Paytech Trends 2024

It’s that time of year when everyone starts writing about their watch items for 2024. Do you ever look back to see how well some of these forecasts did last year?

Select Forecasts from Last Year

Take Morgan Stanley’s 2023 Global Outlook:

• Bonds will be a big winner in 2023…the S&P 500 Bond Market Index has returned 1.81% YTD, not great relative to equities...miss

• Emerging market equities could be early to recover in 2023…the S&P 500 Emerging BMI is up 6.7%, far short of the S&P 500...miss

• 10 yr Treasury yields will end the year at 3.5%...as of Nov 29, the 10 yr yield is 4.27%...another miss

• Mortgage-backed securities will offer upside…the S&P Mortgage Backed Securities Index is off 3% YTD...miss

• S&P 500 will end the year around 3,900…the S&P 500 stands at just under 4,600 with a month to go...miss

• US dollar declines through 2023…S&P 500 USD Index is up 2.7% YTD...miss

• Oil outperforms and Brent crude will end the year at $110…Brent Crude is trading around $82-$83...miss

There was no mention of the Magnificent 7 stock performance that is driving close to 90% of this year’s stock market performance. Lesson to learn: macro projections are notoriously perilous.

If you bring the outlook game closer to PayTech, you can get more precise and accurate.?

Take Visa as an example who had five trends to watch heading into 2023;

• For business and pleasure, travel returns, fueling retail spend…in Q3 earnings both Visa and MasterCard commented on robust travel spend with continued room to grow...bullseye

• Consumers more purposeful, conscious in choosing sustainable behaviors…not so much, according to a Deloitte survey conducted in March 2023, economic uncertainty is putting pressure on sustainable behavior change...miss

• B2B payments will fuel another wave of digital transformation…B2B continues to digitize but limited evidence that it’s anything beyond evolutionary and no where near “transformational”...on target but not a very provocative guess

• During crypto winter, builders build…lots of action below the waterline visible to anyone who watches closely but 2023 saw the submission of spot BTC ETF’s from major players including BlackRock, Wisdom Tree Funds, Invesco, Galaxy Digital, and Valkyrie Funds; tokenized securities and funds from HSBC, JPMorgan and Apollo all in the works, Visa and Solana exploring blockchain-based settlement, building is in fact taking place...bullseye

• Fraud adapts to a “hybrid” model…this one goes without saying and is about as obvious as “the sun will rise tomorrow”

Visa’s outlook was closer to reality with a few safe bets but no mention of key paytech related trends like the record levels of credit card outstandings and rapidly increasing net charge-offs as we end 2023.

We need a different way to think about future trends that go beyond blank assertions and safe guesses as to what’s to come in 2024.??

A Different Approach for 2024: Scenario Planning

In the mid-20th century, Herman Kahn of the RAND Corporation and Pierre Wack of the Royal Dutch Shell Corporation formalized a strategic framework called “Scenario Planning” that is much more appropriate for today’s fintech environment. Here’s what Scenario Planning entails:

• Explore Multiple Futures: Scenario planning doesn't predict the future but rather explores a range of possible futures. It helps in understanding how different trends, uncertainties, and decisions might interact and unfold over time.

• Maintain Strategic Flexibility: Scenario Planning prepares organizations for different possible realities, enabling them to be more agile and adaptable in their strategic planning.

• Deal with Uncertainty: By considering various outcomes, it helps in managing the uncertainty inherent in long-term planning.

When is the use of Scenario Planning most effective?

• Complex and Uncertain Environments: In industries like Fintech where the future is highly unpredictable and influenced by numerous external factors like consumer behavior, merchant behavior, supplier behavior, regulation, technology, global forces, etc.

• Need to Consider Long-term Planning: Particularly beneficial for long-term strategic planning where immediate predictions are less reliable.

• Facing Major Changes or Disruptions: Useful in times of significant technological, economic, political, or social change.

How do you use Scenario Planning?

