The last three years have seen considerable change in how the UK financial services sector operates. The expectations of consumers have shifted, prompted by the pandemic and a need for better digital financial tools for a smoother customer experience. The inventiveness of fraudsters has also put another pressure on financial institutions. There are probably more than five ways digital payments will alter the way financial services operate in 2023 – but these are what we believe are some of the key changes to expect this year.

1. Responding to the APP ‘scamdemic’

Fraudsters have already demonstrated their ingenuity, creativity and determination in 2023. Early in February, a consumer in Bristol reported losses of £8,000 in a banking app scam. He was convinced he was speaking to his bank, ushered through security measures on his app and gave the fraudster a one-time pass code to his account. His bank said he was wrong to give out the code, but eventually reimbursed his money.

It’s clear, therefore, that financial institutions and the regulators still have work to do to tackle fraudsters and ensure that customers are protected. The Payment Systems Regulator (PSR) is compiling a regulatory response to the current “scamdemic” of APP fraud across the UK. It will focus on the use of statistical fraud data, data sharing, and a host of prevention methods designed to ensure safety and innovation.

2. Being clearer about liability and reimbursement

There’s another important facet of the case highlighted above.  Where did the liability lie? In a case from December 2022, a woman in North Yorkshire also lost £8,000 to fraudsters claiming to be from her bank’s fraud department. In this incident she was not reimbursed.

Regulators are proposing different reimbursement models, with 50-50 liability gaining traction. Under these stipulations, the financial organizations responsible for sending and receiving the transaction will split the reimbursement costs evenly and make sure the customer is not left ‘out of pocket’.

But that does put the onus on identifying that there wasn’t gross negligence by the customer — where the injured party is deemed to have been careless in their actions with a failure to take care of their own funds.

In cases where the victim acts in good faith, it is likely they will be reimbursed with the split liability model. But when there are question marks over their behaviour or they do not follow explicit instructions from their bank, further investigation may be required. Setting out clear guidelines on what constitutes gross negligence will be an important task for regulators in 2023.

3. Stepping up the pace on data access to realize the true benefits of Open Banking

London’s tube network was once a global leader in public transport. An efficient form of travel that linked commuters to all corners of the city was respected but has now lost momentum and is outdated, overcrowded, and lags behind the modern systems we see in other cities and countries.

The same applies to Open Banking: the UK was among the first to offer a framework, whereby financial institutions could share customer data directly with regulated third-party providers. Initially we saw traction with examples such as customers being able to view multiple bank accounts from a single app or website. However, the scope was limited and now the UK has fallen behind countries such as Brazil, where innovation is guiding decisions.

By falling off the pace, the UK has yet to see the true benefits of Open Banking, with many institutions holding back from offering full API access to third-party providers. While other countries are moving to a wider Open Finance model where data from a large pool of providers such as insurers, pension providers, cards, mortgages, telcos and others can all be aggregated for a customer to view and manage, through a single app or website, the UK is a way off this.

There has also been little progress in offering truly innovative services based on Open Banking. For example, services where access and analysis of bank account data enables customized insurance policies, greater access to other products or even promotes better healthcare decisions.  Given the limited number of data sources available this is not surprising – it’s a chicken and egg situation, without the access to data the innovation cannot happen. The possibilities that Open Banking enables are vast, untapped and in many cases, currently beyond our imagination. To realize the benefits the UK needs to put the building blocks in place and step up the pace on access to data from a wider set of financial services providers.

4. Ensuring the decline in cash doesn’t leave disadvantaged groups behind

Cash use is in decline across the country; ATMs are being removed; bank branches are closing. Generally businesses are more comfortable accepting card payments. Figures from UK Finance show a continuous decline in cash as a percentage of transactions. In 2006, cash accounted for 62% of transactions, in 2021 it made up 15%, and forecasts show just 6% of transactions to be made with cash in ten years.

Part of this switch to digital transactions is attributed to costs associated with cash. Using cash means businesses require a float, safe, and UV lights to check notes for authenticity. They must spend time acquiring the float, cashing up at the end of the shift as well as facing the risk of theft. Compared to this the transaction fees charged for card usage seems minor.  Covid also put the dampener on the use of cash.

There is, however, an element of nostalgia that persists with cash usage and it’s important that the decline in cash is not seen as an attack on those without access to or the ability to use other forms of finance. In every corner of the UK, it’s clear that the biggest indicator of cash reliance is income, with older citizens also less likely to go fully digital.  Currently industry discussions are focused not on the headline grabbing ‘banning cash’ but rather the effective management of a decline that is happening anyway, so that groups in society are not disadvantaged.

