Payment platforms: innovation at lightning speed

In an era defined by digital interconnectedness, payment platforms are unsung heroes, enabling many – if not most – of our daily transactions and interactions. While payments often operate behind the scenes, they serve a vital structural function for our economies and are ground zero for some of the most exciting technological innovations emerging today.

“Without payments – and without it being slick and smooth and frictionless – you’re not going to have a successful marketplace or platform”

 

Laura McCracken, Advisory Board member of The Payment Association.

Mark Shaw, Director of Global Payments Strategy for Spotify, agrees. “Every single day, you make a Visa or a Mastercard transaction. […] When people genuinely understand the power of that network, it is absolutely mind-blowing as to where it started and where it is today”, he says.

Indeed, Visa and Mastercard were among the original platforms, and the history of digital platforms is intertwined with that of payments and commerce. Laura explains: “We think about payment products first, but what we should do is think about it in the context of commerce.” She briefly sketches out this context, beginning with the foundings of Amazon in 1994 and e-commerce giant Alibaba in 1999. The arrival of social media platforms around the year 2006 created new opportunities for users to transact; 2011 saw the advent of social commerce with WeChat. Today, WeChat has expanded into a “super app”, while Alibaba has entered the payments space with its Alipay digital wallet. With the metaverse, cryptocurrencies and Web 3 on our doorstep, payments are poised to revolutionise the financial landscape yet again. As Laura summarises: “We are innovating at lightning speed.”

Laura has also observed a growing convergence between payment platforms and commerce companies. “If you look at the commerce companies, they’re all trying to embed payments into their journey: Uber with invisible payments; Amazon with their merchant lending; eBay with Buy Now, Pay Later services and Facebook with P2P payments through WhatsApp in Brazil or India”, she notes. However, Laura also sees this trend happening in the reverse direction, with fintech companies such as Klarna, PayPal and Revolut supplementing their services with embedded commerce.

This steadily closing gap between retail and banking payments offers potentially greater value for consumers and the industry as a whole. “Embedded finance has and will continue to transform the customer journey”, agrees Derren Powell, Mastercard’s Vice President of Business Development for the UK & Ireland.

The future of payments already beckons, promising convenience, security and innovation. However, questions remain: what will it look like? And how will it affect our current financial ecosystems?

The major challenges facing fintechs today

In his role overseeing business development for Mastercard in the UK and Ireland, Derren has a bird’s eye view of the fintech landscape. “The acceleration within the fintech scene is something that I’ve never ever witnessed in any other industry”, he tells us, while also identifying two major areas that can prove challenging to new fintechs.

The first is scaling; in Derren’s view, the search for a clear pathway to profitability is now front and centre in a way that it previously wasn’t for fintech startups. He says that many new companies are looking for additional revenue streams, even at an early stage. “They’re bringing in other forms of lending or form factors or products to their stack, which is ultimately giving them other opportunities and levers which they can pull”, he observes. “Let’s be honest, growing a consumer base is hard – really hard – and costs a lot.”

Secondly, Derren has seen how building enough exposure and expertise can become a prerequisite to growth for fintechs. He says:

“Many of the fintechs we work with have truly wonderful ideas […] but ultimately being able to channel that passion and energy, and leverage and harness that talent into something that’s market-ready and can then scale and go beyond – that’s a key challenge”.

Spotify’s journey from music service to audio platform ecosystem

Harnessing a good idea and transforming it into something that can scale is a task that Mark is familiar with. “[Spotify] didn’t start as a platform company. It started by licensing and bundling music and selling that in a very linear business model”, he tells us.

The addition of a freemium, ad-supported service heralded the first evolution of Spotify, and the platform started to see the power of network effects as their user base grew. “The more users we brought to the system, the more attractive that was to advertisers”, Mark remembers. “Now that we’re at scale [with] tens of millions of creators and over half a billion users, we’re starting to think about how [to enable Spotify to become] a true audio platform.”

