the different functionalities of a bank, which can be used either to augment existing banking capabilities or even to create a new financial entity.
The functionalities on offer today range across practically the whole banking stack to include the record keeping system of a bank’s financial data (the general ledger), the treasury (the bank’s investment business), compliance (such as KYC and authentication), customer operation, or the renting of the bank’s licence.
By mixing and matching all the banking functionalities available on an as-a-service basis, it will be possible to build a bank from scratch: as Nigel Verdon, CEO of BaaS provider Railsbank put it, “you can’t start a neobank or build another Monzo on open banking.”
This is a kind of partnership that can work both with or without incumbent banks. In the long run, digital native banks and fintechs with e-money licences may be able to cover all the functionalities needed to set up a new digital bank.
Starling, a digital-only UK challenger bank, for example, offers both products and functionalities on its digital marketplace to retail and corporate customers alike. Its commitment to openness may be exemplary for incumbent banks as well. Having launched its open APIs in 2017, it now offers a wide range of financial products from third-party providers. But more importantly, Starling as a BaaS provider sells banking functionalities to its own competitors in the novobank market segment too.
There are also big incumbent retail banks which have decided to go down a similar route and exploit the “first-mover” advantage. A case in point is multinational Spanish banking group BBVA, which opted for embracing BaaS through offering a variety of white label services on its open platform. In this scenario, it’s the fintechs tapping into an incumbent bank’s services – such as customer verification, money movement, account origination and card issuance – in order to enrich their financial offerings, rather than the other way around, while BBVA stays in the background. In this arrangement, the customer interacts with the fintech’s branded experience, who remains unaware of BBVA’s contribution to the service.
This looks like a major step towards the disintermediation of incumbent banks. In an interview on 11:FS’s podcast, Susan French, Head of Product, BBVA Open Platform, concedes to the downside of the white label model: namely, that the bank in such cases is “one level removed from the end customer.” On the upside, however, customer acquisition becomes much easier for banks via partnerships like these.
It remains to be seen whether the benefits can outweigh drawbacks in the long run for BBVA. Incumbents in Europe, who have already dipped their toes in selling banking modules, need to be cautious and explore whether the fully-fledged BaaS model is transferrable to other markets as well. Thanks to less rigorous financial legislation allowing e-money licences in the UK and EU markets, the appeal of creating financial services on the top of a bank’s regulated infrastructure may turn out to be weaker.
If the account information and payment initiation services and the APIs enabling them are disruptive, then APIs opening up banking functionalities will turn out to be far worse. In the case of their wide adoption, regulators will have their jobs cut out for them trying to ensure that a new breed of banks and financial service providers mixed and matched from deconstructed modules of established banks are operated with the same due diligence as they are in their original environment.
Borrowing from fintech’s playbook, banking leverages AI-based business monitoring
Automated anomaly detection is improving customer experience, lowering costs and aiding service consolidation
Many banks are undertaking digital transformation to improve customer service, reduce their operating costs and uncover new business opportunities. A leading new technology that promises to be a real differentiator in the banking industry is artificial intelligence (AI) built on machine learning (ML) algorithms.
A McKinsey & Company report says that to compete successfully and thrive, banks must adopt AI technologies as the foundation for new value propositions and distinctive customer experiences. Doing so could potentially unlock $1 trillion of incremental value for banks annually.
Where business intelligence tools fail
Monitoring metrics with dashboards and static thresholds based on human assumptions holds banks back from proactively meeting customer needs and operating at a large scale. When using these legacy systems, anomaly detection is a game of chance, consequently prolonging many of the incidents that hurt customer experience and brand reputation.
Traditional monitoring using static thresholds depends on a human setting maximum and minimum values for a time series metric, and getting alerts when data exceeds those limits (see Figure 1). The area in red falls within the shaded blue area representing normal data patterns but still tripped the static threshold, sending a false positive alert. However, the area in orange fell outside the normal baseline but failed to trigger an alert as it didn’t exceed the thresholds – commonly known as a false negative. This represents a lost opportunity for course corrections that can preserve revenues.
ML overcomes the challenges
ML algorithms scale monitoring across the entire business – and billions of metrics – and independently adapt baselines to each metric’s signature behavioral patterns. This is particularly important for business data, which is governed by the dynamic nature of human behavior.
Figure 2 illustrates an incident related to customer experience where models detected an anomaly in transaction success rate for VISA payments for a particular merchant. The drop in transactions (depicted in orange) would have gone unnoticed if static thresholds had been used, but AI quickly detected it. The alert prompted the bank to quickly reinstate transactions for that merchant, preventing additional losses in revenues.
The highest rewards from using advanced AI come from monitoring business data. According to Business Insider Intelligence research, the majority of potential cost savings for banks from AI applications are in front-office and middle-office use cases such as customer interactions and payments. This information can greatly improve customer experience, reduce costs and more easily consolidate services. Here are just a few examples:
Customers’ needs and expectations for personal banking are changing quickly, and their options for service providers are expanding as fintech companies take their offerings into areas served by traditional banks. AI can help banks do a deep and fast analysis of every individual customer to get better insight into their behaviours and respond with programmes or services to enhance their customer experience and reduce churn.
AI is a critical technology for keeping tabs on KPIs and receiving alerts when something is off. By monitoring factors such as the cost of acquiring new customers, the success of marketing campaigns, infrastructure operations and more, banks can lower their overall operating costs. Personal finance company Credit Karma uses Anodot’s Autonomous Business Monitoring to identify revenue anomalies in real time so they can be resolved before negative impacts occur.
Consolidation of services
The scale of business and the complexity of workflows are changing because applications now require extensive API communications to third-party services – for example, for affiliate marketing programmes. Banks need to monitor the performance of the APIs and the vast amounts of data flowing through them to understand whether a service is cost-effective or not. Only AI and ML can analyse this data and produce alerts in real time.
There are many different areas where AI can produce the critical insight to give a competitive edge in banking services. By automating revenue monitoring, banks can provide better customer experience, reduce costs and consolidate services to give them an edge in what has become an increasingly competitive market.
Visit Anodot to learn about the Autonomous Business Monitoring platform that Payoneer, Credit Karma, eToro, and other leading financial services companies use to proactively monitor their business.
David Drai knows the challenges of data monitoring well. Before launching Anodot, he served as CTO of app-based transportation service Gett; content delivery network and site acceleration services provider Cotendo, which he also founded; and Akamai Technologies.
In these roles, David realised that dashboards and business intelligence were keeping organisations from scaling their business monitoring, and contributing to prolonged incidents and revenue loss. Together with former Chief Data Scientist at HP Ira Cohen, and Shay Lang, Drai created a machine learning-based business monitoring solution that is business-first, data agnostic, and significantly more accurate than other monitoring tools.
Located across several continents, today Anodot enables Fortune 500 companies – from fintech to telecom and e-commerce to adtech – to scale their anomaly detection and forecasting, cutting time to detection by as much as 80 per cent and incident costs by as much as 70 per cent.
A few years ago, I celebrated a milestone birthday by getting 12 stitches in my forehead. Not exactly the fun celebration I had in mind.
It was my birthday, and a few friends invited me out for a leisurely walk. Unbeknownst to me, the walk was a ruse. As my friends and I laughed and sauntered around the neighbourhood, a large surprise gathering assembled at a lounge nearby. (Remember those days?)
The company was so good – and the distraction so effective – that I walked right into a very unforgiving post, gashing my forehead. In the ER, as I waited to be seen, my earlier enthusiasm flickered out and embarrassment took hold.
How could I be so careless? I hoped, at the very least, I would see a doctor who was kind, knowledgeable, and fast, and would keep a straight face as I told my tale of calamity. Luckily, I was seen by a wonderful doctor who patched me up and sent me on my way, without further harm done to my forehead and pride.
Why am I sharing this story, and what does it have to do with the banking industry? Much like they would trust a doctor with their physical health, customers trust their bank with their financial health. Going to the bank, just like going to the doctor, can be painful. Customers want to do business with a bank that – like my ER doctor on that fateful day – is fast, attentive, empathetic and trustworthy.
In today’s competitive digital landscape, AI and automation can help you create that human touch, allowing you to build trust and deliver a winning customer experience as a point of differentiation.
Show empathy and build trust
Customer loyalty is hard won and easily lost. As PricewaterhouseCoopers writes in Retail Banking 2020 – Evolution or Revolution?, “Technology is making it easier for customers to switch banks, making relationships much less sticky.”
Forrester predicts that “leading banks will use technology and far deeper customer insight to insert financial services at the customer’s moment of need, often at the expense of brand visibility.” Additionally, with high-profile data breaches dominating the headlines, creating confidence is more important than ever.
Be rapid, relevant and responsive
In Deloitte’s estimation, “today’s competitive advantage doesn't come from being big, but from being fast and nimble.” This is where digital upstarts have a leg up on traditional banks. Building upon Deloitte’s prediction, speed must be applied to the right areas – otherwise, it’s meaningless.
What if my ER doctor was quick to hand me a set of crutches and usher me out the door? I would seriously question whether they knew what they were doing. Similarly, what if a newly retired banking customer wanted to downsize their home but was offered a special interest rate on their first mortgage?
To secure their place in the digitally focused future, banks must create a new status quo: a customer-centric business model that prioritises fast, attentive, relevant service.
Look beyond transactions
If a typical banking interaction is 50 per cent paperwork and 50 per cent discussion, that leaves a lot of room for improvement. What if it was 10 per cent paperwork and 90 per cent discussion?
Let’s say I was applying for a loan or new financial services. The teller may notice that I have two school-aged children and offer me a college savings plan. Similarly, my ER doctor may detect high blood pressure when checking my vitals – the schooled-aged children may explain that – and suggest a follow-up visit in her private practice.
Relevant, timely offers build trust and endear customers to their banks as partners in their financial health. With predictive, data-driven insights at their fingertips, banking employees will no longer be seen as paper-pushers, but as trusted advisors.
The data advantage
By using AI and automation, banks can automate mundane processes, augment the human potential of their workforce, and deliver a tailored customer experience.
