The payment landscape is evolving at a rapid pace, driven by advancements in technology, changing consumer preferences, and the need for enhanced security and resilience. As we have stepped into an uncertain 2023, it becomes crucial to explore the strategies and trends that will shape the payment industry and ensure its growth and stability. This article explores the key aspects that we, at Allyiz, see as core to the payment strategy in 2023, including new regulations, governance and risk management, economic forecasts, provisions for uncertainty, and the potential challenges faced by payment fintechs.
One of the core aspects that has been increasingly shaping the payments industry over the last decades is the regulatory side. Regulators have started looking at the payments and banking industry as oligopolies that require regulatory intervention to provide a more competitive market while ensuring that consumers and businesses alike can save and spend their money with peace of mind.
If we read the multiple new sets of regulations passed over the last ten years, then we might be able to understand how these have come to shape the payments industry.
The PSD2, a European Union directive that aimed to enhance the security of electronic payments, promote innovation, and improve consumer protection, introduced concepts such as payment institutions (thus opening the market to non-banking technology players) and pushed for the standardisation of Open Banking across Europe.
GDPR (with all its limitations from a user experience point of view) drove the standardisation of the use and sharing of personal data across the web.
The NIS Directive, more recently issued by the European Union, introduced rules that established cybersecurity requirements for operators of essential services and digital service providers, including payment systems.
In this payments ecosystem, cryptocurrencies have become worthy of regulatory attention. In April 2023, the EU approved a robust regulatory framework to protect consumers and enhance market integrity. The Markets in Crypto-Assets Regulation (MiCA) aims to bring cryptocurrencies to Europe under regulatory oversight, providing a secure and transparent environment for investors and users. MiCA will be adopted by all member states in mid-2024.
New frameworks to facilitate cross-border reconciliation (an increasingly standard scenario in today’s world) like the ISO 20022 have arisen, but they have had a slow integration. At this date, banks and payment institutions will start to move all of their cross-border payments messages to the ISO 20022 financial messaging standard, in which messages are more highly structured and data-rich than in the previous format. The coexistence period between the old and the new standards will end in November 2025, when MT messages will be removed.
While Europe is in many cases leading the charge, alongside countries like Brazil, the rest of the world is slowly catching up. Examples of such frameworks in the US are the New York Department of Financial Services (NYDFS) Cybersecurity Regulation and the California Consumer Privacy Act (CCPA).
With the increased attention that regulatory bodies show to the payments industry and its security, governance and risk management become more and more critical for payments organisations. The keyword to keep in mind is ‘Individual Accountability’. Starting in 2020, there has been a growing focus on board and executive-level accountability, which is extending and is expected to grow in 2023 and beyond.
Individual accountability regimes have expanded around the world to countries such as the UK, Ireland, Australia, Hong Kong, Singapore, and now South Africa. There is a growing focus in the US from the Department of Justice and the SEC on greater individual accountability for risk and compliance. Most recently, Uber’s former CISO was held personally accountable for a security breach.
This sets the fundamental basis and provides the needed board-level support to ensure the proper set up of governance and risk management programmes within each company. Organisations need to establish clear lines of accountability, ensure compliance with regulations, and effectively manage risks associated with fraud, cybersecurity, and operational disruptions.
It is evident that in 2023 organisations require a comprehensive understanding and clear visibility of risks from all angles. When operating in a turbulent business environment, even a minor incident has the potential to trigger a chain reaction and evolve into a significant problem. Employing disconnected and isolated risk management methods that do not encompass various processes and systems can result in incomplete information, preventing organisations from obtaining a holistic view of the enterprise and its impact on strategy and objectives.
It is not yet certain, and prospects do not look that great. To use the words of the IMF1: ‘The baseline forecast [...] is for growth to fall from 3.4% in 2022 to 2.8% in 2023, before rising slowly and settling at 3.0% five years out – the lowest medium-term forecast in decades. Advanced economies are expected to see an especially pronounced growth slowdown, from 2.7% in 2022 to 1.3% in 2023.’
The reasons for this bleak outlook are interrelated, but the major ones are traceable to high inflation, the war in Ukraine, and the stress on the global financial sector.
According to the IMF, the high inflation is unlikely to go back to a more sustainable level ahead of 2025. This means that the interest rates will continue to grow – and, when combined with the still high level of inflation, this will lead to a decrease in spending and in overall economic growth.