In Mark’s view, this could mean enhanced tools for fan-to-creator commerce, deeper engagement across niche communities and expanded capabilities for creators. He refers to new, AI-enabled voice translation tools for podcasters as just one example: “Individually, creators probably wouldn’t have the technical capability or access to build those sorts of tools, [but] we can build that […] for the benefit of the whole platform.”

From a payments perspective, Mark knows that Spotify is a participant in other payments platforms – one part of a massive payments ecosystem. “We have to manage those ecosystems and our role in those with the needs of our own platform”, he says. This involves navigating a huge range of partners, products, solutions, currencies, services and challenges. The complexity has grown as Spotify has evolved from a service into a platform, and more is yet to come.

“We started out as a simple e-comm company, to now supporting B2B payments, to embedding commerce, to even, in the future, starting to embed other financial services into the platform”

 

Mark Shaw, Director of Global Payments Strategy, Spotify. 

“It’s a really interesting juncture, it’s super exciting, but it’s challenging to do at the scale that we are”, Mark says.

UK and payments innovation: global leader or lagging behind?

Fintech startups and Spotify might have their own unique challenges, but the regulatory environment in the UK affects large and small companies alike. For his part, Ez Britton, CEO of the Centre for Finance, Innovation and Technology (CFIT) is broadly optimistic about the direction in which the UK is headed. “Where we are world-leading is on account-to-account payments. It is astonishing the flexibility that enables for fintechs to bring in new payment rails and new ways of business”, he thinks. “But it doesn’t go far enough. There are still a lot of challenges with account-to-account payments, whether it’s refunds, fraud, failures, error codes – there are so many different things we should look at.”

In Mark’s opinion, the UK has already made important strides. “In many ways, the UK is at the forefront of payments innovation and payments development. I think, by many metrics, it is one of certainly the top 10 most penetrated markets in terms of digital payment usage [and] access to a variety of payment methods”, he says, also pointing out that the UK has the Financial Conduct Authority (FCA), a dedicated payments regulator. As a structural feature of the UK’s financial environment, this can act as a lever for increased innovation. “Big transitional moments in payments are often instigated by government and regulators. They provide step-changes in platforms and infrastructures that allow fintechs to then thrive and to build new solutions for end users”, he thinks. “We’ve got more non-bank access to financial infrastructure here in the UK than many other markets. So, we have some structural advantages, but I think our speed of change is relatively slow compared to some other markets.”

“Looking at things like real-time payments, we’ve actually been painfully slow”, Mark continues. “The regulator kicked us in the right direction. But compare that with the growth of things like UPI in India or PIX in Brazil – clearly starting from a different point, [with much fewer] alternative well-functioning solutions. […] There are still structural barriers, I think – from deep in the payments infrastructure, through banking, through regulation – that we have to unlock for innovation to thrive [in the UK].”

To keep up the pace of growth in the UK, Ez acknowledges that further regulatory changes are needed, some of which may not be far off. “There are some really interesting bills going through Parliament at the moment […] about setting up the environment for us to regulate effectively so that we can put in place secondary legislation [and] we can drive some of these activities forwards”, he adds.

Investing in an open-finance, open-data future in the UK

Ez is well-positioned to comment on how government involvement can act as a meaningful investment in the economic landscape. Newly founded in 2023, CFIT is funded by the UK Treasury and the City of London in a bid to change the playing field for UK-based fintechs and remove barriers to their success. The organisation was born out of recommendations by the Kalifa Review of UK Fintech, commissioned by the UK Treasury in 2021. The review looked at the current state of fintech in the UK, its future potential and the major obstacles. It concluded that fintech could drive increased trade, jobs and inclusivity, as Ez explains, but that challenges were posed by regulation; access to scale, capital skills and talent; national connectivity and international engagement and trade. The report made two key recommendations: the founding of a fintech growth fund to invest in UK scale-ups, to the tune of £50 billion; and the launch of CFIT.

