Ways Financial Services Firms are Partnering with Retailers (and Tech Strategy Implications)
Leading financial services organizations have seen the value in curating an ecosystem of financial services delivered by themselves and selected partners that meet the niche requirements of their customers and increase customer relevance and revenue. This advance has been encouraged by the broad Open Banking momentum gaining traction around the world — both at the regulatory level and the broader philosophical level. At the same time, opportunities to be part of ecosystems in other industries abound. Retail point of sale is one area that is often top of mind for financial services organizations because of the long-standing relationships in supporting payments.
In the past few years, many potentially profitable opportunities have emerged in the space that warrant deeper consideration of strategy for financial services firms targeting retail partnerships. This article highlights some of these and identifies potential high-level implications for technology strategy.
- Unsecured lending at point of sale — online and in store, has continued a high growth trajectory in many developed markets with entrance of fintech style players with increasingly sophisticated onboarding / origination processes often with supporting APIs. Revenue models vary, but fees charged to merchants and late-payment penalties often account for a significant portion of revenue from these services. Some operators are born out of retailers who started point of sale lending in their own stores and moved into more general unsecured lending.
- Merchant lending for SMEs driven by deeper insights into their revenue has continued to be a hot area targeted by new entrants. In particular, SME-focused acquirers (sometimes partnering with a larger traditional acquirer) onboarded small and even micro merchants and moved to lending based on analysis of revenue streams observed at these merchants. In addition, some struck partnerships with point of sale accounting software used by small and micro enterprises and have started to position lending offers by allowing the merchant to share financial data from these system.
- Real-time insurance and extended warranty deals for goods purchased have become more technically sophisticated with providers offering APIs to ecommerce merchants that may offer more sophisticated risk pricing, revenue share and seamless checkout features. In addition, if point of sale account-to-account payment services are available insurance may sometimes be offered to offset cover that might have been provided by the credit card issuer.
- Support for real-time account to account payment services at checkout (where supported by payment rails) — in particular for ecommerce — is growing steadily — with consolidation of account-to-account options with traditional acquiring services in some cases. An interesting aspect will be the extent to which account-to-account based services gain traction for small and micro merchants where these may come at lower cost in what is a price sensitive segment.
Brazil may be a market to watch in this area — with planned real-time account-to-account payments planned for later in 2020 and an already high penetration of card solutions for micro merchants.
Success of theses solutions may go hand-in-hand with the availability and popularity of wallet or QR-code based real-time payment initiation from banks or other providers.
- ‘Productized’ retail financial services offers range from off-the-shelf pre-paid cards and similar in developed markets to funeral cover purchasable in various standardized amounts using a cardboard tag available near a checkout till in emerging markets. In developed markets some of these offers are being displaced by app-based solutions and for payments this trend is likely to continue.
- Acquirer point of sale solutions that support NFC-based payments and associated schemes have been deployed — or are part of a refresh program for retailers in many markets.
- For acquirers and payment processors, analytics services for retailers that provide insights into customer behavior at an aggregated and not personally identifiable level. For example, how purchase values compare with averages made by customers elsewhere, types of stores visited before and after visiting the merchant and more. For smaller retailers these might also provide insights into expected revenue services where the acquirer / bank is able to perform seasonally adjusted analysis in a way that may be more sophisticated than a small merchant would be expected to perform.
- Money transfer services at retail point of sale are popular in emerging markets — particularly those without real-time domestic payments and where use of cash restricts the use of bank services for payments made using a code that is redeemed at ATMs. Some money transfer services are bank supported whereas others run entirely on retailers on rails.
- New way of sharing data insights are emerging that may bring value to bank-retail partnerships. For example, using ‘secure enclave’ and complimentary technologies a bank or insurer may be able to build a model that derives insights from bank information in a way that is useful to a retailer. These insights could then be shared with a retailer receiving a customer without any personally identifiable information being made available to the retailer or the bank being aware of the customers of interest to the retailer. Such a solution was demonstrated in proof of concept by a major Canadian bank late last year.
As the technology and financial services domains continue to increasingly intertwine — particularly in fast evolving segments like payments, what are the core technology capabilities that are likely to help support strategies designed to exploit some of the above competitive challenges and opportunities?
Ensure the bank or insurer is positioned to make intelligent use of data and act on this (direct or via a partner). This is particularly important in supporting the lending, insurance and merchant analytics capabilities mentioned above. It goes beyond having a functioning ‘data warehouse’ or ‘data lake’ and includes:
- Reliably landing and matching data received from partners and other external parties.
- Incorporating telemetry from services delivered via partners to show how these are used and to rapidly identify trends in service and interface use;
- Having a strong data science team that is also able to determine which modeling use cases to pursue in-house vs. which to look to ISVs for;
- The ability to manage the release of predictive analytics models to production and the lifecycle of launching and retiring services afterward.
Next, focus on enhancing the organization’s an agile development capability that enables:
- Keeping pace with potentially aggressive release cycles that partners may have for complimentary services;
- Release and lifecycle management on a par with the commercial software industry for API services that will be consumed by partners — particularly in the payments space;
- Instrumentation attached to everything built to understand how it is being used and performing;
- Hire DevOps skills with experience building commercial software services. In acquiring and related payment services traditional software companies have moved into the payment operations recognizing that their software skills can be leveraged for success.
- Ensure service scalability is top of mind during design — particularly as many services could have significant seasonality in their use.
Finally, the risk management function has to be agile and ready to support the analysis of new services delivered via new partners with ready access to data and advanced analytics tools for risk analysis. Security policies should be consistent across environments and monitored in real-time.