Additionally, AI and automation can help you quickly find and remediate risky data, allowing your organisation to remain compliant, stay ahead of LIBOR and other regulations, and protect customers’ personally identifiable information (PII), naturally elevating your organisation to “trusted advisor” status.
By combining the speed and precision of AI with the empathy of humans, banks can automate what doesn’t add value and focus on what does.
In an industry where multi-step manual processes are the norm, that kind of attentiveness is a breath of fresh air.
Scott Mackey is a founder and SVP of Market Strategy at Adlib. Scott has more than 20 years of experience in content management and digital transformation including contract analytics, data capture, content management and file analytics. He regularly engages industry analysts, Adlib's customers and partners to analyse and assess trends in the content, data and automation space, and stays up to speed on industry best practices by attending and being a featured speaker at global industry events.
When the COVID-19 pandemic first hit, it seemed like the day of reckoning for over-stretched corporate borrowers was finally at hand. For years, pundits and policymakers had been warning about a dangerous build-up of the debt of “non-financial firms”, meaning all those that aren’t in finance, insurance or property.
According to an OECD report from 2019, their debt doubled globally in the decade following the crash of 2008-09. Surely the devastation wrought by a global pandemic would be enough to pop this giant bubble, setting off a wave of corporate defaults and putting the global financial system at risk of another major crisis?
Though corporate default rates climbed across the world in 2020, the long-anticipated collapse of the corporate debt market has not come to pass – at least not yet. This is thanks to government intervention, especially the unprecedented moves by central banks, including the Bank of England, to keep the interest rates on corporate bonds low by directly purchasing them.
These aggressive measures may have helped to avert a corporate debt catastrophe, but they’ve come at a hefty price. In 2020, global corporate debt issuance reached record highs, stoking fears that central banks have merely delayed the inevitable.
Central banks to the rescue?
The measures also appear to be fuelling a “K-shaped recovery” from the pandemic, as large corporations revive and their smaller counterparts keep falling. This is because central bank purchases have been heavily biased toward investment-grade debt, which is issued by large companies with more robust balance sheets.
This has meant that corporate giants have been borrowing vast amounts at record low costs, while their smaller counterparts have struggled to raise funds to see them through the pandemic. With these dynamics at play, it seems almost certain that in the post-COVID world there will be an increase in corporate concentration as more small players get absorbed by the giants.
Yet signs of a K-shaped recovery are less surprising than most people probably realise. The economy has in fact been K-shaped for decades. As our new research on the US shows, the financial fortunes of large corporations have been steadily improving since the early 1980s, while many smaller corporations have fallen into acute financial distress. The pandemic, in other words, is intensifying longstanding dysfunctionalities in US capitalism. The very idea of a K-shaped recovery obscures this reality.
The K-shaped recovery in context
The situation can be seen in the graphs below. Based on US non-financial corporations listed on the stock market from 1954 to 2019, they map their leverage ratios (debt as a proportion of capital), debt-servicing costs, the interest rates they are effectively paying, and net profit margins. The lines in each graph represent the top 10% (in bold), the next 40% (in dashes) and the bottom 50% (in plain black) of corporations based on their revenues.
We see that the borrowing levels (leverage) of the top 10% have increased since the mid-1980s, while their debt servicing costs and effective interest rates fell. In line with these fortuitous borrowing conditions, the profit margins of large corporations doubled from just over 3.1% in the early-1990s to 7.3% in 2019.
What’s astonishing is that the bottom 50% reduced their borrowing over roughly the same period, but their debt servicing costs increased. Over this time, smaller corporations saw their profit margins dip consistently into negative territory. The decades-long fall in interest rates appears to be the only thing that has kept smaller corporations afloat.
Smaller corporations thus appear to be caught in a vicious circle. The fact that their debt-servicing burdens have increased sharply despite deleveraging and falling interest rates points toward rapidly deteriorating financial fortunes. This is reaffirmed by the severe losses registered in their negative profit margins.
Smaller corporations might have been tempted to take advantage of falling interest rates on borrowing to increase their revenues and profits. But the cost of borrowing for smaller firms has been considerably higher than for medium-sized and large corporations, putting them at a considerable disadvantage.
For large corporations, on the other hand, the circle is virtuous: high and stable profit margins allow them to issue investment-grade bonds and borrow from banks at low interest rates, which, in turn, reinforce high and stable profit margins.
How did we end up in this situation? To address this question, we have to take into account the peculiar dynamics of shareholder capitalism as they have evolved in recent decades. The graphs below chart shareholder payouts and fixed investment as a proportion of revenues for our sample of US non-financial corporations – again with three different lines representing the top 10%, the next 40% and the bottom 50% of corporations.
This shows that, in recent decades, corporations of all sizes have been under pressure from financial markets to increase payouts to shareholders in the form of dividends and stock buybacks. But many of the largest firms enjoy such a dominant position in the economy that they can return vast sums to shareholders without engaging in the large-scale investments that may lead to long-term employment and wage growth.
Corporations in the bottom 50% also have to appease shareholders who are continually demanding higher returns on their investments, but unlike large firms they additionally have to establish themselves through large-scale capital investment. This dual imperative puts them in a very precarious position.
So while we may be witnessing a K-shaped recovery from COVID-19, it’s important to keep in mind that this K-shape has a much longer history. Though more research is needed, there are signs that this K-shape has also characterised many other advanced economies in the lead-up to the pandemic, including the UK.
In our view, the pandemic represents a missed opportunity for policymakers. Rather than use their fiscal and monetary power to build a more stable and equitable financial system, central banks instead have chosen to prop up a highly dysfunctional one.
Unless there is a radical departure from the current policy regime, the post-COVID 19 world is likely to resemble the pre-COVID 19 one, only with more market turmoil because of the precarious position of smaller companies, more concentration, and even less investment.
Sunil Madhu, Founder & CEO, Instnt
There’s nothing like a crisis to ignite innovation. The US financial market is becoming increasingly competitive with the optimisation of digital financial solutions. The pandemic has accelerated the need for those solutions but also exposed just how poor the adoption is by financial institutions in general.
Beyond the immediate impact of the disease, regional banks and credit unions will likely face lower revenues and greater pressure on productivity. They may also come to see their branches as an unnecessary cost. Similarly, commercial banks will need to rely more heavily on digital channels to make it cost-effective to serve their customers and their increased needs. That will mean increased investment in digital and remote capabilities to replace in-person approaches.
This isn’t just about cost. It is a wake-up call for businesses that previously focused too much on daily operational needs, instead of investing in creating long-term resilience and digital channels for the future.
How can financial institutions adapt to the new normal? To a large degree the culture of both fintech and financial institutions has been broken. The desire to build a homegrown solution drives up costs, eventually forcing leadership to look at digitisation as a cost-cutting exercise instead of something to inspire growth. That thinking has to change. We should view the pandemic as a once-in-a-generation opportunity’ to create highly digitised banking operations.
Change does not have to be difficult. Recognising when to change is a quality leaders should cultivate. We hear customers and prospects tell us they have integrated up to eight different vendors to verify users and reduce fraud. It takes time and money to get these services implemented, which in return makes it harder for businesses to change. Yet they know a better option exists and they know sticking with the status quo is a huge mistake.
On top of all this, they have to build orchestration rules and waterfall logic to validate a customer in the signup flow – all in order to comply with know your customer (KYC) and privacy rules and regulations. Integrated vendors allow for piecemeal verification of data, with revenue models usually priced per transaction. This means that waterfall logic is always optimised for cost. Businesses push customers through this waterfall in the hopes of getting them through as quickly and as cheaply as possible. When the automated waterfall fails to verify the customer, often because the customers are young and have “credit thin” files, the sign-up transaction falls into manual reviews, which can delay the process by up to two days and cost up to $5 per review. All this friction often leads impatient mobile-first customers to drop off.
What difference will digital customer onboarding make to your bottomline and customer satisfaction
Communities that bring together the standards to reduce operational risks, deliver new business models, and make it easier for the ecosystem to deliver value are the ones that have thrived. On the other hand, the de facto standards for risk management and the limitations of restricted, lengthy, complicated insurance contracts for mobile speed banking and commerce simply don’t scale. Fraud takes weeks to detect and the losses and risks go directly to the bottom line of the enterprise enrolling the fraudsters. Many financial institutions have adopted design patterns for onboarding risk and compliance that results in rejecting up to 40 per cent of good customers. Users are subjected to unnecessary friction and manual review delays that result in high abandonment rates.
If your business has adopted these approaches and you think you don’t have a customer onboarding problem in the post-pandemic era, think again. If fraud is normal, then why are businesses still losing so much revenue? At Instnt, the first fully managed onboarding platform for businesses with fraud loss insurance, we believe that fraud shouldn’t be your problem. With one single line of code on websites or apps, businesses can shift their fraud problem to us so they can focus on what matters most: their product.
See how Instnt can help you sign-up more good customers: https://www.instnt.org/getstarted
David Johnson, CEO and Founder, Vervent
Case study: How Vervent c-suite pioneered the new normal through Covid
Life, business and the economy have all succumbed to numerous changes throughout the ongoing impact of Covid-19. Lending-as-a-service powerhouse Vervent is no exception. But where others have buckled in the face of significant challenges, Vervent, steered confidently by CEO and founder David Johnson, has navigated the pandemic without halting operations and expanded its competitive footprint with the acquisition of Total Card, Inc., now Vervent Card.
Johnson credits three key factors to Vervent’s success in 2020: strong foundations, cohesive leadership, and taking Covid seriously from the beginning. “In March, Vervent’s leadership decisively outlined its three top priorities for moving forward through the looming uncertainty,” he said. “We wanted to keep staff and their families healthy and safe, provide financial stability – keep paychecks coming – for all Vervent team members, and ensure Vervent actively continued to support its clients and their customers.”
Under the guidance of Vervent’s savvy executive leadership team, each department head brings a unique perspective to daily operations, company vision, and pandemic responses. The collective impact exponentially exceeds each individual contribution, enabling Vervent to accelerate, and guide the industry, into the new normal.
From the operational perspective, Stephanie Jimenez, who previously served as COO for the entire enterprise, confronted the challenge of maintaining business operations in uncharted territory by relying on more than 25 years of financial industry infrastructure experience and prioritising transparency with the Vervent team.