CFIT’s remit is manifold, but it centres around delivering on the opportunities that the Kalifa Review identified, Ez says.

“[Our purpose is to] look at how we can enable national connectivity. Bring all the different clusters of excellence in the fintech sector from around the UK together in order to maximise our usage of the relative skill sets. Look at what we could do around skills and talents from a national strategy perspective and start to bridge the gap between academia and business. Look at regulatory challenges and see how we can bring the regulators closer to industry, and fundamentally look at those broader macro challenges that the fintech sector faces.”

 

Ez Britton, CEO of CFIT

Ultimately, CFIT intends to serve as a lightning rod and a touchpoint for stakeholders across the industry. For Ez, it’s all about collaboration: “How can we create a coalition of the willing to really move the dial on some of these problems”

Over the course of the past year, Ez says, “[CFIT has] gone from a concept in a report to a fully funded organisation. We’ve created our first coalition already [including] over 50 organisations from across the entirety of the UK financial services industry.” The coalition’s first core challenge focuses on open finance. “The first set of use cases is around access to SME credit and consumer financial awareness”, explains Ez. “We’re working with the lenders, the CRAs [credit rating agencies], the Citizens Advice bureaux to look at how we can use underutilised or unavailable data sets to boost credit scores and create greater access to financial awareness and inclusion and lending.”

This coalition is just the first step, Ez adds, and encourages companies and individuals in the UK fintech sector to get connected with CFIT. “We are looking at fintech centres, ecosystems, security – these are all the types of aspects that we’re focused on as we go forward. If you want to get engaged, reach out!” he says. “Everyone is welcome.”

Digital wallets: identity and trust

Considering the momentum that’s building in the fintech sector, both in the UK and around the world, it isn’t surprising that Derren predicts more change to come. “The future of commerce is absolutely being shaped by an intersection of new technologies and assets that are uniquely digital”, he says. “There’s continued innovation from a consumer’s perspective: wearables; Buy Now, Pay Later; biometrics. [… It’s important that we] work with players across that ecosystem to ultimately enable and provide choice.” Derren also applauds how drastically adoption has accelerated when it comes to new financial technologies such as contactless payments and virtual wallets. Ez agrees: “I personally believe the digital wallet will be the future of our core platforms”, he says. Through APIs, a verified digital wallet can enable access to a host of other services and tools, with permissions that can be granted, time-bound or revoked at any time.

Reliance on a digital wallet does raise the stakes for security and identification, as Mark and Ez both note. Current verification methods should be optimised for more efficiency, Ez believes, and care should be taken to develop verified credentials that don’t rely on details of identity. In Laura’s professional experience, getting these verification processes right are vitally important for platforms and payment services. “Back when I was at Accenture, we did a lot of research on social commerce, and the biggest barrier was trust”, she says. “We need to get better at identity [verification] to create trust within the system.”

As platforms expand opportunities for users to contribute to their ecosystems, matters of identity and trust become paramount, agrees Mark. For example, he says, any individual is able to record a podcast and upload it to Spotify, and there’s a possibility that advertising attached to that podcast will generate revenue for the platform. However, this open access leaves the platform vulnerable to an erosion of trust among participants if there isn’t appropriate governance. “[Users] are relying on Spotify having done their due diligence”, he says. “What’s now the platform’s responsibility is moderating behaviours and extending trust both in and out of the platform?”

Unlocking growth with payment partnerships

For many platforms, the startup costs of building proprietary payment services are too great for a fledgling business. Instead, partnering with established payment platforms allows companies to focus their efforts on developing other aspects of their business. These mutually beneficial conditions are, in part, what have helped firms like Visa and Mastercard or fintech companies like PayPal and Stripe to succeed. “The power of partnerships […] is what really enables that fintech ecosystem and environment to thrive”, says Derren. “I think there needs to be a level of willingness, intent and humility to accept what one’s strength is versus what the strengths are of a partner.”

