As 2020 gets underway, the upheavals that shook the payments industry over the past year show no sign of ending. All signs point to transformational change in 2020. How will payments technology change things?
Top trends to watch in 2020 include the continued growth of embedded payments with business management software, an acceleration of the B2B payments market, and the belated entry of big banks into the competitive fray.
#1: Software will continue to eat payments
Consumers have been conditioned by Uber, Amazon and others to expect a frictionless user experience where paying is baked into the experience and not a distinct and cumbersome step.
2020 will see this trend extend past the early adopters into a broad range of payments technology from the service industries. Whether for a fitness studio or a landscaping service, customers expect to make electronic payments as part of a seamless digital customer experience. Industry-specific business management software will increasingly offer integrated payments solution to their merchants. Beyond fully controlling (and improving) their customer experience, integrated payments offer automated reconciliation with the general ledger, multiple payment options, and more control over the billing and collection process.
Based on their appetite for control, revenue and risk, vertical software vendors have two main choices for how to provide payments to their customers. The easiest way to start is through a partnership with an Independent Sales Organization (“ISO”), serving as a “referral partner” to a partner payment processor (such as Worldpay or First Data).
At the other end of the spectrum is becoming a Payment Facilitator (“PayFac”). This requires taking on underwriting risk (e.g. responsibility for chargebacks), in return for a larger portion of the payments stream, which can boost net revenue by 20% to 50%. New PayFac-enabling technologies such as Finix are being developed to help software companies become PayFacs with reduced human investment in compliance and security.
#2: Business to Business (B2B) payments is the next frontier
In the U.S., 42% of B2B payments are still being completed by paper check[1]. A new set of innovators are attacking this market, such as Bill.com, BillTrust, Nexus, GTreasury and Coupa. Some are offering more straightforward payments-only solutions, and others are wrapping payments into a software workflow (see trend #1).
The card networks and issuing banks are spending significant investment and marketing dollars on B2B payments. The high penetration rates in consumer payments, especially in developed markets, limits the future growth rates in B2C. Interchange rates being offered on products such as virtual cards (single use, pre-funded cards) are currently high but are expected to come down over time.
To drive adoption, durable value must be provided to both the B2B buyer (consumer in B2C) and the B2B supplier (merchant in B2C). Buyers (or payors) want ease of use, integration into their GL, security, increased visibility, speed and working capital benefits. Suppliers (or payees) want speed, accurate reconciliation and visibility into payments.
Lastly, the promise of Real Time Payments (“RTP”) (basically fast ACH with data) is being partially achieved in non-U.S. countries such as Mexico and the U.K., usually driven by coordinated central bank initiatives. RTP has penetrated P2P payment engines in the U.S. such as Venmo, but B2B RTP in the U.S. is still a laggard.
Check usage will continue to decline across B2B payments, but the current manual virtual card model on a standalone basis may not be the long-term solution as a better user-experience is required, including access to RTP. B2B payments companies such as Fleetcor and Wex are expanding rapidly out of their core transportation and travel verticals into new vertical markets and could eventually collide with B2B software + payments companies for payments volume.
#3: The banks are starting to move …
The banks and the card networks have enjoyed a prolonged period of fat payments margins. With the large-scale payments consolidation, banks are starting to make their own strategic moves towards payments technology, such as Bank of America’s recent decision to end its strategic joint venture with First Data/Fiserv.
For years, banks worried they were going to lose their payment systems. Now, they are realizing they are going to keep them (at least authorization, clear and settle), but no one wants to pay for them.
We are starting to see banks adopt basic modern technologies, such as open APIs, to replace legacy host-to-host connections. However, the majority of banks in the U.S. and abroad still require a range of file types and prolonged testing periods for basic account integration.
For payments, the future is bright with payments technology
All growing core software companies should
consider payments as part of their growth strategy, and all payments companies
should consider building or merging with workflow software. There has never
been a more exciting time to be a software provider innovating with payments.
[1] JPM/Association for Financial Professionals Payments Survey (2019)