In March, she and her team spearheaded Vervent’s largest operational pivot, restructuring its delinquency management protocols. Using data to forecast the pandemic’s possible effects and a deep understanding of customer support cycles, the operations team strategically adjusted support to concentrate and differentiate servicing activities based on delinquency classifications. (Previously, agents provided service across the life of a loan or lease.) This targeted approach positioned Vervent to acclimate to the increasing volume of deferments, offer more personalised customer service, educate customers who were inexperienced with being delinquent, and proactively deliver analytics and insights to clients as the pandemic evolves.
As a result, we are producing higher rates of scheduled payments and capturing stronger data to help predict future payment patterns as the capital markets again begin to function more smoothly. With the economic rollercoaster, we also see an increased need for credit at every socioeconomic level, particularly among the credit challenged. As such, Vervent has introduced Vervent Card, using its stellar reputation for high-quality service as a significant player in card servicing and origination.
A critical element of maintaining service for clients is the prioritisation of staff health and safety. Jimenez said, “One thing the pandemic didn’t change is that our people are still our first priority. Running ambitiously forward to address Covid head on, we prepared to handle historic levels of loan and lease modifications with less manpower as we implemented strict capacity restrictions in our operations centres. In-office capacity has been reduced to a 20 per cent maximum and telecommuting is used where possible. For staff who are not able to telecommute, we enacted split-shift scheduling with reduced hours for each team member, while maintaining whole paychecks.”
We also made safety adjustments to our operations centres above and beyond US Center For Disease Control (CDC) recommendations, including strict social-distancing policies, increased cleaning protocols, no-touch biometric access, and additional workplace tools, such as Microsoft Teams, to facilitate collaboration while minimising interpersonal exposure.
With the need for social distancing, Covid has made technology and virtual interconnectivity paramount to operational success. CTO Brad Herbison spearheaded Vervent’s IT security and technology advances with a two-fold approach: upgrade 24/7 virtual security for our operations centres and bring additional IT resources in house. While our security posture and defences were already multi-layered, robust and constantly adapting, Covid catalysed enhancements to the granularity of our access controls as we implemented new employee schedules and work-from-home arrangements.
“You can test your plans in a controlled environment, but you can never really prepare for the widespread effects of a pandemic,” Herbison said. “Ultimately, it’s rewarding to see that we proved our concept and our security was airtight. We used the opportunity to upgrade our 24/7 virtual security operations centre to one of the industry’s heavy hitters and bring additional IT resources in-house to meet the support requirements Stephanie [Jimenez] brought to the attention of the leadership team. It’s a perfect example of the decisive action and thoughtful impact Vervent uses to guide the industry.”
The need to erect a new supplemental operations centre to accommodate increasing support volumes and changing governmental regulations was an additional challenge faced by Herbison’s information technology department. “As we watched pandemic responses unfold across Europe, it was impossible to predict how our nearshore operations would be affected, despite our Baja operations center being part of the greater San Diego metro area along with our headquarters,” he said.
Illustrating Vervent’s commitment to speed, our temporary operations centre extension, Vervent Convoy, was developed, becoming fully operational within 30 days. From facilities construction to creating IT infrastructure and onboarding new agents, every department efficiently shouldered its responsibilities in this exceptional feat of collaboration.
While local government and health officials required most Mexican businesses to close for nine weeks, Vervent Baja ultimately remained online for the majority of the pandemic. We used our existing scalability in conjunction with the new Convoy expansion to employ stringent health and safety protocols to keep agents online, maintain service for our clients and do our part as a critical infrastructure business.
The timing of the pandemic housed further complications for Herbison’s team. In addition to finalising the technological systems integration required by the 2019 First Associates acquisition of PFSC to create Vervent, it was necessary to consolidate our SOC audit – the first occasion certifying the legacy companies together under the new entity.
Keeping employees afloat financially largely fell to CFO Dhruv Vakharia. “Once the leadership team agreed on the company’s priorities, the key was to act quickly,” he said. “Thankfully, speed is part of Vervent’s DNA. In finance and accounting, we pivoted to put cash first. We turned over every stone for waste and amplified our discipline on spending.”
Disciplined spending does not mean downsizing. Vakharia echoed Jimenez’s dedication to the Vervent family. “Our people are our greatest asset and keeping our staff whole is worth the expense,” he said. “In addition to being conscientious, retaining our highly trained employees pays countless dividends. It allows us to build loyalty, avoid costly turnover and forge ahead with an experienced team, whereas our competitors who were forced to let staff go will need to spend time, and lose efficiencies, staffing back up.”
We immediately invoked a cash-forecasting tool to help determine long-term options and their respective possible outcomes. We made educated investment decisions that positioned Vervent to endure the pandemic’s emergency response phase and emerge stronger, including nearly doubling staff and broadening our spectrum of products with December’s acquisition.
Covid-19 has drastically altered the financial landscape for businesses and consumers alike. “Consumers are propped up by stimulus money, and we’re surprisingly seeing debt being paid down,” said Vakharia. “The uncertainty emanates from the unknown end and inconsistency of federal backstopping, and we simply don’t know what the economy will look like when that happens.”
We’re industry leaders for a reason
Vervent’s intellectual horsepower, drive and determination has fortified us to weather any storm, including this one. “Crises either bring people together or tear them apart,” said Johnson. “Through Covid, Vervent grew stronger than ever.”
“Our executive leadership team bonded significantly, with each member gaining profound, valuable insight into other departments,” he continued. “As a result, collaboration and transparency flourished, showing the strength of our executives as a team and allowing us to accelerate faster and grow stronger in the face of adversity.”
Vervent closed 2020 on a high, pioneering growth in the lending-as-a-service ecosystem and expanding its services with Vervent Card. Driven by increases in demand for consumer credit, continued technological advancements, and trends towards outsourcing, huge growth is expected in the loan servicing business over the next five years, and Vervent is poised to lead the way.
Vervent acquires Total Card to further accelerate and expand client solutions: www.vervent.com
Embracing change: customer experience as a business driver
As consumers increasingly turn to digital solutions, supplying a flexible, personalised and unique customer experience is essential. Are you ready?
Lockdowns, social distancing, capacity restrictions, supply chain delays… you name it. Welcome to the new normal: the antithesis of good business.
The 2020-21 pandemic has changed how consumers buy, how they interact with your business, and how you interact with them. It hasn’t been the best year to create a winning customer experience (CX).
The most successful online businesses, however, are enjoying huge profits based on a simple premise: conveniently give locked-down consumers what they want.
For everyone else, the past months have been about ensuring there’s no “physical contact”. And that means no customers. Those with existing digital solutions have fared better.
This doesn’t just mean supplying an online offering, it means creating products that boost the in-store experience (and promote social distancing), such as digital kiosks, item location apps and even virtual assistants.
CX is a journey, not a one-off trip. It’s why your business must prioritise investment in and focus on developing strategies and solutions that promote and enhance the customer experience.
2020 has shown that keeping customers happy and loyal is a must. In its recent State of the Connected Consumer report, Salesforce found that 73 per cent of consumers expected companies to understand their needs and expectations, while 84 per cent said that “experiences are as important as the actual products and services”.
It’s essential to understand both a customer’s expectations at every step of their journey with you and why you need to continuously collect their feedback and test your products against what they want.
A good customer experience leads to more purchases, increased satisfaction, and deeper brand loyalty. Done well, it can deliver a valuable competitive advantage.
This requires five things:
• Understanding the needs and wants of your customers
• Evaluating how your business, services and solutions engage with them
• Adopting strategies and solutions that emphasise and optimise their experience
• Comprehensively testing your solutions to meet customer expectations
• Putting your customer first in every decision.
Only then can you develop seamless continuity across every touchpoint within your business – ensuring you can quickly adapt your products (or create new ones) to supply the best experiences for your customers.
Many businesses are already developing such solutions, from mobile experiences to premium apps for brand enthusiasts and augmented reality services.
The question is, how to ensure your products deliver what your customers want and meet their ever-changing needs?
The importance of testing
Testing helps improve the reliability, performance and quality of your products. But it’s also an essential tool for developing a personalised experience alongside user research and customer journey maps.
However, while spending on CX technologies is expected to reach $641 billion by 2022, many organisations simply aren’t focusing enough on testing. “It is very important to make testing a priority, and ensure testing happens throughout every step of the lifecycle,” says Philipp Benkler, CEO and Founder of Testbirds.
To create a solid customer experience, testing is essential. And one well-suited method is crowdtesting, where a diverse, and diversely located, group of end-users tests your digital product using multiple devices.
A crowd tester acts like your customer and can often find problems you didn’t know existed or didn’t think were problems – an essential when talking about CX.
“In the latest years, the customer’s behaviour has changed – we are doing more and more in digital channels instead of physical ones. This development has sped up due to Covid-19, and is likely to continue. In the same pace, smarter and better digital services are appearing and the customer’s expectations of these services have also increased. Nowadays, customers expect that more or less everything can be done digitally, and they do not accept poor service quality. It has become crucial for us a company to focus on user experience in order to understand the customer and their needs, so we can be truly customer-centric and develop services that live up to customer expectations. For companies that do not, the future is not looking that bright. But for companies that do, the future holds huge potential.”
Daniel Regestam, UX Team Manager at Swedbank
Crowdtesting, unlike the more process-by-process nature of test automation, can provide a comprehensive end-to-end look at how your product performs – before your product is released and in hours, not days or weeks.
Crowdtesting can augment your in-house QA testers, giving you greater access to a varied pool of users while freeing up resources. Crowdtesting can also be run as either a managed test by using a partner to help run the test, or by doing it on your own with your own testers.
Overall, Crowdtesting’s flexible, human-centric nature makes it ideal when looking for real-world issues. Test automation, which uses software to test your digital products, is best suited to ensuring actual outcomes are as predicted, not in catching human issues such as localisation differences.
It’s most important to catch issues that create a negative user experience. And going by a PriceWaterhouseCoopers report that reveals 32 per cent of customers stop doing business with a brand they love after one bad experience, it’s important testing ensures that doesn’t happen to you.