Mark echoes this sentiment. “I think when you start out, partnering is the natural piece. Financial services come with a heavy burden of regulation – and rightly so”, he tells us. Deferring the development of embedded financial services until a later stage of maturity can be a key strategic choice for startups. “Working with partners allows you to offboard a lot of that overhead as you scale and grow”, Mark says, adding that this naturally arising ecosystem has impressive range and dynamism: “We now operate with more than 40 different partners across the world, all of whom bring different things to our platform.” Still, this approach needs to evolve strategically as the business does. “It might be, over time, that people start taking some of that responsibility in-house and then start to own an increased level of that value chain”, Derren notes.

At Spotify, Mark has firsthand experience of this critical growth point. “When you think about embedding financial experiences deeper into your platform, the question of taking on a regulated status becomes more relevant”, he says. “At some point, to make that into a coherent user experience, we have to take on the burden of knitting some of those things together. There isn’t a single partner that can operate at the global scale that we do. […] Increasingly, that means we’ll start to take ownership [of financial services within the platform].”

And although Spotify’s strategic context is as a global, publicly traded company, Derren believes that the fintech industry as a whole could benefit from a similar approach. “Fintech specifically will really benefit from integrating comprehensive digital solutions, and banks as a result can stay even closer to their customer base”, he says.

A WeChat-style super app for the West?

The seamless interconnection of services has already proven to be a key to success for ‘super apps’. Epitomised by WeChat in China, super apps have quickly become a new frontier for payments and commerce alike. While the concept has thrived in Asian markets, the landscape in the West is characterised by more segregation between platforms. Major platforms like Facebook, Uber and Airbnb may be leaders within their sectors, but Europe and North America have yet to see an app that includes such diverse functions as social media, instant messaging, e-commerce and financial services. With the rebranding and new strategic direction of Twitter, now X, Elon Musk hopes to usher in a global super app.

In Mark’s opinion, however, Western markets have distinct features that make a super app unlikely. “We have so many large-scale, established platforms that it’s very difficult to envision a true super app”, he says. “Uber is not going to give up their audience and their network, because that’s the value of their platform.” Still, while Mark thinks that a path to a WeChat-type super app is difficult to imagine in the West, he notes that existing platforms are working to remove friction and build their ecosystems: “What you’re seeing with the embedding of finance and commerce into these platforms is the intent to make that experience as seamless as possible in those given environments.” The key phrase here is ‘as seamless as possible’; this remains a challenge that platforms of all sizes face. “It’s where these platforms overlap that you get these points of friction”, Mark explains, adding that such points of friction are often opportunities for other issues to arise, such as fraud, negative user experience, or further limitations on innovation.

Whether a super app is a likely prospect or not, Ez poses a broader question. “Do we want a super app? Do we need it? We’ve got all these great platforms. Is it just that we need them to be able to communicate effectively?” he wonders. As a personal example, he shares about using a carsharing app and an app for parking, both of which had unique information that, if shared between the two apps, could have improved the overall user experience. “The APIs almost certainly exist. So, I think really it is about interconnectivity”, Ez says. “But we need to see that level of communication between systems, and that might be a regulatory hurdle.”

Darren points out another potential trade-off of a super app: vanishing market opportunities for smaller, innovative products, services and microbusinesses. Mark however believes that platform ecosystems can partner with niche players to bring more innovation to users and democratise new technologies. “[SMEs] can provide protection to marginalised users in a way that traditional businesses may not. I think there is a role for platforms to play in that space.”

To go further

This panel with Laura McCracken, Mark Shaw, Darren Powell and Ez Britton was part of the Platform Leaders event organised by Launchworks & Co on the 9th of November 2023 at the Science Museum. Attended in person and online by hundreds of experts from all over the world, Platform Leaders provides an opportunity for entrepreneurs, academics, practitioners and policymakers to understand the issues and shape the debate. Stay tuned for more valuable insights from the latest conference, check out the full list of speakers and agenda, as well as videos and articles, and join the community to learn about upcoming events and more.