60428EQG EQ Client Newsletters Jan 2021 Eqdigital Article 1

Prioritising For 2021: A Year Of Innovative Solutions

12 January 2021

What’s on the horizon for financial services organisations and their customers in 2021?

We discussed this with EQ experts and our industry partners, and three key themes emerged: data ethics, true credit risk and monetising 2020 merger and acquisition (M&A) activity in payments. 

For each theme we review 2020 and explore: what was learned, how to apply those learnings to give future benefit, and how we can help customers survive and thrive in 2021.

2021 is the year of innovative solutions. Those that are relying on outdated and manual processes are increasingly at risk of being left behind. Businesses need to leverage new data for innovative solutions, implement more efficiency improvements and deliver outstanding online experiences for customers.

Many organisations have already adapted quickly to meet customers’ needs and it will be exciting to see how others follow, and what new and creative solutions will unfold. ​

Data Ethics

2020 Learnings

Last year saw a growing demand for sophisticated solutions by consumers. Individuals that weren’t already familiar transacting digitally had to learn quickly. Today, ​consumers were more willing to share data in exchange for a valuable product or service, with limited face-to-face interaction.

Internet giants reported record sales. The use of data and Artificial Intelligence (AI) to deliver personalised experiences and recommendations during our online journeys became the norm. The challenge here is ensuring that the use of new data and artificial intelligence products in our customer journeys is supported with an ethical stance. 

2021 Considerations

Data privacy is not a new concept, but one which will be increasingly challenged and examined. Individuals should be assured that data and AI are being used in an anonymous and in a non-threatening way. Where intelligence is gleaned about a population, this must be presented at a higher level, not in a way which could identify and affect individuals. Scrutiny on large companies, holding vast amounts of data, will rise the priority list for regulators. Consumers and businesses will need to understand how and why their personal information leads to decisions being made about them.

Any new data project will need to consider ethics and change focus to reduce risk and improve moral obligations.

Relationships will become the backbone of analytics and data. The links between data will become a key factor in building models and predicting outcomes. Specific data sets will no longer be used in isolation. Connections in other data assets can be very informative when deciphering the decision-making process. Technologies are available to make this analysis more accessible and rapid – those will see more adoption through 2021.

True Credit Risk

2020 Learnings

Credit risk changed in 2020. It was a challenging year for the financial services industry, with business slowing as firms adapted to new conditions brought by the pandemic. In a time where credit was vital for many in the UK, numerous lenders had to pause or cease lending. Widespread uncertainty and instability that came in the wake of COVID-19 made it extremely difficult for financial services businesses and other credit providers to perform accurate risk and affordability assessments. 

Consumers sought tools that would help them manage their finances better and financial vulnerability became a new reality for many. 

2021 Considerations

Understanding a borrower’s current financial situation is going to be imperative. Businesses should look to new technology solutions, such as Open Banking to get a comprehensive and up-to-date picture of an individual’s financial situation. Consumer adoption of Open Banking has been a barrier in the past, but this skyrocketed last year with users doubling in the six months leading to September 2020. Research from Nesta Challenges also found that 1 in 5 adults began using online banking apps during lockdown. 

The vast number of consumers that opted for Payment Holidays meant businesses had to act fast and implement new digital solutions. Further streamlining these processes and improving operational efficiencies needs to be at the forefront of mind for 2021. Businesses face the challenge of increased customer demand and expectation.

We must also consider:

The New Vulnerable

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The criteria for identifying vulnerable customers had changed dramatically throughout the pandemic, as has the number of people suffering financial vulnerability. How much of the short-term regulatory guidance and advice, and operational strategies to cope during the pandemic, will ultimately become BAU?

Payment Holidays

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The introduction of payment holidays was a welcome initiative for many, but how many of the 1.7 million payment holidays taken were taken because they could, not because it was necessary. How many consumers fully understood the implications of postponing these payments? Maybe not quite PPI levels but the rush to implement and the variety of products involved not used to including this payment option means remediation work will no doubt be needed.

High-cost short term credit

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As the increase in financial vulnerability amongst consumers combines with more stringent lending regulations in this sector, what does responsible lending look like? If more people are pushed towards this type of credit, what options/advice do lenders provide if they can’t help? (Charities/ Citizens advice etc).

Monetising 2020 Payments Mergers & Acquisitions (M&A)

2020 Learnings

The past couple of years have seen a previously fragmented industry entering an exciting phase of disruption and consolidation through major M&A activity. The objectives of such M&A activity included:

    1. Geographical Expansion & Economies of Scale – Fiserv/First Data, FIS/WorldPay and Global Payments / TSYS
    2. Diversification & Participation – Visa/Earthport, MasterCard/Transfast,
    3. Enhancing Value Proposition - Nexi SpA / Nets

The payments industry is comprised of various independent ecosystems i.e. Cash, Electronic Funds Transfer (EFT), Payment Card, and recently Alternative Payment Methods (APM), each having its own distinct set of participants, characteristics and proposition for the clients using these services. Traditionally these ecosystems were competing with each other but with the same ultimate aim of efficiently and effectively moving money from point A to point B.

Despite this growth of M&A activity, H1 2020 saw a significant slowdown activity circ. $16.8 billion value compared to circ. $29.3 in H1 2019. While one may anticipate further M&A activity in 2021, it will be at a significantly lower level compared to previous years.

2021 Considerations

2021 will be the year where we will start seeing efforts from the market to monetize on the previous years’ investments for example:

    1. Aggressive growth of major US based payment processors in non US markets;
    2. Delivery of Visa and MasterCard’s EFT payments propositions, potentially allowing seamless movement of funds between the EFT and Payment Card ecosystems;
    3. Global growth and acceleration of Alternative Payment Methods as preferred receivable and pay-out payment instrument;
    4. As Open Banking is more widely adopted, we may see a transition from customer initiated payment models to provider initiated payment models;
    5. Further enrichment of EFT payment ecosystem and subsequent propositions focussed around speed, transparency and cost efficiency.

In summary, increasing consumer expectation in digital solutions, new data with an ethical stance, understanding vulnerability in the new world and monetising M&A 2020 activity are key considerations for 2021. It’s going to be an interesting year for innovative solutions.

Thanks to Credit Kudos for their insights and contributions to the article. 

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