Covid-19 and beyond
The pandemic has revealed weaknesses in traditional business. Especially for those with little or no digital presence. It’s also shown that being a fast and agile business is best.
Being able to create lasting relationships using tested solutions honed to create positive experiences has become essential, as will be improving your organisational resilience so you can best embrace change, and resist and rebound from any future business disruptions.
To find out how to comprehensively test your solutions so they’re fully optimised, error-free and ready to create a great customer experience, visit testbirds.com/remote.
While the rollout of multiple Covid-19 vaccines has created a glimmer of hope for citizens of the UK, the implementation of yet another national lockdown is further evidence of the fact that we still have some way to go before any kind of return to normal. The pressure remains on the government to come up with fiscal stimulus packages that support vulnerable communities and hard-hit businesses.
However, throughout the coronavirus pandemic, the UK government has consistently faced criticism of being slow to act, quick to U-turn, and stubbornly reactive. As a result, we often see headlines that underscore rising inequalities and the plight of those left behind across the country. Politics and personalities have certainly not helped in co-ordinating a coherent response, but this is where big data and fintech tools can play a supporting role.
While financial services and payment systems have been moving online for some time, 2020 was a big year for the digital economy. Since March 2020, the imperative for people to socially distance has led to a surge in the use of digital wallets, electronic payments and online financial management. Fintech has enabled and enhanced the consumer experience while generating a treasure trove of data for businesses, and now governments, to interrogate.
A significant barrier to achieving better outcomes and value for public money is the lack of timely data on public behaviour. Traditional sources of official data such as that provided by the Office for National Statistics (ONS) are often at best published on a monthly basis, with a significant lag between when the data is gathered, reported and then used to inform policy decisions. This may result in suboptimal outcomes whereby government support packages don’t reach their intended targets in a timely way. If the aim is to enable greater efficacy in public spending, governments will need access to, and expertise in evaluating, an array of real-time data sources.
Fintech can offer governments, both local and national, the ability to track and better understand consumer and business behaviour at a micro level. Currently, such platforms provide insight into how spending has been affected by the pandemic. Real-time data pinpoint where, when, how and by whom transactions are taking place, based on their geographic and demographic information. Transaction-based data can also reveal how local trading restrictions and Covid-19 infection rates are affecting broader spending patterns. This can help to identify the sectors and types of businesses that are most negatively impacted, thereby informing the design of policy support measures.
The staggering amount of public funds used to support the economy during this deep recession requires a far more targeted approach at this stage. Understanding how consumer behaviours change and are influenced can increase the likelihood that stimulus packages deliver on their intended effect. For example, are funds reaching the intended beneficiaries and being spent rather than saved? If there has been a pronounced shift to spending online, is this a response to the pandemic, or simply an acceleration of behaviours we were already seeing pre-crisis?
Such data offers rich insight into policy design and how it can be better formulated to address regional and socio-economic disparities that have surfaced due to the economic shock. For example, spending patterns and consumption habits could inform how the government designs a progressive tax system that is fairer and more transparent. Moreover, if the accelerated shift to online transactions continues at pace, what will this mean for the high street and, by extension, local revenue from business rates?
At the time of the 2008 financial crisis, the public sector did not have access to this degree of financial and behavioural data. The pandemic has facilitated a mass mobilisation toward fintech that would otherwise have taken decades to achieve. In turn, the likes of the ONS and Bank of England have started to consider more real-time sources of data than ever before. Tech giants such as Google, Apple and PayPal have disrupted how payments and transactions occur in a more digitised economy. While by no means perfect, there is certainly room for such data to complement the national statistics. Indeed, fintech can allow the public sector to synthesise high-frequency changes in consumer behaviour at a relatively low cost.
Governments, both local and national, have an opportunity to seize the data revolution enabled by fintech. Such innovations have the potential to contribute to more agile policy making that can improve resilience today to better address the financial shocks of tomorrow.
by Jeffrey Matsu, Chief Economist, CIPFA
Blockchain technology threatens to upend the financial sector. While this presents an opportunity to reduce costs for businesses and consumers alike, it may also make some professions, like accounting, obsolete.
What can financial professionals do to reposition and rebrand themselves in the face of potential extinction?
They’re not the first to be replaced by technology, after all. Over the past two decades, travel agents have been replaced by sites like Expedia and Priceline, while taxi drivers are being supplanted by Uber.
What’s different here is that accounting and finance are considered elite professions. These vocations are highly paid and require high levels of education and training, raising questions about how other professions might fare in the face of technological disruption.
How do professions at risk of extinction reassert their value in order to stand a chance at survival?
What do they do best?
The first thing professions need to do is reassess their value proposition. What does their profession do better than anyone else? How can this expertise be repackaged in order to appeal to new clients or customers, or develop new service lines?
As an example, accountants have long been aware that technology has the potential to disrupt their profession. Some are suggesting that blockchain may replace auditing altogether. However, auditors have been able to successfully repackage their expertise to expand into new areas like awards ceremonies, business school rankings or even sustainability reports.
To do this, the accounting profession had to figure out where its strengths lie and how these might be combined with other forms of expertise to create something new.
One place auditors are doing so is in the area of sustainability assurance, which involves auditing a client’s social, economic and environmental performance. This could mean, for instance, assessing and verifying an industrial client’s reported greenhouse gas emissions.
Some auditors are recognizing that while they don’t possess the scientific know-how to validate the science behind sustainability reports, they are able to engage experts from those areas so that, together, they can create a new business line.
While accountants have been unable to entirely eliminate the threat of technological extinction, some have been able to revive their position in the market by finding new buyers for their services.
If you can’t beat ’em, join ’em
Blockchain technology poses a unique challenge because it was designed to upend the traditional financial order. The cryptocurrency Bitcoin is created, distributed, traded and stored with the use of blockchain, essentially a decentralized, peer-to-peer ledger system that is changing the way money is exchanged.
More recently, a new blockchain use called decentralized finance (also referred to as “DeFi”) has introduced financial applications that aim to eliminate traditional financial intermediaries like banks.
Although the probability of banks being replaced by blockchain-based applications is unlikely in the short term, the trend could take hold in the long run. As a result, several banks have developed platforms that allow their clients to trade cryptocurrencies like Bitcoin, Ether or Ripple.
Global financial services company J.P. Morgan has developed a digital coin that provides instantaneous payments between institutional clients. The high-profile financial institution’s embrace of blockchain-based products represents an abrupt departure from comments made by the company’s CEO in 2017, when he called Bitcoin a fraud.
This change in sentiment reflects a broader shift in regulators’ and bankers’ attitudes towards cryptocurrencies — and blockchain, more broadly.
Recognizing that blockchain technology isn’t going away, bankers are instead looking for ways to leverage their status as trusted financial brokers to provide confidence to customers wishing to experiment with cryptocurrencies. Like the accountants expanding into sustainability assurance, bankers are leveraging their strongest advantage — their reputation as trusted intermediaries — to create a new product for the digital age.
However, the shift to providing services in the blockchain sector requires a high degree of upskilling in the area of information technology. My research on auditing suggests that many accountants are refraining from taking on clients in the blockchain sector because they feel they lack the technological competence to do so.
Professional groups like Chartered Professional Accountants (CPA) Canada (the national organization representing the Canadian accounting profession) have called on the next generation of CPAs to become data masters. This may not be realistic. Becoming data experts while maintaining an accountant’s foundational knowledge in tax, financial reporting and auditing may end up producing a generation of jacks-(and janes)-of-all trades who are masters of none.
The reality is that technological disruption threatens all professions and the prospect of extinction is real. The best way to fight back is to focus on what a profession does best — and get even better at it.
While it may be tempting to try to turn finance professionals into data scientists, this could do more harm than good by detracting from what profession’s key areas of expertise, making it even more likely that a profession will become an endangered species. Instead, financial professionals need to focus on finding new uses for their skills.
The promise of machine learning brings new opportunities and new questions to many facets of life, from autonomous vehicles to the media and marketing algorithms that present content to us online.
These technologies are now gaining momentum in the financial services sector, most prominently in areas of application that include analysing credit risk and detecting illegal activity such as money laundering and fraud.
At the Institute of International Finance (IIF), we’ve analysed our member financial institutions’ applications of machine learning through a series of surveys. Focused on machine learning applications in credit risk, surveys in March 2018 and August 2019 provide insights into the continuing evolution and progress of techniques such as gradient boosting and random forests.
The latest survey shows a sharp increase in the number of banks running pilot projects with these techniques, up from 20 per cent to 45 per cent. Although there has only been a modest increase in the number of banks using machine learning in production (up from 38 per cent to 42 per cent), the sophistication of these models has increased markedly.
Equally significant is the progress in the breadth of application across customer segments. In 2018, machine learning was primarily used for credit decisioning in retail portfolios, and with some other applications in credit monitoring in the wholesale and large corporate segments. This represented something of a bimodal distribution, where banks had large pools of existing structured data on retail customers, while there are new sources of unstructured data (such as external news services and supply-chain data) available for large corporates, where natural language processing can be applied.
But while there hadn’t previously been activity in the segments in between, 2019 has seen a sharp increase in usage for small and medium-sized enterprises (SME) portfolios, up from 8 per cent to 40 per cent of banks (see Figure 1).
More broadly across all customer segments, credit scoring and decisioning remains the most prominent area of application, but we’ve also seen significant growth in credit monitoring and the early warning signals for deteriorating credits, up from 13 per cent to 57 per cent of respondents, including the 25 per cent of surveyed firms that are using this in production. One notable initiative is at Scotiabank, where machine learning is used to identify credit card customers that may have trouble making their next payment. This is then used as the basis for proactively approaching those customers and offering them alternate arrangements, a move that has reduced arrears by 10 per cent.
The benefits (both expected and realised) of machine learning have been stable across years, including improved model accuracy, overcoming data deficiencies and inconsistencies, and discovery of new risk segments or patterns. However, banks’ perceptions of the key challenges in implementation have evolved considerably, encountering and identifying more challenges as their knowledge and familiarity with the technology has increased.
