By Jon Bell, Group CFO, PXP Financial
We all know that 2020 was an unusual and challenging year for everyone and as much as we would have all wished that things could have gone back to normal the second the clock struck midnight on Jan. 1, that has unfortunately not been the case. Most industries and businesses continue to face a number of challenges, some carried over from last year and others new to 2021. The payments industry is no exception to this. In difficult times it is even more important to understand our key challenges, so we are able to manage and overcome them.
To support that end, from my own experiences through 2020 and in 2021 so far, I have outlined the four biggest challenges I see for the payments industry and my thoughts on how to approach them.
The biggest challenge facing payment providers this year is the continuing and over-riding state of uncertainty in the short term, but also for the medium to longer term. This isn’t limited to fintech and payments either, the past 12 months have been difficult for businesses in most sectors. This especially causes a problem for businesses as to how they manage the immediate and short-term challenges they are facing, while at the same time retaining focus on their medium- and longer-term planning and strategy. Making decisions that protect the business in the short term and to adapt to the current situation can often be at odds with longer term goals. Increased uncertainty around for example, changes in customer behavior and preferences, rules and regulations, and the economic outlook, adds a further layer of complexity for payments businesses in making strategic decisions.
Moreover, it would seem the current state of uncertainty may persist for some time. This combined with us being to a greater extent in ‘unchartered waters’ makes it even harder to forecast the future. With the struggles that COVID-19 has brought upon us, customer shopping behavior has been forced to change and organizations have had to work hard to keep up with changing demands and requirements. This has led to many businesses having to completely rethink their plans for the year and change much of their existing business model, which in turn has a knock-on effect to their business partners such as payment providers. Uncertainty as to whether the shift in customer preferences reflects a permanent change, or whether they will revert back to ‘normal’, once the pandemic is over, adds further difficulty in maintaining a balance between pursuing short-term initiatives and long-term initiatives – and deciding which of those to pursue. The past is not a reliable indicator of the future is probably now an even truer statement than ever.
Uncertainty does however bring opportunity, and it is often challenges and uncertainty which drive forward leaps in innovation too. Businesses need to remain proactive in these times by staying up to date with industry developments, emerging customer trends and having a close eye on any new opportunities that may arise. A business that manages to remain focused on its medium- and longer-term goals as well as its short-term challenges and which can remain nimble and flexible in its responses to the current uncertainty, has the best chances to be able to spot and take advantage of opportunities quickly. To do this, businesses need to keep their operations constantly under review and make changes decisively to adapt to the current climate as they push forward with their plans and development.
Regulations are also likely to see a further overhaul in 2021. Following on from the ongoing legacy of the Wirecard scandal, regulators worldwide will certainly want to avoid any similar high profile and catastrophic collapses happening within the payments industry again. As a result, regulators are likely to introduce tougher and stricter regulations to keep customer funds safe and to protect the wider financial system.
Most of us would recognize that regulations are a good and necessary thing for the industry but changes in regulation can often present a challenge from a business perspective. This challenge can present itself through assessing the new requirements, through to deploying them and the potential additional time and resources required to ensuring ongoing compliance is achieved and maintained.
Key to successfully ensuring compliance with current regulatory requirements and making changes to meet changes in regulation, is to ensure the requirements are fully understood by the business. Where there is any doubt, it is always worthwhile seeking external advice which can help the business make the required changes and ensure compliance more quickly and can often be more cost effective in the long run.
It is also worthwhile receiving the regular update bulletins from regulators, which can help the business anticipate when new regulations will be announced and can help in understanding the updated requirements and what is required for the business to remain compliant.
Overall, there is a need for business to maintain investment in its compliance function to ensure this is fit-for-purpose and is effective in ensuring ongoing compliance with all current and emerging regulatory requirements.
Fraud remains a key challenge facing the payment industry, as well as an issue which can have a significant impact on both businesses more broadly and end consumers. Financial crime has seen an increasing trend in recent years and is one that is constantly evolving as criminals continue to get more sophisticated and more inventive with their approaches. In parallel new fraud prevention and detection methods and techniques have been developed and deployed. But this is a constantly changing game, with criminals adopting new strategies and the payment industry and other financial institutions deploying increasingly sophisticated techniques to stop them.
COVID-19 has created some degree of additional risk of fraud, thanks to an increase in online shopping including shoppers who have never previously shopped online in the past and are perhaps less familiar will some of the more obvious signs to be wary of. Criminals are all too aware of this and are happy to use this situation to their advantage.
Unfortunately, there is currently no way to full eradicate the risk of fraud. Payment providers continue to develop more sophisticated fraud prevention and detection tools to reduce the incidence. AI and other automated tools offer increasing levels of fraud detection – but at the same time criminals are also using new and more sophisticated techniques to try to avoid detection.
The best way to win in the battle against cybercrime and fraud is to ensure that all businesses have robust and effective controls in place, whether these are around access to data, protection of physical assets such as laptops, or measures to prevent unauthorised access to the business’s IT network and system. This is particularly important for any business that holds customer personal data or payment card information, where the business must ensure this data is fully protected to remain compliant with regulations and to avoid the risk of a costly and reputationally damaging breach.
The fourth challenge for the payments industry, and for services industries more broadly, has been Brexit. This has been a cause of uncertainty since the outcome of the vote in 2016, not just for businesses operating in, or trading with, the UK but for the country in general. A big fear for many working in the financial services industry was a no deal Brexit along with a loss of access to the European Economic Area (EEA) “passport” for financial institutions based and regulated in the UK.
While the agreement of a trade deal is in my view a better outcome than a ‘no deal’ Brexit, it is disappointing that this did not extend to providing any real certainty for the financial services industry, other than a loss of ‘passporting rights’ and only a verbal agreement at the time the deal was announced that the EU and UK government would continue discussions in 2021 around some form of ‘Equivalence’.
The current situation therefore creates ongoing additional complexity, cost and operational effort for many financial services firms – in addition to the huge industry cost and effort of preparing for the risk of a loss of passporting rights over the past 4 years. While the UK has extended ongoing rights to EU-based firms to operate in the UK, these rights have not so far been extended by the EU to UK-based firms.
Financial services companies along with industry bodies continue to lobby for UK firms who are FCA regulated to be able to operate EEA markets, as they did previously. Currently though, it is unclear if, or when, the EU might extend these additional rights to UK-based firms. In the meantime, UK-regulated businesses have had to adopt alternative ways to work with their European partners and customers. Clearly there is a hope that there would be movement going forward to allow UK-based and regulated firms to operate in the EU, and we are beginning to see steps towards this with the technology visa that was mentioned in the UK spring budget, but this will most definitely be a situation where we will need to wait and see.