In the complexities of today's economy, with a high level of income disparity, widely spread income volatility, and sub-optimal business investment, exacerbated by an ongoing global supply chain breakdown and increasing inflation world-wide, businesses are facing tremendous obstacles to generating growth and prosperity. Today we’re examining trends in digital payments with an eye to a future where businesses will be able to focus on what they do best, unencumbered by friction and complexities, particularly as we head into what most likely will be an economic downturn in 2023.
Becoming more efficient during an economic downturn: how to digitize to optimize
In an article published by the Harvard Business Review in June of 2022, Vijay Govindarajan and Anup Srivastava reported on ways for businesses to best gird themselves for a slowing economy. Govindarajan and Srivastava recommended looking at companies that remained buoyant during recent recessions. Recessions are typically short, followed by long periods of economic stability and even prosperity, so the trick is to weather those storms and be best situated for the post-recession bounce. Govindarajan and Srivastava use Samsung’s navigation through the 2008 recession as an example: Samsung doubled down on a handful of their stronger products, invested in research and development (R&D), and improved the technology of their most revenue-generating devices, emerging from the recession at the top of their field in those areas of focus. Samsung’s focus on and investment in technological improvements during a recession seems counterintuitive yet it is the proven winning solution to resiliency during a downturn.
As we move through Q4 of 2022 and head into 2023, we predict companies will be investing in technology, and optimizing their digitized practices to build efficiencies for their business. It’s now common knowledge that digitization is a surefire way to ensure growth and resiliency. In a 2018 National Bureau of Economic Research paper, Brad Hershbein and Lisa B. Kahn published their finding that during recessions dating back to the end of WWII all the way to the recession of 2008, companies invested most in developing their technology set. This is because digitization is a panacea during economic downturns: when you take full advantage of technology in your operations, you provide opportunity for greater time management, more innovation, and more creativity, which in turn allows you to produce products and services that best suit the future needs of your customers.
Diversification creates resilient businesses
As we face a potential recession, we suspect companies will also focus on building more diversified partnerships and enhancing collaboration. By diversifying providers, companies will help defend against an unstable market plagued by volatility. If you have multiple providers, you protect yourself from reliance on potentially vulnerable parties. For a corporation operating in this environment, as rates go up, and banks tighten their lending, working with multiple companies to facilitate payments will allow for greater financial security. Even if you partner with a larger bank as your primary lender or on your facilities credit line, partnering with a tech company like WEX to facilitate your payments will give you increased flexibility when paying suppliers.
Abundance of engineering and strategic thinking talent coming out of fintech startups
With volatile interest rates, rising inflation, and unhappy stock market valuations, there’s been a near halt to the flow of venture capital funds into the fintech sector in the last seven months - venture funding for fintechs overall dropped 23% in Q2 2022 from the first quarter. As a result, companies have laid off workers at a much higher rate in the past several months than in the previous period. As reported in The Paypers, 4,189 fintech employees were let go across 45 layoff events in the first half of 2022. The prices for publicly listed fintech companies have gone down 70% in the past nine months, and we anticipate a great culling of fintech companies in the coming months. What can come with these layoffs is opportunity - a number of talented technologists and financial experts are entering the job market. Traditional financial institutions might embrace the availability of fresh talent and in all likelihood, banks and some of the more stable, senior fintechs will hire more talent and broaden their bench.
Public companies with stable revenue streams will then be primed for even greater expansion of their offerings and for developing new revenue streams. As this shift in talent acquisition occurs, new technologies, products, and processes will be imagined and realized.
Partner with nascent fintech companies to marry their innovative ideas with your strong foundation
In light of these changes, it seems likely fintech start-ups will increasingly partner with senior, seasoned financial technology companies. Being innovative and being able to share those innovations with a target audience require two different skill sets and two vastly different resource pools. While fintech start-ups often have the chops and resources for the former in spades, it is those seasoned, more established, and larger firms that have what it takes for the latter. In a recent episode of the “Inside the Strategy Room” podcast, McKinsey strategist, Miao Wang, reported on the mutual benefits of such collaboration and how the growth in digitization over the past few years has driven a greater need to innovate. This drive toward innovation comes from a need to compete to survive. This is because many of today’s most significant innovations are being created by a new generation of businesses that are almost entirely digital. These companies are harnessing technology to offer more appealing products and services, changing the competitive landscape dramatically. Wang explains that the increasing emphasis on innovation incentivizes old guard tech companies and tech companies that are just starting out to form partnerships. Simultaneously, with younger companies facing hardship, executives and founders newly on the scene will see greater value in collaborating with established institutions than in previous years. Together, large and small, and old and new companies will build synergies, share projects, and generate new ideas and technology.