5. Smoothing the customer experience through Request to Pay

Request to Pay provides a further tool for organizations to use within their collections journeys; the key benefit is the convenience to the customer of being able to pay without having to speak to an agent.

However, those organizations who benefit most from this emerging technology will seek to integrate this into a broader digital collections approach, as opposed to another stand-alone offering.  In doing so, they will look to bring the capabilities that Request to Pay provides into an omni-channel, scalable and flexible collections approach that is now recognized as best practice.

Further to this, the ability for banks to see data from both sides of the transaction will provide important detail regarding customer behaviours and needs, which can develop their own decision making in line with Consumer Duty expectations.

Matt Cox, VP for EMEA at FICO

Archie, a next generation payments and data platform, today launches with a promise to support the UK’s businesses, including underserved small and medium-sized enterprises (SMEs), whilst educating consumers on the vast potential of Open Banking.

Founded by Graham Nyman and Bhavesh Nayi, who have an extensive background in digital transformation and technology, Archie offers a more inherently human experience in a jargon-heavy market, helping business owners and their customers to realise the full benefits of Open Banking and data sharing.

Archie’s platform powers a user-friendly solution that enables its partners, including SMEs andlarger corporations, to create consent-driven payment and data experiences. Partners can set up these journeys in minutes, without the need for any coding and personalised to their own branding.

Small business owners can now add faster and more cost-effective Open Banking payments to their existing payment methods using ‘pay by link’ and QR codes, whilst Archie’s end-to-end solution identifies the benefits of Open Banking data to their specific business. This includes real-time balances and KYC services, but also transactional categorisation and merchant identification data that enables businesses to offer products and services that help customers manage their money better.

Recent research by Mastercard revealed more than two-thirds (69%) of small business owners in the UK believe there is a ‘cost of doing business’ crisis running in tandem with the much-publicised cost of living crisis. Archie is therefore a timely entrant to the Open Banking sector, giving business owners the ability to streamline their payment journeys and save up to 70% in transaction fees as they battle tough economic conditions.

Archie is also committed to educating consumers about the possibilities prompted by Open Banking and data sharing. A white paper created by the company to support its launch, ‘The Elephant in the Room’, has highlighted that whilst 82% of consumers would share their financial data in return for the right incentive, 78% are still unsure about what Open Banking actually is, and what it can achieve. And this is where the opportunities lie, if the benefits are communicated clearly.

Graham Nyman, Co-Founder, Archie, said: “Archie was conceived when Bhavesh and I were sitting in my garden during the pandemic. We were exploring Open Banking, and were frankly confused and turned off by the jargon. People don’t trust what they don’t understand, and this is the elephant in the room. The underlying issue stems from a lack of education by the industry, and this is something we’re seeking to address.”

“Archie is all about education and accessibility, both for Britain’s businesses and their customers, for whom data unlocks a host of possibilities. With our platform, SMEs can plug in and just pay for what they use. We think of ourselves as a speedboat on the cusp of innovation, moving swiftly ahead of the game – developing, iterating and releasing smart data products.”

Bhavesh Nayi, Co-Founder, Archie, added: “We have a passion-led, problem-solving and innovation-driven team. We’re mentors at heart, and by background, and we’re striving to illuminate society on the many benefits of Open Banking.”

“Britain’s businesses are understandably worried about their P&L. We’re providing the right tools to reduce payment costs whilst also providing data-driven insights that will help them better understand, and serve, their customers, increasing lifetime value.”

“Think about a company like Nike or Adidas. They have apps that track how far people run, how much they exercise and so on. If they were to use Archie data, it would also provide usable insights into a user’s spending behaviours. For example, they may have a monthly gym membership and be signed up to Apple’s Fitness+. Tracking this activity via the app, and data trends and behaviour from Archie, the likes of Nike could then reward their customers and provide lifestyle information that would enrich the customer’s life.”

Insolvency figures released yesterday* for February 2023 by the Government’s Insolvency Service shows that the number of registered company insolvencies in February 2023 was 1,783. This 17% higher than in the same month in the previous year (1,518 in February 2022), and 33% higher than the number registered three years previously (pre-pandemic; 1,345 in February 2020).

