Business of Payments - MPE Special
How Paytech makes money
The payment world reconvened in Berlin last week for Merchant Payment Ecosystem, in my view the best industry conference in Europe. MPE is friendlier than most conventions- people will take a meeting and chat to the person next to them. It helps that the organisers produce just this one conference. They really care about their customers and keeping content fresh to match the changing focus of a loyal audience
The payment industry seems in good form. Despite the Fintech Winter and rumours of layoffs at the big companies, the conference took the entirety of the Berlin Intercontinental for the first time. This was bad news for people who come every year to freeload by sitting at the bar networking with those who had a ticket.
The sponsor slots, the best barometer of the health of a conference, were full and the plenary and break-out sessions well attended. Exhibitors told me that they had good traffic to their stands and came away with a number of useful conversations. If Money 20/20 is where you go to find investment, MPE is the place to find new commercial partners.
But success depends on where you’re sitting. Compared to previous years, the traditional payment players were largely absent. For example, there were just two delegates from Worldline and only one from Nexi while Checkout and Adyen, the new kids on the block, sent seven delegates each. The open banking vendors and terminal manufacturers were less numerous than of late. In their place, I found a small army of payment orchestrators. I’m told that the organisers received an extraordinary 25 entries for “payment orchestrator of the year.”
Cardmaggedon
Turning to the content, there was much discussion of when we’ll see the long-promised shift from cards to other forms of digital payments. This is important because the payment ecosystem knows how to make a good living from card payments and isn’t quite so confident about how to add commercial value to bank transfers. There’s a real threat that all the profit could leak out of the industry.
Bain has predicted “peak card” in 2029 in the US but probably a little earlier in Europe where national account to account (A2A) schemes are growing swiftly and a digital Euro is on the horizon.
Open banking
Open banking was meant to be the future of A2A but is getting a bad press. Several speakers were openly dismissive.
David Rintel from Trust Pay, a Bratislava based eCommerce acquirer, told the audience that open banking is far from delivering the promised revolution. The user experience is horrendous, there’s no payment guarantee for the merchant, no consumer protection and, despite PSD2, there’s no European solution. The APIs provided by the banks are not standardised and this makes them difficult for Fintechs to work with. Simas Simanauskas from Connect Pay was even less complimentary. Open banking “is crap” he told the audience. It’s almost impossible to design a payment flow using the retail bank APIs, he explained.
Lea Siering from Token, one of the larger open banking vendors, gave a spirited defence of A2A payments. Open banking will maximise acceptance, reduce costs and save the planet, she said. Token claims A2A payments generate 0.4g less Co2 per transaction than cards.
Long term, big picture, it’s clear that open banking has huge potential. But none of the open banking advocates on the platform addressed the short-term obstacles of poor user experience highlighted by the developers.
If open banking is unlikely going to replace cards before Bain’s deadline, will the digital euro have an impact?
Digital Euro
The Digital Euro session was well attended but left many of us with more questions than answers.
Evelyn Witlax from the ECB was a strong advocate for the project and was ably backed up by Fredrik Rydbeck of the Swedish central bank. It’s clear that policymakers need to address the potential implications for financial inclusion and economic resilience if cash disappears. It’s also apparent that Europe desperately needs to reduce its dependency on foreign operators of its payment infrastructure. There’s a clear risk that Trump 2 could order Visa/Mastercard to close operations in any country he doesn’t like.
But that doesn’t mean that the digital Euro is the answer, certainly not the one that would run according to the draft rules outlined by the ECB.
Merchants will like the fact that this new currency should be cheaper to process than today’s euro but will be less excited to learn that acceptance will be mandatory and that they aren’t allowed to hold any digital euros themselves.
While the ability of the digital euro to operate offline will certainly help make the payment system more resilient, the requirement for ID checks for online payments undermines the argument that the digital euro is simply digital cash.
Most importantly, nobody can explain why consumers should be excited. They can travel around Europe today with their local debit card (co-badged as appropriate) and buy what they need with little trouble. Until the ECB and friends can explain the problem they are trying to solve, there’s a risk that (as Dave Birch put it) we just create a slightly annoying pre-pay debit card.
Mobile payments
A more credible threat to cards comes from the growing number of domestic mobile payment schemes that have successfully wrapped a great customer experience around A2A transfers. David Rintel called out Blik in Poland, Payconiq Bancomat in Belgium and iDEAL in Holland. Each of these is taking 65%-70% of domestic eCommerce payments. There’s also Bizum in Spain and MB Way in Portugal.
Fragmentation is a problem. To replace cards, these schemes will need acceptance outside their home country and work is already underway to extend their reach. Blik is opening in Slovakia and Romania and Payconiq/iDEAL is the foundation of the European Payments Initiative which launches its “wero” wallet later this year. Wero’s 14 founding banks cover 75% of accounts in central Europe.
Two new mobile payment schemes showcased at MPE. Raifaissen has launched RaiPay across its footprint in central Europe and the Balkans. And Gini Pay Connect is an interesting new idea from a start-up whose image-recognition software already sits inside many German banks’ consumer apps. You take a photo of a bill and pay with a direct debit from within the app.
The technology behind these products is often quite simple but distribution is much harder. It takes a lot of expensive marketing to get consumers to download an app which is why support from local banks is so important. So it’s no surprise that the most successful schemes all have local banks as shareholders. Blik also has Mastercard as an investor which would explain its very bullish international ambitions.
Consumer behaviour shifts driving the future of payment acceptance
I moderated an entertaining panel discussion nominally about consumer behaviour but actually covering a variety of topics from Saudi investment in Fintech to why Finland’s largest retailer chose Adyen for its payment processing. The panelists were Adil Riaz from NearPay, a SoftPOS vendor, Gábor Bujáki from OTP Bank, Hungary’s largest acquirer, Janine Kaiser from The Payments Association EU and Kai Lindström from S-Group, Finland’s largest retailer. Click on the photo to watch the conversation.
