Digital Red Envelopes, Palm Readers and Eye Scanners
Millenials struggle to pay for groceries, Etsy hold your money, WeChat pay for visitors, Amazon One, Apple Pay, WorldCoin and FedNow
Welcome back, to Fintech Weekly.
One of the most intriguing stories of the last two weeks has been the potentially groundbreaking finding in physics as researchers are rushing to validate whether or not LK-99 is indeed a superconductor at room temperature and ambient pressure. The implications of this would be that basically anything you use with an electrical circuit on a day-to-day basis would be extremely more efficient as no energy would be lost through heat, somehow I worry that iPhone batteries would still need to be charged every day.
Anyway, in the world of Fintech, this week we find that millennials need to spread the cost of groceries over multiple months, if you have tried to combat this by starting a side hustle selling on Etsy, they are holding your revenue in reserve, but hey!, at least you can now use WeChat if you can ever afford to travel to China.
Who has just been added to WeChat Pay?
Phone, wallet, keys is the usual sequence of checks I make to myself as I am leaving the house each day. Admittedly this is starting to reduce to simply phone, keys for the majority of my outings thanks to the reliability of mobile payment solutions over recent years, in particular in the post-pandemic years. I still remember being awe-struck when I first visited China in 2016 to see that my Chinese colleagues could walk out the door with just their phones. The widespread use of QR codes in almost all settings was one factor that jumped out, but the other key reason differentiator was the penetration of WeChat into everyday life for the locals.
As visitors, we found ourselves stranded and helpless in multiple situations and had to rely on our extremely patient and cooperative hosts. This week it was announced that this problem will soon be a thing of the past as visitors to China will be able to go cashless on WeChat and AliPay by linking foreign credit cards to the mobile payment solutions. Despite the government’s warnings that cash should not be rejected by retailers, visitors have increasingly found themselves with no mechanism to pay. As life in China is increasingly dependent on mobile solutions, ride-hailing services like Didi will also now become accessible to visitors with this announcement. The most noticeable feature that will remain elusive to visitors is to participate in the digital hongbao Custom of sending digital red envelopes of money to one another, a feature that is credited with driving WeChat’s initial growth.
In terms of the mechanics of how this all works, to activate their WeChat wallets, foreign users will need to authenticate their identity by uploading their passports. Verification codes can be sent to foreign phone numbers. WeChat spending limits per transaction, month and year for foreign visitors will be 6,000 yuan (around $835), 50,000 yuan and 60,000 yuan, respectively. Transaction fees are waived for payments under 200 yuan (around $28), and any amount above that charges a 3% fee. Exchange rates are based on the rates of the card organization and the issuing bank.
Sources:
Read more on the story in TechCrunch
When do millennials use BNPL services?
A report published by Pymnts this week had interesting findings on the use of Buy Now Pay Later services among millennials. BNPL is a payment method that allows customers to spread the cost of repayment over several months interest free. Popular service providers include Klarna and Afterpay. The industry is under scrutiny by regulators recently in response to calls that it should be regulated as credit, Australia in particular is leading the way in this stance.
Key highlights from the report, which looked at how younger consumers make credit decisions include:
Over 20% of the surveyed age cohort, whose members were born between 1981 and 1996, had used BNPL in the 90 days previous to being surveyed. This figure is more than a third higher than the share of other generations.
What is most striking is that millennials are using BNPL to pay for necessary purchases rather than shopping splurges. Millennials have the highest rate of using BNPL for groceries and vehicle maintenance, with 15% and 6% shares, respectively. The age demographic also is most likely to have used BNPL to pay education expenses.
A worrying finding was that when the demographics were further subdivided to analyse ‘Bridge Millenials’, the group bridging the millennial and Generation X age cohorts, 16% of this group said they resorted to borrowing money from family and friends when BNPL was unavailable. This suggests an urgency of what is being purchased as consumers felt no option to go without or wait to make the purchase at a later date.