While data management (specifically bringing data from disparate sources into a single data lake), IT infrastructure and competition for the necessary human talent all remain challenges to completing a successful implementation, there is increased emphasis on supervisors’ understanding and consent to use new processes.
This reflects the fact that while banks have been becoming more mature with the technology, so have regulators, and so the nature of their scrutiny has matured with that. While the added scrutiny may intensify the challenges that banks could face in innovating, the fact that supervisors are increasingly able to ask the right questions is welcome and is beneficial for the future of safe innovation within the broader ecosystem.
Given its power and potential impact, machine learning requires a collaborative effort between the industry and the supervisory community to ensure that it protects customers without stifling its adoption or stalling innovation in the financial sector. Pilot projects that explore and test new innovations warrant encouragement from policymakers and supervisors, and it is heartening that the 2019 survey shows both the dramatic expansion of such pilots, and significant engagement between banks and their supervisors.
For more information please see the IIF Machine learning in Credit Risk 2nd Edition report here.
by Brad Carr, Senior Director, Digital Finance, IIF
Philip McHugh, Executive Director & Chief Executive Officer, Paysafe Group
How Covid-19 accelerated trends in digital payments
When we think about the rollercoaster journey we’ve all been on over the past year, it is difficult to point to a single area of our lives that hasn’t been dramatically impacted by the Covid-19 pandemic. The way we work, our family life, education, leisure and entertainment have all been severely affected by the virus.
It’s also been well documented already that the way we’re interacting and transacting with businesses has evolved, and we’ve seen an undeniable spike in e-commerce activity as many people shy away from buying products or services in person. In the world of commerce, this has been both a challenge and an opportunity: we’re not just seeing consumers spending more online, they are also transacting in a different way and using new payment methods.
Why Covid-19 is making people pay differently
During the height of the first wave of social distancing measures last spring, we undertook consumer research across seven countries about the digital payment methods shoppers were using, and 56 per cent said that they had trialled at least one new payment method online since the outbreak, be that a digital wallet or an online cash solution.
This was backed up by the 1,100 businesses who we later surveyed in autumn in a follow-up piece of research. They told us in detail how Covid-19 had affected them and 76 per cent said that they had actively noticed a change in the transaction methods that were being used in their online checkout. The majority also agreed that many of the consumer payment trends they were seeing before Covid-19, and the shift to online, had rapidly accelerated during the pandemic.
The online or omnichannel merchants we surveyed had several explanations for this. Unsurprisingly, many felt their customer base now included consumers who were completely new to e-commerce and had headed online due to the enforcement of social distancing measures or safety concerns about visiting stores. One critical reason why this group hadn’t been making online payments before was because they felt uncomfortable sharing their financial data, such as debit and credit card details, online. Others do not appear to have previously shopped online before because they simply didn’t have a credit or debit card. For both of these consumer groups, alternative payment methods that do not rely on sharing bank card information is their connecting point to e-commerce.
Another factor accelerating e-commerce uptake has come from consumers who are not new to it, but have grown the list of online retailers they shop with. Again, this is not surprising given the climate but it’s important to consider some of the behavioural impacts: these consumers are now buying from retailers they didn’t have a pre-existing relationship with, and consequently feel much less comfortable sharing their financial details, again making alternative payment methods such as digital wallets and e-cash solutions more attractive.
All evidence points to these consumers staying online in the long term once the pandemic is over. So for businesses, being able to service them with a wider choice of payment methods at checkout will be critical to long-term success as well as short-term survival.
An acceleration of existing trends
As mentioned earlier, while it is clear that the pandemic has significantly impacted consumer payment habits and how they shop, the trends coming to the fore are not unexpected. People often talk about how Covid-19 has triggered a global reset, but this is unlikely to be the case when it comes to digital commerce and payments. The shift towards greater adoption of e-commerce was happening well before the pandemic, but the trends we were already seeing have dramatically accelerated. The fragmentation of the online payments landscape as alternative payment methods grew in popularity developed and become a reality far more rapidly than perhaps it would have done. And the same is true in-store, where penetration of contactless payment methods had already gained some traction, but the adoption rate has leapt forward by light years on the back of Covid-19.
Businesses can’t afford to ignore these trends. For some time now, having an omnichannel digital and in-store strategy has been an important component of a growth strategy – today, it is critical for survival. Managing data and fraud risk efficiently and effectively has also been an increasingly important matter for business over the past few years, but tackling it is now more important than ever as online transaction volumes multiply.
Another trend we’re seeing outside of retail is the international remittance or money transfer market. Pre-Covid, as much as 70 per cent of the global remittance market was cash-based, but the shift towards greater adoption of digital remittance methods was already having an influence. And while the economic impact of the pandemic may have a supressing effect on the overall value of the international remittance market in the short term, undoubtedly the shift to digital remittances methods will accelerate.
Businesses are more prepared in the second wave
Despite a hopeful return to “normality” on the horizon thanks to the roll out of vaccines, it seems clear that there are going to be many more months ahead of managing through the virus. What was clear during the initial outbreak is that businesses were at different stages of readiness to manage the acceleration of the digital payment trends we have seen, and those that were not suffered as a result.
But many of these businesses have rapidly learned how to make their payments strategy a competitive differentiator and have been adept at adjusting their check-outs accordingly. By doing so they are not only better-positioned to ride out any future storm during the final phase of the pandemic, but also better set up for success in the new age of e-commerce once Covid-19 is no longer an issue. For businesses that have been slower to adapt, embracing a diverged payments ecosystem is now imperative. The good news is, it can also be a quick and easy move to make.
The recent increase in consumer adoption of digital payments is an important hurdle cleared towards further payments innovation, yes. But the floodgates are yet to open. Barring more unprecedented external forces, most consumers will not suddenly adopt new payments experiences, especially if their primary added value is novelty alone. However, many consumers and merchants alike have graduated to a new level of digital payments maturity.
What we’ve collectively experienced – in the changing of our payments habits this past year especially, but also in years prior – is that payments are the invisible invaluable. Invisible because the best payment experiences are quick, painless and, increasingly, barely perceptible. Invaluable because merchants depend on payments, to, well, make money, and also because it is one of the most emotionally potent moments of the customer experience (most evidently when something goes wrong).
Let’s look at a few of the coolest experiences in payments today and explore what they may show us about what’s possible tomorrow.
The present: merchants are getting creative with payments and currency in campaigns to drive sales and improve other experiences. When IKEA Dubai launched a new store – on the outskirts of a city as they often are – it ran a “Pay With Your Time” campaign to drive traffic to the store. The customer would share the time it took them to get to the store in their Google Maps app, then IKEA would use the average salary of a Dubaian citizen to calculate the value of their travel time and discount their purchase by that amount. Or take Dominos, whose finance and payroll system is now partnering with challenger bank Branch to enable instant payouts for employees’ and drivers’ wages and tips in addition to offering other financial services.
The future: the emotional potency of payments and payments-like experiences become the battleground for competitive differentiation. Merchants will use APIs, automation, virtual currencies, digital issuing and real-time payments to inject payments and payments-like experiences into more customer journeys and to improve more of their internal processes. (Employee experience is the new frontier of customer experience improvement after all.) Expect more partnerships with big tech and fintechs to deliver on these more creative and payments-immersive experiences.
The present: more payments players and fintech firms are stepping up to support customers and merchants in unique scenarios. Take Apple Cash Family and Splitwise, which both, in their own ways, support shared finances among connected consumers and whose capabilities align to the complicated realities of our financial lives (caring for children or parents, shared custody agreements or roommates, for example). Or take PayPal Extend, which supports the secure portability of consumer PayPal data across PayPal merchants to support more seamless payments across its merchant ecosystems.
The future: payments innovations will converge with distributed digital identity management and distributed ledger technology to support authentication, value accrual and redemption within multi-merchant and partner ecosystems. For merchants, this will enable, for example, loyalty programmes to break out from the walled gardens in which they exist and let consumers organise and orchestrate rewards across an open portfolio of programmes.
Some merchants still treat the payments experience as perfunctory: a necessary but unremarkable threshold. They see the payments team and technology as a cost centre. This modus operandi will go the way of the dodo. The companies laying the foundation today for payments as invisible and invaluable will likely stick around long enough to see the future we see in the extraordinary payments experiences of today.
Get more insights into Forrester’s Predictions for 2021 here
by Lily Varon, senior analyst, Forrester
A large proportion of Americans are credit challenged – but they don’t have to be left behind
Most people are likely to need credit at various points throughout their lives. Financial emergencies, such as a major car repair or large medical bill, can happen at any time. Last year, 28 per cent of adults in the US experienced an unexpected expense of, on average, $3,500. And the need for credit goes beyond emergencies. Major purchases such as home appliances, electronics or a new car are typically financed rather than purchased outright.
Sadly, many US households are “underbanked”, forced to go outside the traditional banking system for important financial services such as credit products. There are around 24 million of these households, representing nearly 50 million adults.
The importance of credit
The ability to access credit typically requires already having a satisfactory credit score. However, many US households (nearly 20 per cent in 2017) don’t even have a credit score, often because they have never had a credit card. Many others – 34 per cent according to Experian – have only a fair or poor FICO credit score. This creates a paradox where non-prime and “credit invisible” consumers aren’t able to access credit, and because they don’t have access, they also aren’t able to build credit for the future.
So what happens to those underbanked families who can’t access credit from a traditional bank? They may have to pawn valuable possessions, take out an unaffordable payday loan, or pay expensive overdraft fees. And the problems go beyond simply figuring out how to pay for things.
A poor credit rating can stop you from getting a cell phone contract. It can mean you have to pay a deposit to access basic utilities such as gas and electricity. Landlords generally check your credit rating when deciding whether to rent to you. Your car insurer may take a look at your credit scores when deciding what rates you’ll pay. And your credit rating can even affect whether you are offered a job or not.
In an ideal world, existing banks would provide financial inclusion to the underbanked. Unfortunately, they struggle to do so for various reasons, ranging from profitability challenges to safety and soundness concerns. But there is a solution: with the right technology and data, serving the underbanked can be profitable and sustainable for the lender while also improving financial outcomes for the borrower.
