In September 2020 I said Netflix will almost definitely commission a documentary about the rise and fall of Wirecard.
It turns out Sky, and not Netflix, first got round to making Wirecard’s documentary – and they did not disappoint. A few weeks ago, the documentary “A Billion Euro Lie” premiered and, as predicted, it was riveting.
Mind you, it was hard to overstate any element in the decline of the beleaguered payment solutions company, whose final chapter was written in November 2021, when it delisted from the German stock exchange. The almost-vertical fall in market cap at closing (€12m, from a peak of €24bn in 2018) is testament to how close to godliness this payment service provider (PSP) once was.
Understandably given what else has happened since then, the market hasn’t shifted much. This is not because of Covid – in fact it’s arguably been a catalyst for innovation across much of fintech. Instead, it’s down to the almost immediate ramp-up of anti-money-laundering legislation sweeping through the greater part of Europe and the wider Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.
In fact, almost unequivocally across the payments space, everywhere you look has suddenly become harder to process, or even receive, payments coming from any source, including, somewhat ironically, white territories. The disruption was enough to scupper Trustly’s plans to float in Sweden earlier this year – officially because the Swedish Financial Authority found issues with the way customers are screened – equally concerning to any other IPO-aspirants in the payment space.
And on the losses in the card payments industry, the statistics speak for themselves. According to a Nilson report released earlier this quarter, while the volume of payment processing increased in 2021, the number of fraudulent claims (by card holders as well as merchants) exploded at a higher rate together with the quantity of chargebacks.
The rationale is easy to understand here. Throughout the Covid interlude, issuers, merchant acquirers and travel and event industry merchants were forced to absorb an exceedingly high volume of expenses related to lockdown-induced cancellations. As a result, chargebacks grew to unprecedented levels and, rather than wait for the refund, many cardholders denied the transactions ever took place and claimed the transactions as fraud.
What’s worse, because so many issuer and merchant employees were working from home, the backlog of disputes became nearly impossible to manage. Acquirers lost money and criminals took advantage of an overstretched framework to stealthily insert more fraudulent transactions into the system.
The Visa and MasterCard networks will continue to pump the same annual message that all is well, as let’s face it, they don’t have much choice. But a lot of pain is being felt in the small and middle tier of operators and merchants and especially more so in gambling.
According to the Gambling Global Market Report 2021, global gambling revenue was expected to reach $516bn in 2021 – 12% more than in 2020. Most of this revenue will be subject to higher amortised processing fees, and a higher overall rejection rate – including and especially on 7995-based cards.
Hope for the future
Not all is lost, however. As we usher in 2022, this is indeed a tale of two halves. While the legacy payments market is falling over itself to try and regain some stability, there are some developing stories.
The first, albeit mostly subliminal change, is happening around the overhyped space known as open banking. In fact, rather than coming from any one place or PSP, it seems that this revolution will rather be more… evolutionary. And this is mainly because not much thought was given to it during the pandemic hiatus.
In fact, according to a report by Business Insider, while in 2020 global fintech companies underspent their open banking investments (€32m instead of a budgeted €50-€100m), that figure rebounded in 2021. Wealth management firms’ budgets showed the strongest increase in open banking investment at 58% year-on-year, followed by wholesale banks at 55%, credit providers at 51%, and digital-native challenger banks at 50%.
What’s interesting in this space at the moment, is that while we’re witnessing the rise of so-called open banking providers, in reality most such as Volt or Tink are actually payment initiators. It remains to be seen whether offering the full deck of open banking services will be as appealing as just owning one part of the supply chain.
What’s for sure is that these services are gradually eating into the once-unvanquished territory owned by credit card companies. Witness the efficient KYC and what processing services such Brazil’s Pix Payment and UK’s Faster Payments are capable of, and it becomes clear that the status of debit/credit cards as all-in-one payment leaders is being challenged.
We’re still not quite yet there however. For example, Streamlined Consent Management – which is essential for collecting or sharing various types of personal information between financial institutions – is still evolving and hasn’t yet been standardised.
Moreover, laws are under review in the UK and EU, and still in draft stage in the US and Canada. Given how glacially slow changes happen in legislation, it will take a few more years until they become drafted into law.
Revamping legacy systems
In the meantime, until open banking is as distributed as, say, SWIFT or even SEPA, it’s likely that regional banks may need to be drafted in to support last-mile payments. It is likely that we will continue to see a rise in payment aggregators until, or even after, the standard is widely adopted.
Staying competitive, agile and responsive is even more critical as open banking breaks down barriers and lets new players – many digitally native – enter the market. To really usher in a new age, legacy financial institutions must enhance their core infrastructure, or even consider partnering with disruptive fintech. But this will clearly take time, and it might be too late, or too costly, for some legacy players to adapt.
The second, and arguably real revolution in the future of payment will come from venture capital funding. Practically most, if not all, of the significant fund raises in fintech this year have been towards disrupting payments, specifically open wallets and crypto-backed payment providers.
Just a few days ago, Balderton Capital, one of the heavyweights in fintech investment, led a £40m round into Polish crypto-payments startup Ramp. Having previously backed Revolut and Wise, it is now flanking itself alongside mainstream investors in Web3 companies such as Andreessen Horowitz and Mark Cuban.
Similarly AIMS Financial, a London-based crypto OTC platform has just closed a new funding round led by Yolo Investments, to deliver deep liquidity digital currency trading solutions specifically to crypto and gambling markets with multiple licences across the world.
Why are companies like Ramp and AIMS important? They offer a non-custodial, full-stack payments and banking solutions, which is very much API-driven to help improve companies’ efficient accounting and payment solutions.
Previously when you wanted to invest/divest in crypto you typically had to go to the likes of a Coinbase or eToro to transact on digital assets, usually with a mind-numbing spread. That story changes considerably once you deliver payment infrastructure into existing ecommerce services, apps or i-frames, without users needing to jump to others apps to buy crypto assets. This is what Stripe and others have done for the ecommerce space; at its last funding round Stripe was valued at $95bn.
To understand how fundamentally game-changing this revolution will be, cast an eye back to the mid-1990s when Paypal allowed seamless cross-border payments through email addresses.
Imagine how the world would look today if you could remove the friction of payment services for gaming (for players and partners alike) by just enabling virtual wallets. No issues with fiddly APIs or mistyping emails. If your MetaMask wallet is enabled in your mobile or desktop browser, then you can buy axies, cash in on NFTs or even lay Southampton-Arsenal.
The beauty of it is that any unnecessary KYC, credit-card checks or payment gateway failures will be a thing of the past. Get to what you really want quicker, cheaper and, importantly, more reliably.
And such first-wave solutions are already gaining traction in a rapidly growing set of territories. Just by example, a number of gaming operators are already reporting more than 40% of payment settlements from Asian and African PSPs in cryptocurrencies.
What that suggests is that once you remove the on-ramping pain points, adoption is virtually frictionless. So invest in tokenised KYC solutions – with commercially-savvy compliance teams – and you’re well on the way to solving one of the major headaches in the payments industry.
So, the revolution is already happening today. Expect it to appear shortly on a sportsbook near you. And to some of you reading this, it may already be here.
Co-founder of RB Capital, Julian Buhagiar is an investor, CEO and board director to multiple ventures in gaming, fintech and media markets. He has led investments, M&As and exits to date in excess of $370m.