Innovation
Three interesting start-ups pitched to the audience in the final of the innovation showcase. The winner was Torus but only by a small margin.
1 Click Procurement – a PayPal equivalent for the corporate travel market. This tool could help finance teams in large enterprises who are often frustrated by the low compliance rates with expense policies.
Ballerine – an AI merchant risk platform. This software allows acquirers/PSPs to onboard SMEs at scale by automating (and orchestrating) KYC/AML checks. It sounds too good to be true but is worth investigating.
Torus – pricing analytics for merchant acquirers. Most processors use spreadsheets rather than commercial software to calculate merchant pricing. This results in frequent errors, especially with merchants on IC++ plans, and missed opportunities to exit or reprice unprofitable customers.
SoftPOS
This technology seems finally ready for prime time. Deja Mobile, based in France and now owned by MarketPay, presented some good case studies. Two months after launch with Rabobank in the Netherlands, 1,200 micro-merchants have activated the service of which 80% are generating transactions.
Deja Mobile also showcased two enterprise use cases. Tabesto, a vendor of intelligent ordering tools for restaurants, has launched Fox, an integrated all-in-one kiosk with no expternal POS or printer. Payment is via the Deja Mobile app. Fox has been a very successful launch and now accounts for 90% of Tabesto’s new kiosk sales. Here’s it is in action at Waffle Factory.
The Deja Mobile SoftPOS app is also live on Famoco hardware at a chain of bowling alleys. The screens are used for at-lane ordering of food and drink. The client says food and beverage revenue is up 30%-50%.
Other SoftPOS vendors present at MPE included NearPay, which claims over 50,000 installations in its home market of Saudi Arabia, and Yazara, the Turkish leader.
In a quiet show for POS innovation, I was impressed with POP Codes, based in Calgary, which offers tools to allow merchant acquirers to use the terminal screen for merchant communications. Pricing starts at $2.50 per month per POS.
Merchants
The merchant perspective was provided by Atze Faas, a long-term BP exec, who now represents Eurocommerce on the newly formed Merchant Payment Coalition – Europe. This is a lobby group looking to address the rising costs of payment acceptance. The major areas of concern are the lack of competition in the payment industry, the lack of transparency of its charging structure, the many regulatory gaps and the industry’s continued insistence on ad valorem pricing. Why should a €1000 transaction be more expensive than a €100 transaction? Why should CNP be more expensive than CP? Atze challenged the industry to explain because he felt that SCA had dealt with the risk issue.
It's certainly true that SCA has reduced fraud levels, but it’s also introduced friction that has led to reduction in legitimate transactions too. And SCA is no guarantee that the customer is who they say they are. Chris Read, EVP Identity Solutions at Mastercard, explained that the dark web is now awash with fake credentials such as passports and driving licences. You can “buy” a bank account for €200 or less.
If there’s one bright spot, it’s that experts seem more worried today about the explosion of first party fraud. Merchants are appalled by these pesky Gen Y consumers who spend their leisure time on Tik Tok exchanging tips on how to rip off merchants - cheating on eCommerce returns or scamming McDonalds for free burgers as compensation for fake negative reviews. Paradoxically, the payment industry is in the clear. If merchants are defrauded by their own customers, we’re not to blame.
Artificial Intelligence
Artificial Intelligence (AI) may be the latest buzzword but it holds more promise than Blockchain and the Metaverse.
Fraud is an early use case. Galit Shani-michel from Forter showed the impact of moving fraud decisions from simple rules to AI powered decisions. She told the audience that fraudsters were using AI to reverse engineer rules and merchants need to stay one step ahead.
Forter recommends using AI to optimise payment authorisation, for example choosing whether to use a PAN or network token or to ask for an SCA exemption or route to a particular acquirer. She explained that some issuers are more likely to approve a transaction that uses a network token and others less likely. And some issuers don’t mind, in which case AI can recommend saving money by not asking for a network token in the first place.
Visa’s Natalie Kelly spoke of “Fraud GPT” which writes scam emails in multiple languages, making Japan accessible to phishers for the first time.
Franceso Burelli of Arkwright Consulting said we are “at the top of the hype curve” but predicted 10-15% layoffs across the board as businesses start using AI to automate manual processes. It is this “potentially radical improvement,” that is driving stock prices higher, he explained. Burelli also said he’s seen good use cases in financial services for ESG monitoring, KYC/AML and faster coding.
AI is moving at such a pace that nobody knows the likely impact. Dave Birch talked about the potential for personal AI helping us make our daily purchases. I would hope my robot is a tough negotiator but how do you market to a machine? You’d expect that AI would make rational purchase decisions and be less swayed by brand than the average European.
AI even offers to put me out of business by writing articles about the payment industry. Drafting an earlier post, I wrote "people being rude about open banking" which LinkedIn’s AI wanted to change to "it's disappointing to hear people being rude about open banking. Let's remember that open banking has the potential to revolutionize the way we manage our finances, making it easier and more accessible for everyone." Hallucination, bias or common sense? You choose.
See you next year in Berlin for MPE 2025. There will be lots to talk about.
Where to find me
I’ll be moderating the open banking panel discussions at ePay Europe in London on 21 May. Before that, you can catch me at Retail Expo in London on 24/25 April.
Alternatively, if you liked this newsletter, you can hear me guesting on Worldline’s Navigating Digital Payments podcast.
How to get in touch
Geoffrey Barraclough
geoff@barracloughandco.com