Closed-loop payment ecosystem; Three ways to lower your payment processing fees; Adyen’s shares soar 21% as European payments giant posts profit beat;
Closed-loop payment ecosystems incorporate in-network money transfers in three ways: from consumers to merchants, from merchants to employees, and from employees — to consumers — to merchants.
In this edition:
1️⃣ iOS 17.4 adds new ‘Virtual Card Number’ feature to Apple Cash
2️⃣ Revolut is launching phone plans for travelers in the UK
3️⃣ Adyen’s shares soar 21% as European payments giant posts profit beat
4️⃣ Key categories of Embedded Finance (EmFi) and revenue opportunities for non-financial businesses
5️⃣ Closed-loop payment ecosystem
6️⃣ Three ways to lower your payment processing fees
7️⃣ High Performance Payments
News
iOS 17.4 adds new ‘Virtual Card Number’ feature to Apple Cash
iOS 17.4, which is currently available for beta testers, appears to include a significant change for Apple Cash users. According to reports on Reddit, Apple Cash users can now set up a virtual card number that can be used for shopping when Apple Pay online isn’t an option.
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Revolut is launching phone plans for travelers in the UK
British financial technology company Revolut is launching phone plans in the U.K., the company has told CNBC exclusively, making it the first financial services firm in the country to offer telecom plans — and among the first globally.
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Adyen’s shares soar 21% as European payments giant posts profit beat
Shares of European online payments giant Adyen skyrocketed Thursday after reporting strong sales growth and better-than-expected profit numbers for 2023.
Insights
Three ways to lower your payment processing fees
1️⃣ Work with multiple local acquirers
Cross-border payments are always significantly more expensive than local payments. Working with multiple local acquirers and comparing their payment processing rates allows you to take advantage of the most competitive fees available in each market. This can minimize costs and maximize your profits.
There are other benefits to working with multiple acquirers:
Having a backup acquirer in place can provide backup processing options and give peace of mind if your primary acquirer experiences any issues with their performance, which can happen even to market leaders.
Every acquirer is unique and has their own advantages. For example, some acquirers may have higher acceptance rates in certain countries, while others may have higher acceptance rates with certain BINs. By identifying these combinations, merchants can increase their payment authorization rates and increase their margins.
2️⃣ Enable on-us processing
On-us processing is when a transaction is processed by the same bank that issued the card being used in the payment. In contrast, regular processing is when the transaction is channeled through another network. This is common among large financial institutions, especially in the APAC and MENA regions.
On-us processing can lower payment processing fees because the bank that issued the customer’s card also handles the transaction and the funds do not have to be moved between banks. It also means faster settlement cycles by eliminating the need to go through other networks.
Another benefit of on-us processing is that it can increase payment acceptance rates. This is because the transaction is processed within the same bank, creating a seamless and efficient flow of information between the merchant and cardholder with less dependency on additional systems.
3️⃣ Introduce local alternative payment methods (APMs)
As the world becomes increasingly interconnected, it’s easy to assume that using international payment processors is the most efficient and cost-effective way to handle online transactions. However, this is not always true.
Local alternative payment methods (APMs) are often more cost-efficient than credit cards due to their ability to tap into lower-cost funding sources, allowing you to lower the cost per transaction and improve margins.
Customers love having the option to pay with payment methods that they are familiar with, so it’s no surprise that local APMs are so popular in their respective countries. For instance, GoPay is a go-to APM in Indonesia, iDeal is a top choice for shoppers in the Netherlands, and WeChat Pay is widely used in China. According to Credit Suisse, there are now over 500 alternative payment methods across the globe.
Source Payrails
Key categories of Embedded Finance (EmFi) and revenue opportunities for non-financial businesses
Interchange fees: This is simply a reference to the revenue from fees involved in credit, debit or gift card usage, which has historically tended to accrue to the banks and payment networks involved in facilitating a transaction, having been deducted from the vendor’s revenues — typically as a small percentage of the price for goods or services purchased. Interchange fees in Ireland and the rest of Europe are on average 0.1% to 0.4% of the transaction amount for consumer cards, and 0.3% to 2% for commercial cards. EmFi offers brands the opportunity to issue consumers and business networks with their own cards and thereby enter this value chain themselves, gaining control of a proportion of those revenues. With total interchange fee revenue in Ireland estimated to be close to €290m annually, the size of this opportunity is compelling.
Foreign exchange fees: Some EmFi platforms operate across multiple jurisdictions and provide enterprises the opportunity to meet the cost and burden of regulation in several regions at once. Different from traditional banking networks, EmFi platforms achieve reach and scale by growing their network of strategic partnerships. These platforms can build payment systems that automate regulatory compliance for payments across as many operating countries as necessary, reducing friction and transaction costs and stripping out the complexities of legacy banking processes and archaic payments infrastructure.
Transfer fees: EmFi offers non-financial businesses the opportunity to obviate these fees by embedding branded bank accounts directly into their customer relationships, serving to reduce transaction costs by cutting out middlemen whilst simultaneously developing new sources of revenue. Whilst consumer-facing businesses may have more to gain from seeking top-line growth through money transfer fees, B2Bs may find it makes more sense to concentrate on bottom-line growth by cutting transaction costs through offering branded bank accounts to frequent customers and suppliers which will then reduce transaction costs. The size of this opportunity is attractive, with total transaction fees for personal consumers alone in Ireland estimated to be close to €510m annually.