Leading restructuring and insolvency professional Oliver Collinge from PKF GM in Leeds said: “The large rise in corporate insolvency numbers is not surprising compared to this time last year. High interest rates, persistent inflation, ongoing supply chain challenges and weak consumer confidence continue to provide real challenges for many businesses.

Budget support needed

”We’re hoping that the Chancellor’s Budget will provide some respite for company directors. Renewed energy support as well as a reduction in business rates to help ease the current pressures would be very high up the wish list.” said Oliver Collinge.

Firms across the board are facing multiple challenges, from the continued fall out of Brexit and the pandemic, to labour shortages and high energy costs and even better-performing businesses are not immune. Businesses in the hospitality, leisure and retail sectors are particularly at risk as evidenced by the recent collapses of Flybe, Paperchase and M&Co.

Company directors urged to act now

Oliver Collinge added: “We advise directors and their advisors to act now if they are experiencing cash flow pressure. It’s critical businesses act early and seek advice if they are struggling at the moment or they think cash flow may be squeezed in the coming months. The earlier they act, the more options they’ll have to secure the business’s long-term survival.”

“It can also be challenging for firms to prepare reliable forecasts given the current economic uncertainties, and this can make obtaining additional liquidity or capital more challenging. Speaking to an expert to discuss the options available is key.”

“For struggling businesses, it’s not too late to begin negotiations with landlords and creditors to develop manageable repayment plans. Will revenues be high enough to support your cost base? Will cash flows be sufficient to deal with the additional debt burden (both formal and informal) that has accrued during Covid? Perhaps a CVA is something which should be considered or, where you may need to take the difficult decision to make redundancies to survive, consider applying for government funding to meet the short-term cash impact of this.”

February 2023 insolvencies

Of the 1,783 registered company insolvencies in February 2023:

There were 1,505 CVLs, which is 13% higher than in February 2022 and 59% higher than in February 2020;

158 were compulsory liquidations, which is more than twice the number in February 2022, but 32% lower than February 2020;

12 were CVAs, which is four times higher than February 2022, but 37% lower than February 2020;

There were 108 administrations, which is similar to February 2022, but 27% lower than February 2020;

There were no receivership appointments.

Following the release of the Bank of England’s latest Mortgage Lenders and Adminstrators Statistics for Q4 2022, Andrew Gething, managing director of MorganAsh said: “While we may be seeing signs that inflationary pressures are beginning to ease, the news of an increase in mortgage arrears shows that for many, the higher mortgage payments is creating a greater burden.

“When you also consider an increase of mortgages with LTV ratios exceeding 90 percent, the number of active borrowers who may now be in a financially vulnerable position is concerning. What we don’t know is the compounding impact of those with consumers with health or lifestyle vulnerabilities, who typically suffer more.  This is a key reason why the new Consumer Duty regulation has been introduced, to ensure financial services not only better identifies but protects the most vulnerable for the long term.

“Under the new rules, firms are duty bound to ensure customers achieve good outcomes throughout the lifetime of the product. This simply isn’t possible though if firms do not have the means to measure all types of vulnerability consistently and monitor customer outcomes. This must be a priority in a high interest economy and as more borrowers potentially fall into the vulnerable category.

“Many advisers and brokers will say looking after vulnerable consumers has been a priority all their professional life. This is undoubtedly true – but Consumer Duty has increased the scope of vulnerabilities we need to consider, the evidence we need to keep and the actions we need to take. We are no longer just concerned with financial vulnerabilities, but all potential issues including health and lifestyle, domestic abuse and divorce to name just a few.”

“Today’s statistics show little sign of an economy in recovery. Company insolvencies are continuing to edge upwards as companies buckle under the pressure of a cost of living crisis, increasing interest rates and energy costs still at a high level. The number of company voluntary liquidations (CVLs) is perhaps the most stark manifestation of economic headwinds, with a 13% increase on last year and a huge 59% increase on pre-pandemic levels.

“We have also seen a dramatic increase in compulsory liquidations, which have doubled in number since February of last year. However, notably, this is 32% lower than February 2020, showing that even with the restrictions on winding up now lifted, compulsory liquidations are still below pre-pandemic levels. This could be reflected in the high numbers of CVLs, demonstrating that companies have sought to take positive action to enter liquidation rather than waiting for hostile creditors to force their hand.

“All, however, is not doom and gloom and slowing inflation could be the light at the end of the tunnel for companies struggling to make it through the winter months.”

Lucy Trott, senior knowledge lawyer and insolvency expert at Stevens & Bolton