Over the last six years, since the introduction of the first banking app in the UK, we have experienced a revolution in the way that consumers behave in the retail landscape.

 Around 20 million people around the country now reach for their contactless card when they pop out to pick up a sandwich at lunchtime.  Instead of visiting an ATM or a bank branch, they then use their mobile phone to check their bank balance on the go. During 2016 30 mobile banking transactions were recorded per second in the UK – that’s nearly one billion in total for the year, an increase of nearly 60 per cent on 2015.

Changing players in the market

Banks are increasingly under pressure to keep up, not with other banks, but with technology companies who are coming up with ever-more clever solutions that feed today’s consumer needs of speed and interactivity.

In the meantime, high street retailers are finding themselves competing with the very manufacturers who supply the goods to their stores, as those manufacturers offer digital sales and fast delivery, as well as point of sale finance, at a click of a button.

New risks and opportunities

Whether you are a retailer, a manufacturer or a financial service provider, as traditional customer loyalties are being broken down, the old communication and marketing techniques are being set aside.  Although businesses are doing their best not to feel left behind, the pace of change risks them being dependent on just a few youthful “tech-savvy” individuals to drive real growth, and there is risk if that innovation is not balanced with regulatory and legal compliance.

But with change comes opportunity: not only are the boundaries between different financial services becoming blurred, the boundaries between financial services, retail and digital services are becoming blurred too.

For example, innovations being driven by the UK’s Competition and Markets Authority and the European Union mean that, during 2018 and 2019 we should start to see online businesses having the capability to display customer real-time current account balances and even allowing their customers to make online bank transfers, all from an own-branded website, essentially delivering an own-brand online banking mini-site. This is because payments law is being updated to increase competition in this space, so that non-banks can effectively disintermediate banks.

Whilst players in this market will need to apply for Financial Conduct Authority (FCA) authorisation, the potential benefits to those who provide these services successfully are considerable. Not only will they be able to increase their screen time and brand awareness, the data that these businesses may have access to will have the power to drive new products, partnerships and strategies. Businesses will potentially have the power to know when and how much their customers are paid, where they shop and how they spend money and their time – subject, of course, to compliance with data protection law. This data could be the golden key that unlocks the potential profitability that is locked into rewards programmes. Plus, for lenders, there is the prospect of using the access to current account data to speed up credit decisioning and pre-assessment for loan eligibility, whilst at the same time improving credit risk management.

Point-of-sale finance and the alternatives

There is no doubt that finance is becoming increasingly point-of-sale based. The days of consumers walking into a bank to discuss a loan or making a loan application by post in order to make a large purchase are numbered. UK online retail sales hit £133bn in 2016, up 16% year-on-year, and globally, online retail sales are estimated to reach 8.8% of total retail spending in 2018. Point-of-sale finance, sometimes promoted as “buy now, pay later” lending is helping to drive that continued growth, particularly in jurisdictions where credit cards are not widely used. Rates and repayment amounts are often low, and consumers who previously steered clear of credit but who are keen to make a particular purchase will often find themselves quite happy to spread the cost of that single purchase over a few months.

Equally, as technology changes, it is becoming clear that consumers are no longer particularly bothered about owning the goods that they are using. We have seen this in the huge increase in consumers taking cars on a “personal contract plan” – a form of hire purchase credit which allows them to make monthly payments to reflect the depreciation in the initial years before trading it in for another car. This has contributed to a striking increase in consumer credit, which grew at an annual rate of nearly 11% in 2016. Concerns have been raised about PCP, as there is a risk that consumers can become “locked in” to a cycle of credit because the residual value of the vehicle is less than the remaining balloon payment that is owing at the end of the term. There is also concern that firms offering this kind of credit are not properly assessing affordability at point of sale. There is no doubt that assessing affordability of finance at point of sale of a larger asset like a car is tricky, particularly online, so the regulatory risks that then arise can make offering this type of finance unattractive for the uninitiated provider.

A popular alternative is to provide goods on hire – the important difference between hire purchase and hire being that if you offer goods on hire you don’t give the consumer the option of keeping them at the end of the hire period. Not only can launching a hire product result in an easier FCA authorisation process (a limited form of permission may be available), there is still the ability to upsell the customer the latest technology in 2 or 3 years’ time.

There is still plenty of scope for nimble firms to use technology to streamline the design, quality and the delivery of these types of finance in ways that will challenge the larger players.

Looking to the future

With this ever-changing market picture, firms are investing in innovation like never before. The good news is that while the regulatory environment can be challenging, it can also be an enabler.  Furthermore, government and regulators are keen to support innovations that drive improved customer outcomes. So the key to success is twofold: understand the regulatory environment and the policy behind it, and understand the customer benefit being driven by your innovation and how it fits with those policy objectives.