Technology is critical because it brings down the cost to service customers who only generate small profits. And the right technology can be transformative. In Kenya, the M-Pesa, a mobile-only payment system, was introduced as far back as 2007. By 2016, 90 per cent of the adult population was using it to get paid, pay bills and take out loans.
Using data creatively also helps. Credit providers can better serve the underbanked by looking beyond a traditional FICO score. For example, a consumer who has made regular on-time payments of rent and utility bills and has a consistent track record of positive cash flows may be creditworthy today despite a less than perfect credit history in the past.
Braviant: credit for the underbanked
One company making inroads into the underbanked market is Chicago-based Braviant, whose team of technologists, data scientists and fintech veterans has developed a new approach to lending.
Braviant provides credit services that aim to better suit the needs of its sub-prime borrowers. A typical payday loan must be repaid in a few short weeks. The need to come up with a $500 repayment in as little as 10 to 14 days after borrowing $400 can cause another crisis in the life of the borrower. This problem is often compounded when a customer takes out multiple payday loans to meet a larger need of $2,000 or $3,000, for example. By comparison, Braviant offers larger loan amounts that can be paid back in small, affordable installments over several months or even a couple of years. Instead of spending a large portion of their salary to repay a debt, customers still have access to 80 to 90 per cent of their net paycheck after making a loan payment.
Braviant is able to offer these longer-term loans because it understands its customer base better. Its proprietary decision models look beyond a traditional credit score to assess a person’s true ability and willingness to repay. Instead of relying solely on a traditional FICO score, Braviant builds its own custom algorithms that are powered by machine learning and take into account a rich set of alternative data sources.
This means that Braviant’s models are much more accurate at predicting the likelihood of default. As a result, Braviant can make better credit decisions and approve borrowers who others would decline while simultaneously lowering the cost of credit by weeding out applicants who don’t have the ability or willingness to repay.
A key challenge that companies who lend to sub-prime borrowers face is that small, unsecured loans are often less profitable. Of course, rates can be pushed up to solve this problem, but this makes the loans less affordable. Braviant solves this problem through its risk-based pricing model, which identifies the right cost of credit for each new first-time borrower and empowers returning customers to graduate lower rates over time. In fact, Braviant’s mission is to create a “Path to Prime®” whereby customers can not only access the credit they need right now, but also build credit history and qualify for lower rates over time as they work to access mainstream credit products in the future. One way Braviant helps its customers increase their creditworthiness is by partnering with Experian Boost to give them credit for paying recurring bills such as Netflix, phone and utilities.
So far, Braviant has extended more than $300 million in credit to nearly 250,000 borrowers. In the past year, Braviant has also started to offer its marketing, technology and analytics services to traditional banks in order to further close the credit gap for credit-challenged consumers.
Many people think sub-prime is a tiny subset of people at the very bottom of the credit spectrum. The reality is that much of middle America is considered non-prime. Tens of millions lack access to basic financial products such as credit cards or auto loans that others may take for granted. These consumers deserve fair, transparent credit solutions that help them achieve better financial outcomes. Powered by technology and data, Braviant is one of the few lenders serving this huge market effectively and helping non-prime borrowers take control of their financial lives.
written by Jeremy Swinfen-Green for Braviant Holdings
Learn why cut-and-paste will soon end for Making Tax Digital for VAT, and find out what you need to do from April 2021
Making Tax Digital for VAT is back on the horizon, with digital linking rules changing from April. But the outcome will give you a greater chance to boss your business as you’ll make fewer errors and reduce the chance of receiving penalties.
Following the implementation of MTD for VAT in April 2019, HMRC provided a 12-month soft-landing period so businesses could ensure their systems were 100 per cent digitally linked to comply with the new requirements. However, the impact of coronavirus meant this was extended to 1 April 2021.
What is a digital link?
When using “functional compatible software”, any data that’s transferred or exchanged either within or between software programmes, products or applications needs to be digital where the information forms part of the digital records. Say you add some data into software that’s used for keeping and maintaining digital records. If you need to make an additional transfer, or recapture or modify the data, you must do so using digital links.
According to HMRC, a digital link is “where a transfer or exchange of data is made, or can be made, electronically between software programs, products or applications [...] without the involvement or need for manual intervention such as the copying over of information by hand or the manual transposition of data between two or more pieces of software.”
Digital links also apply if you’re using one piece of software. For example, values that are submitted to HMRC have to be digitally linked to the underlying records – you can’t overtype them.
So essentially, the cutting or copying and pasting of data will be prohibited – and continuing to do so could result in penalties.
Spreadsheets, manual adjustments and bridging software
When the soft-landing period ends, that doesn’t mean spreadsheets can’t be used for your VAT accounting. If they’re MTD API-enabled – they can record and submit digital transactions – they can be used alone.
If digital links are used, manual adjustments prior to submission are also still acceptable in some scenarios. HMRC recognises certain calculations, such as capital goods scheme adjustments, have to be made outside of software and entered manually. Then there’s bridging software. As long as digital links are in place and the software is used appropriately, it’s fine to continue using it.
A better way to boss your MTD digital linking
But spreadsheet formulas can break, while manually inputting data can lead to errors. And most bridging software works in a basic way.
There’s a more effective way to boss your digital linking obligations: use MTD-compatible accounting software that allows you to record and submit your MTD data from one place. Not only will you meet HMRC’s requirements, it will help you work efficiently, keep accurate records and save time and money.
Need to amend your processes to comply with the digital linking rules? Start the process now. And get in touch with HMRC, an accountant or a VAT specialist if you have any queries.
To find out how you can boss MTD, visit the Sage website
by Tom Ritchie, Product Marketing Manager, Sage
Luxury goods giant LVMH has completed its US$15.8 billion (£11.6 billion) mega-deal to buy famous American jeweller Tiffany & Co. LVMH, which owns Louis Vuitton, originally agreed to pay US$16.2 billion for Tiffany in 2019, but the market has sufficiently changed since the pandemic that it was able to talk down the premium.
It’s just one example of the fire that the COVID-19 pandemic has ignited in many industries. There has been a surge in global mergers and acquisitions since the second half of 2020 as the strong snap up the weak. Driven by the tech, media, entertainment and telecoms sectors, total deals for the year were worth US$2.9 trillion.
Recent moves include Ladbrokes Coral owner Entain’s £250 million takeover of Swedish gaming group Enlabs, and US group Alden Global Capital’s US$520 million bid to take full control of Tribune Publishing, owner of the Chicago Tribune. This trend looks likely to snowball in the coming months. What will it mean?
Houses of cards
Many firms were vulnerable even before the pandemic. For over a decade, low or sometimes negative interest rates had driven businesses to reduce their rainy-day cash holdings and embark on a borrowing spree that left them heavily indebted.
The default strategy in advanced economies like in North America and Europe was often to maximise leverage – meaning to borrow as much as possible from banks and the markets to try and maximise returns from the capital employed. You can see in the graph below how leverage has steadily increased over the decades in the US, for instance.
But in the low-growth environment since the 2008-09 financial crisis, times have been hard. Many companies experienced disappointing returns and rising portions of profits being diverted towards interest payments.
This left many businesses cash-strapped and unable to invest. This further weakened their profitability – in many cases turning them into zombie companies that would be put out of their misery when credit conditions tightened.
Many companies swapped long-term stability for short-term gains, relying on financial schemes with high hidden risks. For example, companies increasingly borrowed to buy back their own stock for an immediate uptick in the share price. With management teams often paid partly in share options, they had a personal financial interest in this strategy.
When COVID panic set in last spring, it threatened a financial crisis caused by corporate bonds being dumped by the markets. This could have driven up interest payments to ruinous levels and caused many corporate collapses. Central banks responded with a major new round of quantitative easing (QE), expanding the supply of money to effectively put a floor under bond prices. They then did more QE later in the year.
This kept many firms afloat, but pandemic lockdowns have also jeopardised many business models. The long buoyant conditions that many took for granted are gone. Low on cash reserves and buried by debt, companies in industries like hospitality or airlines, and manufacturers whose supply chains have been shredded, have joined the zombie hordes.
Meanwhile, banks have made credit lines and interest payments flexible to allow companies to hang in there. And companies have been issuing new corporate bonds at record levels to get the cash to survive. But in the end, collapses are often unavoidable.
Distress, distress, distress
We are seeing three kinds of distress: owners, lenders and buyers. When owners can’t keep their cash flows positive, are refused cheap loans or are forced to accept higher loan rates on existing debt, they often fail. It happens to listed and privately held companies alike, and even those with strong underlying assets can get into trouble. They must either restructure debts, find a buyer or do both.
Lenders are under pressure, too. Corporate bondholders face being left with worthless bonds. Banks must decide whether they believe in a company’s ability to pay back their loans or to accept less than the full payment and get the debt off their books. Having just cleaned up their bad loans following the global financial crisis of 2008-09, they will be experiencing a bad case of deja vu.
In many cases, banks are being asked to accept less as part of a takeover. Just like the Tiffany shareholders must have concluded in the LVMH deal, it’s often better to have an end with horror than a horror without end.
For buyers, companies with good assets that are insolvent only because of the crisis can be a smart acquisition. Blumberg is to raise US$1 billion to acquire prime commercial real estate from distressed sellers, for instance.
But many buyers are pushed to the negotiating table. Rather than seeing key suppliers sink, doing a deal that incorporates them into your business is often preferable. Otherwise your competitor might do the deal instead, threatening your competitiveness and bottom line.
It’s in the interests of all three groups to survive the current crisis by negotiating compromises, so a huge wave of mergers and acquisitions is inevitable in 2021. This boom will touch many people in society. Perhaps the most important reason why governments and central banks have been keeping zombies from going under is to prevent massive layoffs. When these distressed companies are bought and restructured, it will likely cost many people their jobs and force them to search elsewhere.
Yet at the same time, some employees will enjoy career advances by striving in the rejuvenated subsidiaries of new parent companies. M&A can also be a relief for taxpayers if zombies no longer waste valuable public resources that can be used more efficiently elsewhere. In short, more change is coming. It will produce winners and losers, but it’s better to expect it than be taken by surprise.
