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Europe losing the embedded finance race to US - Industry roundup: 28 October

Europe losing the embedded finance race in SaaS as US strides ahead

Europe’s banks and financial services players are seriously lagging behind those in the US in the embedded finance race, according to research by payment consultancies PSE Consulting and TSG (The Strawhecker Group). The research reveals that 33% of SMBs in the US already use embedded finance solutions via Software-as-a-Service (SaaS) platforms, compared to just 11% in the UK, and 6% in Germany and France.

The joint research is the first time embedded finance usage via SaaS platforms by merchants has been tracked to assess current levels of adoption. Embedded finance is set to transform the delivery of financial services as more use cases are explored across a wide range of industry verticals. Surprisingly, the research finds that one of the big adoption hurdles is a not really a lack of demand from SMBs for embedded finance solutions. Instead, the market has been constrained because SaaS platforms have struggled to promote embedded finance and capture the interest of merchants.

The research took the pulse of 1,000 small and medium sized businesses (SMBs) across the US, UK, France, Germany, Italy, and Spain, and uncovered a significant gap in the use of embedded finance in the US compared to Europe. Even though interest in both regions is very similar, with 51% of UK SMBs taking an embedded finance service when offered, compared to 53% in the US, what drives the significant difference in the maturity of the market is software platforms’ success at promoting the product. Only 22% of UK merchants and 16% of Italian SMBs say they have received an embedded finance offer from their SaaS suppliers, compared to over 60% in the US.

Merchants have provided a clear signal that they are interested in switching to software platforms away from traditional payments providers. 70% of SMBs across Europe and the US say they would use a software platform’s payment solution when they next change suppliers. Again, there is a significant gap between US interest levels which now exceed 80% versus 55% in Europe.

The research also explores the current and anticipated demand for the full range of embedded products. Payment acceptance emerges as the most mature product (15% of US merchants currently use this service) while services such as insurance and FX remain nascent. The significant potential of embedded lending is also apparent, with 69% of US merchants interested in taking finance from their software suppliers. However, this product is much less mature than payment acceptance, with only 3% of US merchants currently using their software suppliers to source their lending.

“There has been lots of excitement about the potential for SaaS as a new distribution channel for financial services, but this is the first time we have seen levels of usage in the SaaS world stripping out the role of marketplaces and fintech,” says Chris Jones, Managing Director of PSE Consulting. “These figures really show the gulf in maturity between Europe and the US.”

 

Lack of bank support risks variable recurring payments progress

Merchants, payment service providers (PSPs) and third party providers (TPPs) recognise the potential of Commercial Variable Recurring Payments (CVRP, in the UK) and Dynamic Recurring Payments (DRP, in Europe) to deliver better payment experiences, more choice, and lower processing costs. There are real concerns, however, that lack of bank support is impeding their delivery, according to a survey from Token.io and Open Banking Expo. 

This year’s data reveals substantial market appetite for both provisioning and adopting these new payment services. Over half of surveyed merchants [57%] plan to convert card payments to CVRP. Both UK and European PSPs and TPPs also recognise the importance of CVRP in driving greater merchant adoption of account-to-account (A2A) payments, with an overwhelming 97% describing CVRP as “important”, and 28% and 33%, respectively, as "extremely important”.

The survey findings also highlight the potential for CVRP to empower consumers with greater control over their payments while providing businesses with more efficient, cost-effective and secure recurring payment options. Respondents expect CVRP and DRP to surpass traditional methods like card-on-file and direct debit in delivering superior user experiences (59% and 51%, respectively) and increasing payment success rates. One-click e-commerce payments were identified as a top use case.

While the SEPA Payment Account Access (SPAA) scheme has established a commercial model for DRP in Europe, no consensus has emerged as to an ideal pricing model for CVRP in the UK. Presenting data to illustrate expectations for CVRP compensation and pricing from a range of industry stakeholders. 

