Jan 03, 2022

The Power of Fintech: A New Era for Payments Innovation

Fintech
BNPL
Payments
Finance
Frederick Crosby
5 min
Woman using smart watch for paying to courier for package delivery.
Frederick Crosby, the Chief Revenue Officer at Nium, discusses how the payments landscape is changing and what to anticipate in the months and years ahead

The disruption caused by the pandemic has exposed several gaps in our global payments infrastructure: travel companies struggled with cash flow, SMEs came under threat due to the complexity of cross-border payments, and debts from unregulated Buy Now, Pay Later deals surged. As the world builds back, better payments infrastructure that helps cut business costs and risk, and improves experiences for customers, is critical.

The way the world makes payments has changed significantly in recent times. Thanks to the pandemic, consumers have become accustomed to doing almost everything online, accelerating digital transformation and embedding new behaviours. After a five per cent dip in global payment revenues in 2021, the payments industry is on track to recoup its losses and climb back to a seven per cent growth rate in the year ahead. Amid so much turbulence, what are the most significant payments milestones we can expect to see in the year ahead? To answer this question, we have put together a few predictions for 2022. These are:

Regulators will hammer down hard on payments companies

As payment methods like cryptocurrency and Buy Now, Pay Later (BNPL) continue to gain popularity, global regulators are starting to notice. 2022 will see increased scrutiny and stricter rules, offering greater consumer protection but also prompting new product innovation. New areas of fintech such as crypto-currencies and NFTs have encouraged government attention across the world through their deregulated nature and the public’s exposure to fraud and other crimes. One area of progress will come in new identity verification models that can better protect the consumer in proving ownership of their assets. 

Crypto acquisition of fintechs will put them ahead of the competition

Over the last decade, an enormous fintech ecosystem has evolved. By the end of 2022, it’s predicted to be worth over $300bn, thanks to fintechs’ ability to uncouple and offer banking services faster and more flexibly. Cryptos will be next to take advantage of their agility. Over the next year, there’ll be a surge of acquisitions in the fintech space by Crypto companies as they attempt to keep ahead of the competition by acquiring payment licenses as part of the deal.

BNPLs will be forced to become credit brokers

BNPL is now a $100 billion industry, and it’s expected to keep on growing. But the easy, short-term loans that have popularised BNPL are only possible because it exists in a grey area between payment licenses and lending licenses. Technically, they have the former, but not the latter. As a payment license holder, BNPLs can advance payments in the form of a credit to the merchant but don’t need to abide by credit regulations. A significant concern is how BNPL is contributing to personal debt. BNPL firms aren’t required to conduct rigorous creditworthiness assessments and aren’t required to share their credit risk assessments with credit rating agencies. Creating a gap in a borrower’s credit history can cause future lenders to overestimate their creditworthiness. The result is a shadow segment of subprime borrowers.

Thus, regulators will clamp down on BNPLs, forcing them to become credit brokers to protect consumers. As authorised lenders, BNPLs will need to dramatically overhaul consumer transparency, making it clear that they are offering credit, and redesigning their user journeys to highlight lower-risk payment methods. They’ll also need to make urgent investments into risk assessment technology to help them perform credit checks effectively without interrupting the user experience (UX). This could mean that smaller retailers opt-out of offering BNPL at all. And while consumer demand for BNPL is unlikely to dry up, new rules and restrictions will dent the revenues of BNPLs.

The travel sector will accelerate payments innovation 

Travel has been rapidly returning to pre-pandemic volumes. As it recovers, the whole industry is re-evaluating its payments infrastructure. In 2022, travel companies will look to fintech to fix issues and take the competitive lead but might find the payments space more challenging than anticipated.

Travel is set to rebound dramatically, ushering in a ‘roaring 20s’ for the industry. Fifty-seven per cent of consumers expect to be travelling within two months of the pandemic being contained and are in a solid position to do so, with household saving rates having spiked 10 – 20 per cent in the US and Western Europe. And it’s not just leisure travellers; business travel spending is expected to jump 37 per cent as conferences make a comeback and offices reopen.

As overall volumes recover, travel companies will need better payment capabilities to meet demand. The pandemic exposed quite how inadequate current payment systems are. Some travel firms saw almost half of their booking cancelled or rescheduled, causing headaches with refunds and chargebacks. The complexity of international payments and the high cost of payments processing (3.2% of topline revenue, on average) further exacerbate the problem for travel companies.

Travel companies will look to unlock new payment options and modes that help increase demand while lowering the cost of supply. In 2022, travel firms will infuse new-age payment capabilities and replace legacy systems with digital solutions, unlocking automated payment processing, refunds, accounts receivable and more, without opening travel companies up to fraud.

Hundreds of small fintechs will be swallowed up by bigger players

Acquisitions in the payments industry are nothing new. Ever since the first wave of fintechs hit the market, established financial institutions have been keen to acquire them. Facing disruption, they’ve partnered with fintechs to get access to tech talent, build better products and customer experiences, and get them to market in a more efficient, agile way.

That trend towards using the fintech ecosystem as a “supermarket” for capabilities didn’t slow during the pandemic. In the last year, there have been several significant acquisitions of fintechs by established FIs, including American Express’ acquisition of Kabbage. In fact, 56 per cent of fintech acquisitions were made by trade and financial institutions in 2021. This trend will only continue. This spate of acquisitions will accelerate the trend towards greater ecosystem collaboration and ‘rebundling’ of the fintech stack. And that’s good news for consumers, who’ll benefit from an increased pace of innovation and the development of new digital finance solutions with a focus on quality over quantity.

Ongoing change 

As global payments reconfigure in the year ahead, there’ll be winners and losers. Increased regulatory pressure and the complexity of building payments capabilities will force some players out of business or into acquisition, reshaping the entire ecosystem. But others will rise to the challenge, developing new products and services that respond to the changed needs of other businesses and consumers post-pandemic.

As the global payments infrastructure continues to evolve, change will be the only constant in the next twelve months and beyond. 

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About the author: Frederick Crosby is CRO at Nium.

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