Karl Schmedders, Professor of Finance, International Institute for Management Development (IMD) and Patrick Reinmoeller, Professor of Strategy and Innovation, International Institute for Management Development (IMD)
2020 brought a whole platter of new experiences for us all. The entire world had to adapt to a new environment and find new ways of being creative, agile and determined. Still, we can find a positive way to look at things, despite all that.
We saw an acceleration in certain facets of the retail industry (such as a boom in online shopping), and things progressed at a speed we didn’t expect. The pandemic acted as a jump-start for digitalisation, allowing the payments industry the opportunity to innovate. For instance, consumers are more inclined to shop with retailers who improve the shopping experience with technology, including the implementation of new ways to pay. Even customers who were previously less familiar with using technology had to go online to order groceries and catch up with loved ones. Online shopping has been turbocharged by the pandemic and there’s no going back.
As businesses of all sizes are looking to bounce back from Covid-19’s effects, here are some payments and fintech trends we see taking off in 2021.
Buy now, pay later
Lockdown periods during the pandemic have resulted in millions of jobs being lost or put on pause, leading to serious financial challenges. This resulted in more people adopting buy now, pay later (BNPL) methods in 2020, and we can expect this trend to continue to increase. BNPL schemes were named as the fastest-growing online payment method worldwide in 2020, and businesses have plenty of benefits to draw from implementing these flexible payment methods in 2021, since BNPL will boost basket conversions and customer loyalty.
According to Kaleido’s report, BNPL’s value will reach more than 12 per cent of total e-commerce spend on physical goods by 2025. Kaleido also predicts that Europe will be responsible for some $347 billion in e-commerce spend via BNPL mechanisms in 2025, representing 30 per cent of the total e-commerce spend in that year.
With countries having to find ways to maintain the necessary hygiene standards to prevent spreading the coronavirus and put a stop to the pandemic, we have observed a huge uptake in the use of contactless payments and digital wallets.
Dutch consumers, for example, expect that they will continue to pay electronically more often than before. 39 per cent of surveyed Dutch consumers who have reduced their cash payments since the Covid-19 crisis are certain they will continue to pay electronically more often, while 43 per cent consider this likely. Over the course of 2020, the proportion of Dutch consumers that preferred contactless payments rose steadily. In February 2020, 45 per cent preferred to pay contactless for all their purchases. Six months after the pandemic broke out, this figure had risen to 54 per cent.
The Covid-19 pandemic has accelerated the digital transformation journey, with increasing numbers of non-finance digital brands embracing banking-as-a-service (BaaS).
This plug-and-play approach enables service providers to embed a wide range of financial services into their suite of offerings, which can be accessed by consumers even if they aren’t customers of the underlying bank.
Moreover, BaaS is a solution for banks that want to modernise, gain customers and offer a greater range of services to existing clients. Actually, BaaS is increasingly seen as a way to complement banks’ core businesses, according to a new report.
Embedded finance offers new digital growth opportunities to incumbent financial institutions – an addressable market worth more than $ 7 trillion. It’s time for financial institutions to serve those parts of the market that have been underserved, especially with SMEs being more demanding and driving banking-as-a-service uptake.
Today, banking-as-a-service providers focus primarily on supporting fintechs. For incumbents, however, it is highly important to understand how API-based BaaS platforms work and the options they have in terms of where to play, how to win in this space and how to support this market opportunity in a meaningful way. Especially as the pandemic has put into sharper focus existing inefficiencies and amplified the need for disruption in the distribution of financial services.
BBVA, for instance, has taken a unique approach in tackling this market. In the US, BBVA’s APIs aim to help third parties in the development of financial services (BaaS model), but the bank has many other examples in Mexico and Spain in which it seeks to co-create digital journeys with its partners or enhance the digitalisation of its client’s processes.
We’re seeing a range of hubs from around the world undergoing a rapid expansion within the green fintech sector.
Switzerland’s government has launched a Green Fintech Network to identify and propose new measures that will improve the operating environment for start-ups involved with sustainable finance and tech. The network has been created by the State Secretariat for International Finance (SIF). Initial members include fintech and venture capital firms, consultancies, law firms, and universities.
The SIF, which is overseen by the Swiss Federal Department of Finance, published a survey on the opportunities and obstacles facing green fintechs. Reported barriers included high requirements regarding client onboarding and know-your-customer (KYC) processes; the limited size of the Swiss market; lack of access to talents from non-EU countries, as the available quota is taken up by larger companies; and higher development costs compared with other fintechs, due to longer time to profitability.
Recommendations include, among others, mandatory disclosure of environmental risk and impact information for larger companies; the establishment of a permanent technical working group for green fintechs, mandated with producing an action plan; support of VC funds that focus on green fintechs; and improved collaboration between financial institutions and green fintechs (through open finance, for example).
The adoption of social media payments
Social media shopping (social commerce) is a growing trend. Covid-19 has acted as a catalyst, increasing social media engagement by 61 per cent compared with previous usage rates. In other words, coronavirus lockdowns have brought the future of social shopping closer and that is why PSPs and other financial institutions should start providing social media payments to their clients.
Firstly, PSPs need to offer a platform that can easily embed a payment method into social media posts. Customers should be able to instantly pay for a product they see on a company’s feed, without having to browse on the merchant’s website. This will result in fewer dropouts. Also, companies will be enabled to capture new buyers and a younger market, as the majority (58 per cent) of 13-to-37-year-old consumers report being interested in purchasing items directly from social media feeds such as Instagram, Facebook or Pinterest, and 81 per cent believe if you are posting a social media ad, there should be a direct link to purchase.
It is also essential to provide an option of alternative payment methods (such as QR code or pay-by-link payments). PSPs should expand their payment methods as they are relevant for e-commerce retailers, as well as being appealing to social media shoppers. It’s important to seize this opportunity and look at enhancing the shopping experience for customers across all channels, including social media.
by Oana Ifrim, Senior Editor, Banking & Fintech, The Paypers
The best tech companies fix broken industries by disrupting incumbents. At their heart is an undying belief in the ability of technology to benefit society and transform economies. Transformative innovation relies on collaboration, the sharing of ideas and coming together for the greater good.
This is something we’re increasingly seeing in the fintech sector – collaboration is now driving the rapidly scaling industry.
And scaling it is.
2018 was a record-breaking year for fintech venture capital investment – $36.6 billion invested globally, representing a 148 per cent increase on the year before. Investment flows into the UK’s fintech sector continued to perform strongly in the first half of 2019, reaching a record level of $2.9 billion across 123 deals.
The rise of fintech has triggered a global movement of innovation in financial services. Companies from early-stage start-ups to large corporates are increasingly playing a part in improving the way our financial system operates. Even big tech is starting to enter the market, with Facebook recently unveiling plans for a cryptocurrency and Apple preparing to launch its version of a credit card.
Fintech contributes more than £6.6 billion to the economy every year, establishing the UK’s fintech scene as the crown jewel in the wider UK tech industry and a genuine leader on the world stage.
However, as the sector matures, so does the need for greater collaboration between hubs. Whether it is for international expansion or raising capital, fintechs are increasingly borderless, with growing coordination taking place between global financial centres.
Collaborative hubs enable ease of access to different markets for fintech and, in turn, result in global growth – which is undoubtedly good for the sector as a whole.
From America to Asia, there are several fast-growing fintech markets across the globe, with a critical mass of start-ups building world-class centres and areas of expertise.
The UK government has increasingly recognised the importance of partnering with hubs of this kind and has now signed fintech bridges with Singapore, China, Hong Kong, South Korea and Australia.
And collaboration is not only taking place on an international scale. Connections can and should be built locally in the UK too. Initiatives such as the FinTech National Network help connect fintech ecosystems across the UK, enabling them to communicate more effectively with international markets, government and overseas partners.
In short, taking the UK’s fintech sector to the next level relies on forging stronger international and local ties, and it is heartening to see this happening across the board. We are well placed to realise fintech’s huge potential to transform the lives of billions globally – whether that’s by increasing transparency, providing much-needed infrastructure or banking the unbanked. We won’t slow down on collaboration – if anything, there’s a greater opportunity than ever to explore new partnerships, develop and evolve.
In an increasingly global landscape, championing collaboration between innovative fintechs is the key to enabling sustainable growth. Inward looking? I’d say quite the opposite.
by Charlotte Crosswell, CEO, Innovate Finance
Tackling your year-end might be tougher in 2021, but here’s how you can stay on top of your requirements
Wrapping up your payroll year end processes in good time is a great way to show you’re bossing it. But the past year has thrown up a series of challenges that will try and slow you down. Due to the coronavirus pandemic, the need to access and check data from furloughed staff and your employees who are working remotely are key requirements. However, don’t worry, you’ve got this – and we’re here to help, too.
Payroll year-end processing and key dates
With no extensions from HMRC to payroll-filing deadlines, despite the impact of coronavirus, it’s business as normal. You’ve got until 19 April to complete your end-of-year submission, regardless of when you pay your employees for the last time in the 2019/20 tax year. Make sure your payroll software and employee payroll records are updated from 6 April. Ensure your employees receive their P60s by 31 May. And report expenses and benefits to HMRC by 6 July.
To stay in control, don’t leave things to the last minute. Give yourself enough time to manage your year-end process – and do things carefully to avoid time-consuming mistakes. By automating your processes, you can work quickly, accurately and efficiently. Cloud payroll solutions are your friend here.
It’s worth noting that if you do miss any deadlines due to coronavirus, get in touch with HMRC. It’s said it will consider the pandemic as a reasonable excuse for missing deadlines on a case-by-case basis.
Job Retention Scheme challenges
The Job Retention Scheme has been a lifeline for businesses. But with it has come an extra set of admin tasks. While you’re no doubt bossing that of processing furlough claims by now, the big challenges come in the form of keeping up with HMRC’s timeframes for making claims – usually a couple of weeks after the end of each month – and regular changes to guidance.
Ensuring furlough claims are accurate and completed on time is an important job for you to maintain, especially when you throw remote-working into the mix. A cloud-based payroll solution will help you work from anywhere and at any time to make sure you’re able to stay on top of your duties.