Although 79% of surveyed banks believe CVRP will benefit their account holders and the UK payments ecosystem, only 32% expect to support CVRP for low-risk use cases in 2025, and just 26% for e-commerce use cases. This lack of bank support was a significant concern for survey participants, with 73% suggesting regulatory intervention may be necessary.

Survey results also point to consensus on the need for a consumer protection framework for CVRP, while most banks surveyed view CVRP as an opportunity to develop a new framework that benefits all ecosystem participants and addresses key issues with the current framework, like operational overhead, abuse, and inefficiencies.

“Our 2024 industry survey unveils key challenges that need to be addressed to unlock the full potential of CVRP and DRP in delivering greater consumer choice and enhanced payment experiences,” said Todd Clyde, Chief Executive Officer of Token.io. “We believe these survey results will reignite a sense of urgency and collaboration among industry stakeholders, working together to overcome obstacles and shape a brighter, more innovative future for the payments landscape.”

 

The China rally may just be getting started

Chinese equities soared following the announcement of a major stimulus package, and according to Kinger Lau, Goldman Sachs Research's chief China equity strategist, further upside could be ahead.

“We think the rally makes sense,” said Lau. “The Chinese government has shown its commitment to supporting economic growth - which is exactly what investors have been waiting to hear.”

He acknowledged that some investors may be hesitant about buying after such a significant move, which may explain why the market has corrected. But he added that a historical analysis suggest that “this rally could have legs,” given that “when we've seen 20% rallies in Chinese stocks, that rally has continued over the next several months.”

Lau added that Chinese stocks remain “quite reasonably valued - with valuations only rising back up to historical averages.”

Finally, he noted that Chinese equities’ correlations with developed markets have fallen to around 30%, which suggests that exposure can provide diversification benefits for international investors.

“So even if the rally does lose momentum,” Lau concluded, “we think Chinese equities still have a place in investors’ portfolios.”

 

Getnet launches e-commerce payments solution in Brazil, Argentina, Mexico and Chile

Getnet, Santander’s global provider of payment solutions for merchants, has launched Getnet SEP, a regional e-commerce solution that will work as a single entry point (SEP) for payments in Brazil, Argentina, Chile and Mexico. Through this payment solution, merchants operating in these countries will have access to Getnet’s payment services through one direct integration.

An increasing number of online merchant platforms are operating in more than one Latin American country. This includes regional businesses or large enterprises, such as subscription entertainment platforms and online marketplaces. Getnet SEP aims to simplify the integration of payment services, including sales, refunds, anti-fraud, subscriptions, and tokenisation. Through this simplified integration process, customers could reduce the complexity and technical challenges associated with integrating and maintaining multiple payment methods and providers. 

Customers in Getnet Brazil using “Plataforma Digital” and in Getnet Argentina already have access to the new solution. Merchants in Chile and Mexico will have access to Getnet SEP in the next weeks, the company says.

 

Nacha releases educational materials about AI-based scams

Nacha’s Payments Innovation Alliance, a membership program that brings together diverse global stakeholders seeking to transform the payments industry, has published materials aimed at raising awareness of AI-based scams, including a new report, Payments and Artificial Intelligence: Protecting Yourself Against AI-based Scams, focusing on protecting consumers from AI-based scams and what to do if you are approached or victimised by an AI-based fraud scheme, as well as a Did You Know? fact sheet that addresses the unique capabilities and challenges presented by generative and predictive AI technology.

Fraudsters are increasingly using deepfakes, voice cloning and other hyperrealistic AI content to scam consumers and financial institutions. Criminals are approaching the public via phone, email, text and social media seeking money and access to financial accounts in ways that can initially seem legitimate. The theme of Cybersecurity Awareness Month 2024 is “Secure Our World,” to remind the public of simple ways to protect themselves, their family and workplace from online threats.

“AI technology makes it easier than ever to complete personal and business tasks, but there is a dark side,” said Jennifer West, AAP, APRP, Senior Director, Payments Innovation Alliance, Education & Accreditation, Nacha. “It’s also easier than ever for criminals to impersonate government agencies, financial institutions and even loved ones claiming to need immediate assistance.”

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