Credit interest: Embedded lending options in the form of loans, overdrafts, and other forms of credit have already become popular with many large online retailers, and offer significant new revenue opportunities through fees, commissions, interest and interchange. Historically, only financial institutions have been in a position to earn these revenue channels, but EmFi has the potential to let non-financial businesses take a slice of this substantial pie. In Ireland, personal loans credit interest revenue alone is close to €1,430m annually.
Source KPMG
Closed-loop payment ecosystem
Vertical software refers to a suite of solutions tailored to the needs of specific industries. Leading vertical software platforms are expanding rapidly into financial services for consumers and merchants. With two-sided networks, such software could facilitate closed loop transactions from consumer to merchant, merchant to employee, and employee to merchant. ARK believes that digital wallets on these platforms will enable fully closed payment ecosystems.
Block, Shopify, and Toast are compelling platforms likely to use digital wallets as the nucleus of their consumer, merchant, and employee ecosystems. According to our research, closed-loop consumer payments, merchant banking, and employee payroll/payments could increase their revenues by 22–33% at an annual rate during the next seven years, from $7 billion in 2023 to $27-$50 billion in 2030.
✅ Vertical Software Platforms Are Consolidating Financial Services
In addition to enabling core business operations, vertical software providers like Block, Shopify, and Toast are consolidating financial services for merchants. With digital wallets at their core, and partnering with sponsor banks and fintech companies or activating their own banking charters, vertical platforms should eliminate myriad merchant interactions with less efficient legacy financial institutions.
✅ Vertical Software Platforms Are Consolidating Consumer Services
Vertical software platforms are not only enabling vast merchant networks but also building consumer networks using digital wallets. By scaling merchant and consumer networks simultaneously, vertical software platforms are becoming operating systems for these two-sided networks.
✅ Two-Sided Networks Can Close The Financial Loop Between Consumers And Merchants
Closed-loop payment ecosystems incorporate in-network money transfers in three ways: from consumers to merchants, from merchants to employees, and from employees — cum consumers — to merchants. To build these payment ecosystems, platforms must have:
1) large and engaged two-sided networks,
2) end-to-end visibility over merchant operations and finances, and
3) vertical industry expertise.
Source Ark Invest
Acceleration of Embedded FinTech Solutions
Embedded Finance began to gain momentum with the promise of making every company a FinTech company by enabling them to offer financial services to their customers directly within their own platforms, mostly via partnerships with financial institutions and infrastructure providers. Initial use cases were primarily related to banking-as-a-service (BaaS) and embedded payments, but new embedded FinTech use cases and traction have begun to pick up in pace, which we expect to accelerate in 2024.
Embedded finance, simply put, is the integration of financial services such as lending, payment processing or insurance into the infrastructure of nonfinancial businesses without the need to redirect to traditional financial institutions.
Until recently, the primary applications of embedded finance were banking and payments-related. Traditional use cases for embedded banking include store-branded credit cards and BNPL installment plans for high-priced consumer goods. On the payments side, companies like Amazon, Uber, and DoorDash enable customers to place an order and pay for it all in one application, while embedded payment applications such as Google Pay, Apple Pay and Venmo allow users to store financial information and conduct transactions in one place.
Synctera is a BaaS platform designed for launching fully compliant bank accounts, debit cards, charge cards, lending and more. Synctera’s platform gives companies of all sizes the technology infrastructure, sponsor bank connection and compliance framework they need to launch FinTech or embedded banking products through powerful APIs. Synctera is transforming the way vertical SaaS companies bank and move money by offering their customers a true end-to-end business management solution.
Other new entrants have emerged offering innovative solutions, while some large established players have begun offering embedded versions of their own products. In late 2023, JPMorgan announced a partnership with Gusto to offer embedded payroll services to small and medium-size businesses. Chase Payment Solutions will use Gusto Embedded, an API customized for any business software platform to combine payments, banking and payroll with a single sign-in, saving business owners valuable time.
Several newer use cases have been gaining traction in recent years across the embedded finance ecosystem, including insurance, payroll, tax solutions and brokerage.
Sure is an embedded Insurtech company powering API-based digital insurance programs for global brands and insurance carriers. Check and Zeal partner with software platforms to build and scale embedded payroll businesses, increasing revenue and customer retention. Column Tax is using an API for personalized income tax, enabling users to deposit funds or make tax payments directly from the platform.
Source FTPartners
Reports
High Performance Payments
In this short paper, Checkout.com will explore the actual size of the problem of false declines in payments and its economic impact on regional economies and on individual businesses, as calculated by Oxford Economics. Uncovering the latest statistical data from surveys of over 1,500 medium to large enterprise merchants and 8,000 consumers Checkout.com delves into the underlying dynamics behind the costly rise in false declines. And Checkout.com team draws on expertise from brands such as Playstation, GE Healthcare, Getty Images, Sainsbury’s, Wego, Klarna, and the Financial Times to think about what ‘high payments performance’ means and crucially how it can be achieved in the face of seemingly exponential complexity.