The report paints a worrying picture of the financial lifestyle of millennials with three quarters living paycheck to paycheck, 40% taking on a side hustle, and further difficulty to come with interest rates continuing to rise and student loads set to resume in the US.
Sources:
Read the full article on Pymnts
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What will be the impact of FedNow on my business?
We have covered the launch of FedNow, the new instant payment rail in the US over the last few weeks. This week I wanted to highlight an article from CFO Drive that highlights six ways that business operations could be affected as the US payments system finally starts the catch up to the modern payment standards.
First, as FedNow offers instant settlement for participating financial institutions, it makes the need for a “float” i.e. the time between the initiation and clearing of a payment, redundant. Up until now, businesses keep an eye on the costs of borrowing money or the potential interest of holding extra cash, but if their partners now migrate to instant settlement via FedNow, this concept disappears and the models of finance teams will need to adjust accordingly.
Second, ERP systems will need to be adjusted to account for 24/7 payments. The assumption that after 17:00 on a Friday, funds will not be arriving from partners until Monday morning is set to be a distant memory, therefore any operational processes that rely on this assumption will need to be updated.
Third, there is a heightened need to sure up fraud prevention matters. As we have discussed in previous issues of the newsletter, instant settlement means that businesses must be more certain than ever that due diligence was conducted on each party that interacts with a payment, and any suspicious payments are blocked at source.
Fourth, real-time payments are set to enable optimisations in direct-to-consumer retail as brand-supplier relationships will be better aligned. Currently, delays in payment reconciliation can add multiple days to the shipment of raw materials and production is not started until the books are in order. Real-time payments reduce this burden and allow production to start almost as soon as a payment is made.
Fifth, FedNow vastly improves the reconciliation of payments in and payments out from a business, meaning that businesses have a much clearer and more accurate picture of what their cost of business is in a given month.
Sixth, and perhaps most importantly, as we have discussed already in relation to FedNow, currently, there are only 35 banks and credit unions registered for FedNow, however, this is set to grow, meaning the likelihood that a business will be impacted by FedNow and the items mentioned above is set to increase.
Sources:
Read more on cfodive
Where is my money Etsy?
Online marketplace Etsy has been in hot water that has motivated their users to call for a boycott of the service this week after they issued a notice to hundreds of small businesses selling on their site this week that they were actioning a "reserve system". In real terms to those businesses that sell on the platform, many of whom are individuals who make and sell their own products, the implications of this was that 75% of the revenue they earned from sales would be held and inaccessible to them for 45 days. The justification from Etsy, which has over 7 million active sellers and more than 120 million items for sale, is that payment reserves are used to "keep the marketplace safe" and cover potential refunds. For many sellers, this is a potential death sentence to their businesses, without the economies of scale of larger operations, they cannot afford to buy the raw materials required to fulfil future orders.
The announcement leads to several online forums popping up to rally the troops for a boycott of the platform. Facebook group Etsy Reserve Strike had over 1,100 members - an increase from around 800 members in three days. On Reddit, sub-Reddits r/EtsyStrike and r/IndieSellersGuild were also set up. Sellers also complained to the UK's Office of the Small Business Commissioner (OSBC), which says it is "extremely concerned" about the reports. However, OSBC has no legal power over Etsy as it is a US company.
Talks of a boycott added further pressure to Etsy after their share price was down more than 5% at the close of trading on Wednesday following the announcement of a reduction in profits versus the same period last year and a forecast of further reduced revenue for the next three months.
The reaction from Etsy has been to announce a rather vague u-turn, saying that they will "substantially decrease" the amount of money it would put on hold but did not state the new rate or time frame. The scale of a potential boycott remains to be seen, with sellers holding their fingers over the ‘vacation mode’ option which would keep their account put and not take any further orders from buyers.
Sources:
Why should I pay with my Palm or Iris?