How innovative, disruptive technologies are changing the world of payments: The future of the wallet
Increasingly, the consumer-led experience is blending with the business to business (B2B) experience. What we all experience in our personal lives is also now an expectation when engaging in B2B experiences. Recent developments in technology – from Venmo to digital IDs, Netflix to Amazon, wearables and apps – have changed our norms around the speed of transactions. Whether your product is consumer-facing, or B2B, customers, clientele, and business partners are all trying to speed up the process, and remove any and all pointless delays.
As a result, corporations are looking for ways to make payments easier. One example can be found in the now-ubiquitous tap-and-go technology for plastic cards. What we learned was that it is not that much easier to take a card out of your wallet and tap it than it is to take a card out of your wallet and swipe it or dip it. So while tapping the card was cool, it really didn’t remove friction. Fintechs went back to the drawing board and came up with the digital wallet. Our prediction is that wallet technology is going to continue to be developed in the next year or two, and digital wallets will see greater adoption in 2023.
What makes the digital wallet interesting is that it actually truly does remove friction – not only can I tap my card, but I no longer need to even have the card with me, because it’s stored in my digital wallet on my smartphone. That opens up all kinds of use cases. It also simply makes life easier. Unsurprisingly, the digital wallet phenomenon is bleeding over to the B2B segment. Once corporations have digital wallets up and running, small, everyday processes become quicker and more efficient, which saves significant time in the long run.
Digital wallet adoption is particularly relevant for small businesses and a little bit less relevant at an enterprise level which has its own unique needs - but for small businesses the bleed over to B2B from B2C with digital wallets is happening.
One way to think about the uptick in digital wallet usage by businesses, is to consider a kind of “consumerfication” of B2B payments. By reproducing the speediness and elegance of consumer apps, companies can keep in step with the times while increasing efficiency. One great feature of WEX’s SMB product, Flume, is digital checks, allowing for rapid and low cost of payments to suppliers. Digital checks are just one example of wallet technology that will shape the future of B2B payments.
How does payments technology tie to building a more sustainable business model?
Paperless, digitized, task-automated systems are more environmentally friendly practices which make for greater sustainability. The data hubs required to power those systems are not as sustainable. A focus on reducing data hubs will be an important part of the sustainability equation for digital payments technology companies.
One trend we anticipate in the near future is a new offering where fintechs will act as a consultant in the buying process for corporates. Companies will rely on data housed by fintechs to assess which suppliers are the most sustainable, and to learn the best route and the best marketplace for them to transact. If your corporation is making a lot of large buying decisions annually, your payments provider should be able to tell you where to buy your products and materials that will allow your company to make the most green buying decisions. Let’s say you are in the market to buy office furniture – maybe you go to a big box office supply company and buy it, but if you have some direction from the data supplied by a company like WEX to know which companies that are selling furniture are doing it in the most environmentally-friendly way, you can easily convert those buying decisions into the most sustainable choices for your business. Ideally the vendor options would all be ranked, and you could easily draw out which furniture company has the highest environmental rating. This fintech service will help buyers choose more wisely.
This is a future trend we are anticipating – what consultative offerings can payments technology companies give to a buyer that are value-added. Smaller and mid-sized companies with fewer resources and less time to focus on environmental improvements to their supply chain would benefit tremendously from this resource. In the near future, there’s good reason to believe these companies will begin to rely on their payments providers for this kind of information. Executives at many companies are concerned about sustainability and want to improve, but may not have the resources to adjust their practices. Fintechs can fill that role. They have the data.
The future of crypto
As Time Magazine’s Alex Gailey and Ryan Haar recently reported, Bitcoin and Ethereum are down more than 50% from their all-time highs in late 2021. While there have been small surges in recent weeks, the crypto market as a whole is largely stalled. While purely speculative, there’s some chatter that the future internet/Metaverse/VR/AR will help digital currency survive this downward spiral, and potentially give it wings to thrive and become a realized currency.