The war in Ukraine is likely to keep alive the instability of the global economic outlook, further emphasise the permanence of two clear geo-political blocks, and push national sovereign countries to increase their already high debt level caused by the COVID-19 pandemic.
Furthermore, the stress level of the global financial sector seems hard to ascertain at the moment. The increase in global interest rates could have been easily absorbed by the financial industry, but some banking operators leveraged business models that relied heavily on a continuation of the extremely low nominal interest rates. This is the key reason behind the unexpected failures of two specialised regional banks in the US in mid-March 2023 and the collapse of confidence in Credit Suisse, a globally significant bank.
To summarise, as stated by the IMF: ‘With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened’ (IMF).
It is thus probable that the private sector is embarking on a new phase characterised by ’higher for longer’2 interest rates and capital costs. To thrive in an environment of sluggish growth, increased inflation, and costlier capital, companies must rely on established strategies for achieving success. There are definite business playbooks to navigate through the economic fog ahead. Companies should:
review their cash flow and understand how to adjust it to the new global economic outlook;
reduce costs – for example, by adopting SaaS solutions rather than increasing bulk spending;
consider new pricing arrangements with all suppliers while decreasing fixed costs;
be cautious regarding hiring plans – promoting the services of freelancers and consultancy companies and trusted advisors of experts like Allyiz might be effective ways to do more, faster, and with less long-term financial burden.
While all these elements must be taken care of, it is important to ensure one has a solid growth strategy in place. The fact that the global economics might paint quite a bleak scenario does not mean that companies cannot grow. Some companies will achieve incredible levels of success, while others will disappear. In fact, the key to success is to have an efficient business and a solid growth strategy.
CEOs and investors of fintech companies must be able to look at this new reality with careful but growth-anxious eyes. There are regulatory pushes to tighten security and increase oversight of one’s own business within an uncertain economic environment. Additionally, larger, traditional payments and banking institutions might find it challenging to adapt to these new conditions, and they might be slow to respond. On the other hand, regulatory bodies set the rules for a market that is open to new technology players able to disrupt a traditional sector.
For fintech companies, however, this balance between efficiency and growth might be even harder to find due to their existing financial positions. Younger private companies might find themselves in positions where growth is achieved thanks to higher marketing spending, decreasing the available runways faster than most other traditional companies – and requiring additional external investments sooner rather than later.
Can growth come at the expense of finding a sustainable business model? This is the key question that many fintech CEOs will have to answer over this and the coming years. Drawing from the lessons of the past, it is predicted that one in four payment fintechs may face difficulties in 2023, leading to closures3. Similar to the aftermath of the 2008 financial crisis, those fintechs that fail to adhere to the established playbook may struggle to survive. The importance of risk management, regulatory compliance, and sound business practices cannot be overstated. Fintech companies need to prioritise sustainable growth, customer trust, and resilience to thrive in a rapidly evolving landscape.
In conclusion, the payment industry in 2023 is witnessing a transformation driven by regulations, governance, economic stability, and the need for resilience. Organisations that adapt to new regulations, prioritise risk management, leverage favourable economic conditions, and prepare for uncertainties will be better positioned for success. At Allyiz, we have already seen an increase in RFPs for payment services across the global landscape. We have also observed an increase in the setting in motion of pricing re-negotiations for payment services. Moreover, we have seen many companies requiring assistance to look at growth opportunities or to increase efficiencies in the payments space. Furthermore, favoured by the rise of BaaS (Banking-as-a-Service) software providers and a timely regulatory framework, some enterprise companies are already attempting to vertically integrate the payments acceptance functions.
Risks? Opportunities? Only time will tell.
This article was first published in ‘The Global Overview of Payments Providers 2023’, the most recent market overview and analysis of key payment providers in the B2B and B2C commerce payment ecosystem.
Amleto Montinari is a highly experienced payments, product, and strategy consultant with 20+ years of expertise in the industry. He held senior roles at PayPal and JP Morgan, specialising in electronic payments optimisation, regulatory environment, AML, Banking-as-a-Service, Acquiring, and Identity Verification. He is a payments consultant and an expert at Allyiz, leveraging his extensive knowledge and academic background to provide comprehensive guidance to clients.
Allyiz is the ‘go-to’ company for businesses to source knowledge, time, or people with expertise in payments and more. We offer a broad range of services both on strategic and operational levels in the fields of payments, risk management, marketing, education, and people leadership. We bring the experience of professionals who have successfully run the function on the business side and have done it well many times. Our purpose is to deliver actionable results fast. For more information, please visit our website.
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