If I had a euro for every zebra crossing, bicycle and traffic light I have identified online to apparently prove I am not a robot, I wouldn’t be writing this newsletter anymore I would be writing this newsletter from my yacht. Fortunately, it seems this experience will soon become a relic of the past, but the catalyst for this appears to be the maturity of artificial intelligence. As a result, a new problem has emerged, it is becoming increasingly difficult to verify humans from machines when analysing online behaviour, and few domains are impacted by this problem as much as payments.
Two solutions that are looking to offer solutions to this problem are Amazon One and WorldCoin. We covered the latter in a recent newsletter, as World Coin shares the same founder as OpenAI in Sam Altman. The former Y Combinator president has managed to raise over $100 Million to create an “identity and financial network” which would attempt to solve problems that his AI venture has accelerated. The Worldcoin project was officially launched last week, and for those unfamiliar with the story, the project has raised eyebrows due to its use of an iris-scanning Orb to generate a unique verifiable online identity. According to Worldcoin, 2.2 million people have already visited registration sites in cities around the world and scanned their iris in exchange for 25 Worldcoins, the native cryptocurrency of the network. Needless to say, this has generated significant heat from data watchdogs including those in Britain, France and Germany who are concerned over the privacy of the data generated. Setting aside the data privacy concerns and simply considering this from the perspective of a solution to verify a users identity when authorising an online payment, I would have my doubts about the ability of the project to scale, simply due to its reliance on users physically attending a location to be fully onboarded to the network. We have grown accustomed to everything being accessible from the phone in our pocket and I cannot see enough people committing to turn up to achieve the network effects required. For reference, only 52.2% of the citizen voting-age population participated in the 2022 U.S. congressional elections, and this was the second highest for a nonpresidential election year since 2000.
Jeff Bezos’s attempt at “biometric authentication” comes in the shape of Amazon One. This week it was announced that the system will be used for payment, identification, loyalty and entry in over 500 Whole Foods and Amazon Fresh stores in the US by the end of the year. The solution (pictured above) uses a palm scanner to authorise a payment, but also identify the person paying simultaneously. Again, the concerns for the data privacy elements of this solution are also significant, compounded by a series of cases against Amazon in their handling of personal data in the past (for example). Having said that, the applications of this technology are certainly intriguing, David Birch has an excellent piece in Forbes this week which discusses the possibility to validate your age when buying a beer in Coors Field in Denver (bad news for any 16-year-olds with their brother’s ID), and also the future possibilities of layering Open Banking and instant payments into this solution, I recommend reading the full article linked below.
What is clear is that the problem of authenticating users’ identities online, especially when authorising payments is one that is growing with the rapid development of AI. How the payments industry adapts and innovates is going to be fascinating over the coming years.
Sources:
Read more on the story on Forbes and Bloomberg
How much has been deposited in Apple Savings Accounts?
Back in April, we discussed the launch of Apple’s High Yield savings account, in partnership with Goldman Sachs. Well, since then over $10 Billion has been accumulated in customer deposits.
The scheme allows Apple Card users to earn an annual percentage yield of 4.15% on their savings accounts. Apple announced this week that since launching the service, 97% of Savings customers have selected to have their Daily Cash automatically deposited into their account. When customers pay with their Apple Card, they get cash back on all purchases. By default, all purchases grant you 1% in cash rewards and 2% for all purchases made using Apple Pay.
It has not all been plain sailing since launch though, back in June it was reported that Goldman Sachs was looking to off-load their venture with the tech giant to other firms, and talks were said to have been held with American Express. This decision comes in line with Goldman’s moves to scale back its consumer business. If the firm was to execute its plans to offload this partnership, it would end its pursuit of becoming a full-service bank and refocus on its strengths in investment banking and trading.
Sources:
Read more on the story on Reuters, and Wall Street Journal
Thanks for reading, as always, if you have any feedback or suggestions for topics I could cover in future newsletters please let me know by commenting through the link below.