There are good reasons to be skeptical of this analysis. Crypto has been around for five years with zero B2B use cases. Current forms of payment – both the movement of money, and the data that monetary transactions generate – are both cheap and reliable. Blockchain doesn’t provide enough value when stacked up against the incumbent technology. This is undeniable when it comes to B2B payments, and one could argue that crypto doesn’t win in C2B payments either. It’s widely acknowledged that crypto does provide a speculative form of value storage. We have created a new speculative commodity class that people can invest in, but we haven’t been able to find a practical application for it.
In recent months, Ethereum has transformed cryptocurrency’s relationship to energy usage. Ethereum, conceived in 2013 by programmer Vitalik Buterin, is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of the platform. Among cryptocurrencies, Ether is second only to Bitcoin in market capitalization. Usually, crypto’s energy expenditure is extraordinarily high. Bitcoin, the world’s largest cryptocurrency, currently consumes an estimated 150 terawatt-hours of electricity per year. This accounts for more than the entire country of Argentina, which has a population of 45 million people. Producing that energy emits some 65 megatons of carbon dioxide into the atmosphere annually which is comparable to the emissions Greece produces. Ethereum has come up with a solution designed to cut the cryptocurrency’s energy consumption by more than 99%. Not only does this mean crypto is now more sustainable, it’s also much more cost-effective to run. Does that mean that the value equation starts to change? We believe it’s way too early to know. But it’s something we’re watching and anticipate potential disruption from this sector in 2023.
How Artificial Intelligence and software as a service will continue to develop and evolve
AI was described by Google CEO Sundar Pichai as “more significant than fire or electricity” in terms of the impact it will have on human civilization. Future trends in AI run the gamut from large language models to generative artificial intelligence to multimodal learning. In digital payments, we anticipate future trends in AI will develop in myriad ways. For WEX in particular, AI could have a range of possible usages. WEX is exploring ways to use AI to augment the best segmentation of its customer supplier bases. We hope to help companies use AI to determine the best way to pay their suppliers whether it be through check, ACH, or via virtual card. AI is already being used to develop strategies, to enhance customer service, to expand on market research, to drive autonomous cars, to automate medicine, and more. It seems inevitable that AI adoption will continue to expand in 2023 as businesses develop new tools, processes, and technologies to drive innovation.
The future of digital payments technology is built on the foundation of a strong bench
Recessions are notorious for being a pressure-cooker exercise in change management, creating the need to be flexible and ready to adjust paired with a need to provide your staff with the tools to be nimble right alongside you. We all know we are only as good as the people with whom we surround ourselves and if you do nothing else in 2023, focusing on a strong culture of employee engagement and leading with your values will be the needed guiding light through the recession we most likely will be facing. Supporting employees takes many forms. Ensuring that your operating processes are efficient, and that employees are working with thoughtfully developed technology, is one way of creating a positive and motivating work environment.
A lot to be hopeful for looking forward to 2023
There is a lot to be hopeful for in the coming year. Despite friction from supply chains, inflation, and labor shortages, small business owners are forecasting a strong 2023, according to a report that came out this month from Bank of America. Surveying more than 1,300 small business owners nationally, the bank found that revenue expectations are at a seven-year high, and expansion plans increased significantly since earlier this year. Over the next 12 months:
- 66% of business owners expect revenue to increase—a seven-year high
- 52% plan to expand their business—up from 37% this spring
- 83% plan to obtain funding for their business—up from 70% this spring
Small and midsize businesses (SMBs) could be a focal point as you develop your 2023 strategic plans if the data is true and SMBs will ride out this storm better than others.
While there is a lot of concern surrounding future economic forecasts, small businesses are feeling good about their prospects, and there are some exciting technological developments surfacing that will impact businesses of all sizes and reduce friction and complexities in our operations. Add to that a great pool of talent at the ready and we should feel capable of weathering whatever is coming. Our best path forward is to support our customers, drive innovation by capitalizing on emerging technologies, augment sustainable practices, and build an employee community that balances talent optimization with encouraging an open mindset to the possibilities ahead of us.
Harvard Business Review
Center for American Progress
Columbia University School of Climate, Earth, and Society
University of Cambridge, Jude Business School