• Identifying Key Drivers: Recognize the critical uncertainties and trends that could significantly impact a given industry or company.
• Incorporating Diverse Perspectives: Involve a wide range of stakeholders to gain diverse perspectives. This helps in understanding different aspects of potential futures.
• Developing Plausible Scenarios: Develop scenarios that are plausible and span a wide range of possibilities, from optimistic to pessimistic outcomes.
• Facilitating Strategic Discussion: Use scenarios as a tool for strategic discussion, not just as an academic exercise. They should inform decision-making and strategy development.
• Ensuring an Ongoing Process: Treat scenario planning as an ongoing process, not a one-time event. Regularly update scenarios to reflect new trends and information.
• Delivering Actionable Insights: Focus on deriving actionable insights from each scenario. This involves identifying indicators that might signal which scenario is unfolding and developing strategies to respond effectively.
• Avoiding Predictions: Avoid the trap of trying to predict the most likely future. Instead, focus on understanding a range of possible futures and how to navigate them.
• Enabling Communication: Effectively communicate the scenarios and their implications to stakeholders to ensure a shared understanding and preparedness.

Thinking about the coming year and what’s in store for the fintech industry there are a range of factors that represent the critical uncertainties that could have a significant impact on the industry.?This is only the first two steps in Scenario Planning. It will be up to you to use these to facilitate discussions, create actionable insights relevant to your role and communicating to your internal and external audiences.

What are the Key Drivers for PayTech in 2024?

Advances in Open Banking

Open Banking is taking root across the globe. In some cases it is defined by regulation, elsewhere it is defined by market need. Banks and Vendors continue to construct the API-led scaffolding around legacy banking infrastructure increasingly hosted in cloud infrastructure to allow first and second party services to interact in new ways that deliver new forms of value to customers. As the pace of change continues to accelerate and innovation ascends to primacy as a competitive dynamic, leaning into open banking becomes table stakes. No single company can out-innovate a large ecosystem of developers. Key scenario dimensions to consider:

• Global Standardization: High vs. Low consistency in international standards.
• Security Models: Increased vs. Decreased data breaches and fraud.
• Key Demand-driver: Regulatory requirement vs Market need.
• Interoperability: Global standards vs Local standards.
• Control Point: Bank walled gardens vs Bank dumb pipes.?
• Key competitive dimension: Innovation vs Status quo.

Uptake of Payment Orchestration Services

A group of cloud-native transaction processors are serving the needs of medium and enterprise-level customers in performing the role of enterprise switch. As more customers contemplate changing or gaining more flexibility over their processing infrastructure, they will increasingly turn to modern architected orchestration layers to remove their dependence on legacy, inflexible processors. In some cases, large merchants will drive their processors to integrate, in some cases, the processors will see orchestration as a competitive differentiator. If you’re a medium to large enterprise or hope to be one someday, you need to consider the role orchestration (home grown or through a partner) can play in giving you control over your payment processes. Key dimensions to consider include:

• Integration Complexity: Simple vs. Complex integration with existing systems.
• Cost Efficiency: Cost-effective vs. Expensive solutions.
• Speed of Change: Evolutionary vs Revolutionary.
• Key driver: Merchants (demand side) vs Processors (supply side)

Propagation of New Authentication & Identity Models

Data security and privacy protection are areas of active R&D. Passwords are on life support. Everyone recognizes the challenges with managing, maintaining and securing their respective networks using passwords and the need for new ways to authenticate users. Hardware and biometric-based methods of authentication are spreading across the ecosystem reducing the reliance on passwords as an authentication method. Identity management solutions that limit the scope of where sensitive personal data resides will take quite a while to propagate. Staying abreast of the challenges and opportunities in authentication and identity management are table stakes for providers in PayTech. Key dimensions to consider include:

• Privacy Concerns: High vs. Low public concern about data privacy.
• Technological Reliability: Highly reliable vs. Prone to errors.
• Consumer Trust: High vs. Low trust in new authentication methods and providers.
• Consumer Usability: Adds friction vs Removes friction
• Accuracy: Highly accurate vs False Positives
• Hardware: Incremental HW vs existing HW.

Advances in AI?

AI capabilities are increasing at an exponential rate. Each new release of a commercially available AI capability goes well beyond expectations. AI is beginning to displace jobs in certain fields like creative design and media & entertainment. A few will monetize AI capabilities through product offerings, many will jump too soon to try to make incremental revenue and miss the more immediate opportunity in applying AI to operational efficiency across every function in their organization. Regardless, every organization needs to have a strategic framework for how they plan to leverage AI across their organization taking into a range of dimensions:?