Getting P60s and P11Ds to your people
And on the topic of remote working is the need to get P60 and P11D payroll documents to your employees. You’ll need to retrieve any information that’s filed manually at your office – let HMRC know if you can’t access it due to coronavirus restrictions. Again, a cloud-based payroll solution will help to avoid this in future as you can easily access and update information, no matter where you are.
An additional benefit is that you can produce key payroll documents – think payslips, as well as P60s and P11Ds – and send them to your remote workforce securely, while remaining compliant with data protection regulations.
With the clock ticking on the need to complete your year-end requirements, good planning and the right technology will keep you on track to boss your payroll processes.
To find out how you can boss your payroll, visit the Sage website
by Mai-Po Wan, Product Marketing Director, HR & Payroll, Sage
For a considerable part of the world, the next big payments trends are going digital. Instant payments, wearable devices, contactless payments, QR codes and Bitcoin are cited as the future of the industry – which is not necessarily wrong.
However, the payment trend landscape is a little different in Latin America, one of the fastest growing regions for e-commerce worldwide, where millions of people made their first online purchase in the last year. As overall digitalisation and connectivity rises in the region, payment digitalisation takes on a form unique from other markets. Perhaps surprisingly, in Latin America, the most reliable and offline payment method – cash – has been crucial in giving access to the digital world.
In a region of almost 650 million people, where half are unbanked or underbanked, according to the World Bank’s data, the importance of cash is evident – even with the massive growth of financial inclusion brought by the Covid-19 pandemic.
As millions were ordered to stay at home, digital banking and payments saw unparalleled growth in Latin America. Governments created digital accounts in state-owned banks, in order to distribute emergency aid. Many were financially included, having a digital account for the first time. And even under a deep economic crisis, e-commerce had an 8.5 per cent jump in Latin America, with an increment of almost 25 per cent in the number of online consumers, according to EBANX's Beyond Borders study.
Yet all of this happened while keeping the long-standing cultural preference in Latin America of paying with cash intact. This is the breakthrough: not only is there a record, fast adoption of digital payments, Latin America is also “digitizing cash”.
The new face of cash in LatAm
Cash is no longer solely synonymous with paper money. It has evolved to include paying with cash vouchers through your smartphone and/or using a bank application. Or putting cash into a digital wallet – and then using it to make a purchase through an international website, sending money to a relative, ordering a pizza, or even splitting your bills in instalments. When cash takes on a digital form, the limitations and barriers for the use of money are removed.
Let's take a look at an example of this in Brazil. Boleto Bancário, a cash voucher that is one of the most widespread payment methods in the country, can now be paid for through a bank application, without the need for cash. In fact, EBANX's Beyond Borders study showed that the preference to pay for the voucher digitally has grown: most Brazilian consumers (56 per cent) say they actually prefer to pay electronically, a growth compared with the previous year.
There is also an emerging hybrid use of this type of voucher: you generate the voucher digitally, on e-commerce, and then pay it in cash. This is what happens in Mexico, for example. A consumer can buy clothes on an international website using OXXO, a cash voucher widely popular in Mexico. Traditionally one can go to any of the 19,000 convenience stores across the country and pay for a purchase using paper money. When you digitise this method, the physical process works seamlessly with the digital element. The barcode generated from the cash voucher can be scanned, the physical money is paid to the cashier, and boom – the e-commerce order is fulfilled as cash is digitalised and sent across the world to pay for a T-shirt. It is a wonderful new hybrid world.
Why the fast adoption
For many people, the process of blending the physical and the digital is a necessity. Many Latin Americans are living under imposed digitalisation, due to quarantine measures, as banks and other locations to pay cash in person have been closed or limited to the public. According to Beyond Borders study, at least 52 millions of Latin Americans bought online for the first time during the pandemic, including basic items such as rice, flour and kitchen oil. High and growing levels of internet penetration, especially due to smartphone popularity, have also contributed to this fast digitalisation of consumption in LatAm.
In this circumstance, cash payment methods, whether physical or digital, became a safe alternative for those who didn't have the habit of buying online, those who couldn’t count on any other payment method, or even for those who had been distrustful of digital payments due to data theft or credit card fraud (which, unfortunately, is still common in Latin America when compared with other countries).
We have seen this trend at home. EBANX processes payments in nine countries in Latin America, for global companies such as Spotify, Uber, Sony and Amazon. Historically, alternative payment methods, including cash-based ones, account for around 29 per cent of our total volume of payments in e-commerce in the region’s six main markets. In 2020, however, there was an impressive growth of these methods, with peaks of up to 40 per cent of our total processed volume in retail merchants in Brazil, for example, as shown in our Beyond Borders study.
We are not the only ones to witness that. In Colombia, for example, reports show that cash usage grew more than 32 per cent during the pandemic, according to a study from Banca de Las Oportunidades. At the same time, mobile banking registered a 68 per cent growth in number of operations during the first half of 2020. Once again, cash and digitisation do not compete with each other in Latin America, but instead go hand in hand.
Looking ahead for the future of payment digitization in LatAm
What we are seeing in Latin America is the emergence of a hybrid payment system. While cashless methods are the bright shiny objects in other parts of the world, in LatAm what is crucial is making sure that, as the digital landscape evolves and modernises, so do the most trusted payment methods. In this process, it’s important to create access for the vast majority of the population – whether they want to pay in cash (even via e-commerce) or digitally.
Global brands that want to seize the potential of Latin America should leverage this flexibility and offer a wide range of local payment options. While digital payments have been on the rise, with the surge of native digital wallets and the launch of instant payments in Brazil and Mexico, for example, cash-based payments will likely keep evolving to remain a key asset in the region, due to their adaptability and longevity.
Latin America's e-commerce market will continue to grow at a fast pace, and is expected to grow by 19 per cent in 2021, according to Beyond Borders. Consumer digital habits should remain in the post-pandemic scenario, such as a general increase in online shopping and the use of mobile devices on e-commerce. But cash is not dead – at least in Latin America. It will keep adapting and being used in the “Latino way”.
by João Del Valle, co-founder and COO, EBANX
As stock markets around the world struggle through the pandemic, Bitcoin has seen a steady rise in its price. The cryptocurrency is steadily climbing back towards its all time high of US$20,000 (£15,000) in 2017.
While this growth can be partially explained by investors being spooked by stock markets during the pandemic and looking for better investments, it is also influenced by the new, but evolving, decentralised finance market, also known as DeFi.
DeFi allows people to engage in financial services such as borrowing, lending and investing but without intermediaries such as banks using blockchains and cryptocurrencies. Blockchains store digital records of transactions. Individual records, called “blocks”, are linked together in a single list, which creates the “blockchain”. Blockchains are used in DeFi to create “smart contracts”, which are automated, enforceable agreements that don’t need intermediaries, such as banks.
The DeFi market is one to watch. It has grown to become worth US$14.61 billion – an increase of almost 700% since the beginning of 2020.
DeFi has enormous potential in international trade by making payments more efficient. It could do away with the need to use intermediaries such as correspondent banks, which are financial institutions that offer services to a customer on behalf of another bank, usually in a foreign country. DeFi could also potentially help with the availability and equality of opportunities to access financial services.
There is, however, a difficulty holding any particular person or entity accountable for any technological failure in this market. This can be anything from security failures, when the system is hacked and digital assets are stolen, to the collapse of the entire system.
Unlike traditional banks, which can be sanctioned or shut down, there is nobody who can be held accountable or take responsibility when something goes wrong. This is because the applications in DeFi are built on decentralised systems, which distribute functions and power away from a central location or authority. Every node (computer, IP, server) connected to the system makes its own decision, and the final behaviour of the system is a collection of the decisions of these individual nodes.
This is further complicated by the fact that DeFi transactions typically operate globally, and when regulatory standards are created for this sector in one country, platforms may gravitate to countries with less strict ones. There is also the challenge of global coordination, especially as countries are at varying stages of financial regulatory development. While advanced economies such as the UK and US have stronger regulatory frameworks, most in developing economies do not.
Is it even possible to regulate DeFi?
These factors raise the question of whether decentralised platforms can ever be regulated, or if the rules for the crypto industry set by the Financial Actions Task Force (FATF), the global anti-money laundering watchdog, is robust enough.
FATF only covers centralised systems or virtual assets service providers such as cryptocurrency exchanges. These are licensed businesses that allow customers to trade crypto or digital currencies for other assets, such as fiat currencies like the pound sterling, US dollars and euros.
Such exchanges must adhere to FATF’s “know your customer” requirements, where the platforms are expected to know the parties transacting on them. FATF requirements do not cover financial activities occurring on decentralised systems.
The idea of regulating centralised platforms and cryptocurrency exchanges – where people purchase crypto to use to transact on DeFi platforms, but leaving DeFi platforms unregulated – limits the overall effectiveness of the regulation of the whole crypto industry.
Unless it is built into the source code of a decentralised application, it is difficult to see how regulation can be achieved. This would require cooperation with blockchain software developers. However, this may be placing too much power in their hands as they could manipulate the code to circumvent regulatory oversight at any time they choose to.
Regulators may not want to do this. They could try to ban such activities instead. In the EU and the US, legislation has been proposed that could potentially ban the operation of DeFi. These include the Markets in Crypto-Assets (MiCA) Regulation proposed by the EU and the US Stable Bill proposed in December 2020.
Although it is not impossible to shut off a decentralised system, it is very difficult to achieve and it would require heavy reliance on government or regulatory authorities. It would also require getting access to IP addresses, cooperating with local internet service providers, identifying or tracing the physical location of people using the system and using the police to effectively shut down such platforms or activities. Locating and then prosecuting anyone within one jurisdiction would not be an easy task.
Although this would potentially deter people from using these services and slow down the number of people using them for illegal means, it would be difficult to achieve on a global scale – which would threaten international standards.
What is clear is that regulators need to acquire technological expertise and be willing to engage with a wider group of stakeholders, including software developers, to effectively regulate DeFi.
It is worth noting that DeFi has been built mainly on the Ethereum blockchain, just as initial coin offerings (ICOs) were in 2017. ICOs eventually fizzled out due to their links with fraud. Whatever its future, DeFi is a fast-growing industry and deserves urgent regulatory attention.