By Mark Flamme, managing director, AlixPartners
What’s the future of the point of sale?
We will see global, cross-channel, point of sale solutions integrated with the merchant back-office and financing options to reach scale. Globally, European open banking efforts will create the foundation of significant point of sale innovation. Successful merchant acquirers/payment processors will innovate through some combination of three strategies:
Create a POS platform upon which others can develop industry specific applications (e.g., First Data Clover)
Create easy-to-integrate with APIs, market to developers and merchants and actively seek ISV partners (e.g., Braintree)
Acquire ISVs in select industry verticals and integrate payments with them (e.g., Clearent integrating with Spot and FieldEdge ISVs)
What impact will a decelerating economy have on credit risk management and risk pricing?
Issuers, as well as point-of-sale finance innovators like Affirm and Greensky that share in credit risks, should prepare by optimizing underwriting, pricing, and collections and recovery operations.
Credit risks will impact merchant processors that underwrite merchant card sales as well as banks that finance trade and cross-border foreign exchange hedging.
Any downturn will certainly test the risk management capabilities of newer players like Square, Adyen and cross-border trade innovators.
What’s the future of APIs in payments?
Effective ecosystem development and management, enabled through standardized APIs, will be a differentiated capability.
Companies will need to be adept at rapidly assembling an ecosystem that provides access to the right type and scale of data, advanced analytics, and the right customer touch points to deliver enhanced value propositions to customers. Innovators will have to work to establish data sharing and API standards. We expect 2019 to bring enhanced ecosystem solutions in account aggregation, fraud detection and prevention, rewards, loyalty, deals and offers, and integrated payments.
Will regulatory focus on data privacy and security stifle open data related innovation?
Industry participants must be proactive in setting data sharing standards and enhancing data security to allay public and regulator concerns.
Most importantly they must develop compelling data related use cases in loyalty, financial management, and deals and offers. For the right value propositions, consumers and businesses have expressed willingness to share data. For the farsighted there may be opportunities to leverage trusted brands to become custodians/stewards of customer data as a revenue-generating service.
Where will we see investment in business to business payments innovation?
Investments will be focused on real-time, cross-border, improved settlement, and customer experience.
Company CFOs and treasurers have high expectations of their treasury and cash management providers shaped by their experiences as individuals with retail banking innovation. Expectations include: transaction status and fee transparency, mobile transacting and reporting, cash flow forecasting, information rich payments, speed of access to funds, and straight-through transaction information flow into back office systems.
In response, banks expect cash management technology spend to increase dramatically over the next two years.
Investments will focus on improved transaction transparency, cash position reporting, fraud detection and prevention, anti-money-laundering/compliance efficiency, payments hub technology, cross-border/FX transaction streamlining, and API-based partnerships with back-office solution providers.
What will the impact of fraud be on payments investment?
With commerce and payments becoming more digital, fraudsters have developed sophisticated attacks to steal consumer and corporate digital payment account information, driving up the cost of cyber-security and fraud losses.
Fintech innovators are developing solutions using such things as biometrics, acoustic analysis, geolocation, and behavioral traits (swiping patterns on smartphone) that not only provide improved fraud prevention in customer authentication but also improve the customer experience over traditional easily forgotten passwords. Banks, Fintechs, Payment processors, merchants will invest heavily in these solutions in 2019 given the growing magnitude of losses and brand impact of major fraudulent events.
Is the traditional plastic card form factor dying a slow death?
QR code-based transactions dominate the Chinese urban payments landscape, changing the market entry calculus for the US based card brands.
Significant portions of US online transactions use payment credentials stored online with Uber, Airbnb, Starbucks, PayPal, Amazon or others and research has shown once the card is set, it stays top of the eWallet. In Europe open banking will enable new account to account payment schemes, eliminating the card in the transaction.
Card issuers will have to refine strategies to get to top of digital wallet and stay there through rewards partnerships, cobranding, and auto-provisioning of card credentials. However, the long-term impact is likely a reduction in interchange fees. Payment service providers will have to continue to focus on flexibility, offering a menu of services to enable least cost routing, rewards integration, payment settlement to multiple merchant sub-accounts, prepaid account management and back-end bank integration.
Will hyped solutions remain experimental or have specific use cases that are broadly disruptive?
Cryptocurrencies – continue to be experimental with significant volatility, lack of merchant acceptance, and significant money laundering concerns.
Blockchain – many current pilots could be built using a simple database model. Based on our 3-part blockchain framework of Industry Maturity, Business Case Fundamentals, and Case for Change, specific use cases in payments in cross-border trade (with smart contracts) and FX market making are likely to gain further traction in 2019
IoT – The IoT will drive ecosystem development with sensors giving insights into equipment life, pre-approval of replacement financing and easy payment plans utilizing stored credentials will have to be stitched into the customer experience. Use cases in cars and home appliances will emerge in 2019.
NeoBanks –The path to profitability for many of these banks is uncertain and their ability to make the right credit decision is unproven. Additionally, many have me-too business models. Expect an economic downturn to drive significant consolidation in the space with only a few winners in each market.