• Technological Breakthroughs: Step change vs. incremental advancements.
• AI Value driver: Growth only vs Growth + efficiency.
• Development approach: Build vs Ally
• Ethical and Privacy Implications: Major vs. minor concerns.
• Scope of capabilities: General intelligence vs Autonomous decision-making.
• Governance: Strong vs lax.
• Industry adoption: Targeted vs broad.
• Infrastructure (data, power and connectivity): Limited vs broad-based infrastructure support
• Collaboration models (academia, industry and government): Few vs many.

Merchant Adoption of New Technologies?

There are typically three reasons why merchants rapidly adopt a new technology - (1) dramatic cost reductions (10X, not 10%), (2) Access to new customer segments or (3) Regulatory requirement. Rarely do merchants move fast to adopt new technologies within a single year because it’s a marginally better way to serve their current customers. Those incremental improvements could be important but the first to market with a slightly better feature is often replicated by fast followers before it results in a meaningful share shift. The key is to stay abreast of the step change improvements introduced by competition. Companies should assess new technology along a number of dimensions:

• Merchant ROI: High vs. Low ROI for adopting new technologies.
• Merchant value driver: Efficiency vs Growth.
• Capital requirement: High vs Low?
• Partner dependence: Build vs Ally.
• Nature of new revenue: Incremental vs Cannibal.
• Degree of Merchant Change required: Change vs No Change*

*There are very few “small changes” to a merchant’s technical infrastructure related to paytech. “A few lines of code into their POS” is a clue that the technology is unlikely to scale.?

Change in the Trajectory of Crypto as an Established Asset Class?

The total value of all crypto is approaching a 100% gain year to date as we approach the next Bitcoin halving in 2024, an event that has preceded a 1.5-2 year bull cycle on the last three occasions. Some predictions are for BTC to reach all time highs bringing crypto back to the forefront of the public’s mind. Others think it’s a fad, or worse. We will also see SEC action early in Q1 related to spot BTC ETF followed by spot ETH ETF. The topic of crypto will be in the public’s minds. You run a risk of ignoring it so it should be on everyone’s radar in 2024. The Key scenario dimensions to watch include the following:

• Public perception: Fear vs Greed.
• Regulatory Environment: Strict vs. Lax regulation.?
• SEC Action: ETF Approval vs ETF Denials (coming in Q1)
• Consumer Acceptance: High vs. Low adoption rates.
• Merchant Adoption: Fast vs Slow adoption.
• Market Stability: Stable vs. Volatile cryptocurrency markets.
• Product / Market Fit: Point Solutions (Tradfi) vs Broad Use Cases

Digitization of B2B Payments?

Will next year be the year that checks die in B2B transactions? EDI has existed since the 1960s, NACHA was formed in the 1970s. ACH processed over $52T in B2B ACH payments value in 2022. The only safe bet is that checks won’t gain share and will continue to lose share to electronic means. But the opportunity goes beyond moving money electronically and involves digitizing the entire financial supply chain and related workflows - purchase orders, remittances, invoices etc. It is more accurate to refer to this as the digitization of B2B financial processes vs B2B payments. Key dimensions to follow:

• Cross-Industry Collaboration: Strong vs. Weak collaboration between industries.
• Legacy System Resistance: High vs. Low resistance to replacing legacy systems.
• Focus of solutions: Money movement (narrow) vs workflow management (broad)
• Speed of transaction: Real-time vs Same day vs batch.

Continued Adoption of Embedded Fintech

As software continues to eat the world, providers of core business capabilities (B2B SAAS Providers) are combining their services with traditional financial flows as a way to achieve incremental growth. Software platforms that manage customers, inventories, order taking, employees etc. are continuing a trend to integrate core financial processes that were otherwise provided by 3rd parties through referral agreements or simply not contemplated. Vertical software platforms are now offering payments as a core feature. But beyond embedded payments, progressive thinking platforms are looking at all financial flows - invoices and supplier payments, payroll and employee benefits, insurance add-ons, working capital loans repaid via daily payment settlement, disbursements, refunds, etc. The scope of PayTech within a Vertical Market SAAS offering is broadening in scope and creating incremental growth opportunities for participants. Key dimensions to understand the dynamics in a particular vertical include:

• Embedded Scope: Payment acceptance only vs Broad set of financial flows
• Model: Referral vs Owned/Managed
• Control of the User Experience: Partner vs B2B SAAS Provider
• Compliance Risk: Partner vs B2B SAAS Provider
• Financial Risk: Partner vs B2B SAAS Provider
• Distribution: Generalist sale vs Specialist sale
• Pricing: Cost-plus vs Blended

Uncertainty Around Consumer Health

Everything comes down to the health of the consumer, the “footings” of any economy. Real wage and income supplemented by their use of debt growth less disposable income taking into account cost of living - household, food, energy, debt service costs, etc. When you look at all the components of consumer’s capacity to continue to drive economic activity, the outlook for 2024 is highly uncertain.?

• Economic Stability: Strong vs. Weak economic conditions.
• Inflation: Rising vs falling.
• Consumer Confidence: High vs. Low consumer confidence.
• Spend Patterns: Shifting spend to low cost alternatives vs stop spending altogether in certain categories
• Excess Savings: Declining vs stabilizing.
• Consumer cost of capital: Declining vs rising.
• Housing costs: Stabilizing vs rising.

Renewed M&A Activity

Deal volume looks to have bottomed in Q1 23 but will it return to the levels seen in 2021-2022 or more like pre-2021 levels? In an environment where low cost capital is no longer abundant, the market places a premium on ability to grow organically. As deals come back into vogue, the scorecard will be the efficient deployment of capital and a clear, compelling message related to the commercial logic of any deals. If deal volume does pick up, scenarios need to consider strategic tie-ups or events among the digital leaders. What are your plans in an environment where software leaders look to accelerate their roadmaps through strategic actions that will threaten incumbents. What role does M&A play in your ability to gain share or keep the share you have?

• Synergy source: Expense vs Revenue.
• Regulatory Environment: Tightening vs. Loosening of merger regulations.
• Deal driver: Filling revenue gaps vs. Strategic growth.
• Focus of Deals: Early stage vs late stage.
• Nature of Deals: Public markets vs Private markets
• Deal impact: Marginal vs transformative.

The Coming US Election?

Corporate strategists can’t afford to make bets on what the prevailing political winds “might” do, but they certainly need to have contingency plans thought through and prepared when action does take place. A change in the administration in the US may accommodate a change in the view related to M&A approvals, regulatory hurdles or general enthusiasm for business growth. Strategists should formulate scenarios and monitor the market to take appropriate action:?

• Political Climate: Stability vs. Volatility in the political landscape.
• Policy Changes: Radical vs. Moderate shifts in financial and tech policies.
• Fintech Changes: Pro innovation vs Pro control.
• Regulatory Focus: Pro demand-side (consumer and merchants) vs Pro supply-side (fintechs and banks)

Wild Cards?

It’s also useful to think through plausible wildcard scenarios. This is where having a diverse set of views on the team comes in handy. Wildcards are the crazy set of scenarios that will get the market’s attention and impact roadmaps in the short-term. A few wildcards that I have on my radar:

The X Factor: X launches a WeChat-like super app that combines communication, commerce and money movement.

• Bank response: Lean in vs Block
• Payment Network response: Lean in vs Block
• Consumer response: Limited adoption vs Rapid adoption
• Geographic Scope: Limited vs Broad

The Apple Factor: Apple takes strides to broaden the scope of the services they offer direct to customers to capture more margin opportunity

• Role of FIs: Distribution partners vs Service providers to Apple
• Focus for innovations: Consumers only vs Consumers & Business
• Balance sheet: Apple's vs Bank's

Industry changing M&A: Digital native processors combine to create a new competitive capability.?

• New small business model: Stripe + Square vs Legacy
• New enterprise model: Stripe + Adyen vs Legacy
• New commerce model: Shopify + Apple vs Legacy

Closing

As you read the upcoming wave of forecasts about what’s likely to be the dominant focus areas for 2024, you might consider placing less emphasis on the specific assertions and use a tool like Scenario Planning to understand the range of forces and plausible scenarios that may prevail. The market is too dynamic and uncertain for you to bet on a precise outcome. But if your job entails allocating capital and making resource decisions in a capital constrained environment you need a better way to understand and handicap the entire field. It's not about predicting the future, but about preparing for a range of possibilities in a thoughtful and comprehensive way.