Stefan Merz, Chief Strategy and Growth Manager at PPRO, provides his take on this industry growth and the impact this is having on the payments sector.
“Acceleration”, “investment” and “hypergrowth” have all been words associated with the global fintech industry this year. After bubbling away beneath the surface, building momentum, global investment in the fintech sector reached US$44bn in 2020 – an increase of 14% from 2019. Despite ongoing economic uncertainty, confidence in financial technology continued to flourish. In fact, in the first half of 2021, Europe broke the record for annual investment in fintech – raising €10.4bn and trumping the €9.3bn raised across the whole of 2019.
The front and centre of this momentum has been the emergence of a new generation of payment services and providers, responding to a range of rapidly changing consumer behaviours. Whilst certainly disruptive, Covid-19 acted as an inflection point for the payments landscape. The global retail market changed trajectory from predominantly offline commerce to online commerce and the need for digital payments surged. Even the more e-commerce hesitant regions were forced to migrate online due to extended periods of lockdown. In Germany, for example, e-commerce was valued at €83.3bn euros last year – up 14.6% from 2019. Today global e-commerce is approaching $4.6trn in annual volumes and given that numerous large developed markets are still at just 10-15% penetration of retail sales – it is clear that growth in the digital payments space has only just begun.
But with the recent rush of fintech investment, what does this mean for the payment ecosystem specifically?
Opportunity on the horizon
With innovation and investment booming, this has beckoned a new wave of strategic partnerships and acquisitions within the payment sector over the last 12 months. Collaboration has always been key to the success of the payments and wider fintech ecosystem and innovators within this space are increasingly recognising the power of such partnerships to stay ahead in a crowded market.
Rather than going it alone, companies operating in the sector are partnering with other companies with varying capabilities and niche areas of expertise to allow them to break into new markets, save time and resources and rapidly escalate time to market.
For example, late last year, Mastercard announced an expansion to its instalment offering through a new partnership with TSYS, a Global Payments company. The partnership would enable consumers to use their Mastercard to split transactions into instalments before, during or after checkout. For PPRO, the acquisition of Latin American payments provider allpago acted as a stepping stone towards its ambitions of globalising the company. Meanwhile, a global leader in financial services, JPMorgan Chase has made more than 30 acquisitions in 2021, one of its largest buying sprees in years. In fact, the bank recently became a strategic investor for PPRO, to support the company in its next phase of growth after it doubled its transaction volumes and increased its global team by 60% in 2020.
Whilst there is plenty of opportunity for new payment start-ups, it is clear there is an equal opportunity for existing enterprises to evolve and grow.
Emerging trends driven by consumer demand
As the sector continues along an upward trajectory, we can see several trends and patterns emerge in response to consumer demand for greater choice and personalisation. Digital payments are now the preferred method over cash. Digital payment apps in particular are seeing rapid growth. One example, has been Bizum, the Spanish digital payment app, that allows users to send and receive payments easily, doubled its numbers in 2020 and has set itself the challenge of reaching 20 million this year.
Buy Now, Pay Later (BNPL) schemes will also continue to grow in dominance for online transactions as retailers try to keep pace with new customer expectations when shopping online. These credit-style payment offerings have grown increasingly popular amongst younger generations over the last couple of years, with over 30 BNPL offerings now competing across the globe including Klarna, Afterpay and PayPal Credit. Whilst in the future we may see a consolidation of these platforms, for now, the competition is rife.
Greater convenience is a top priority for today’s consumer, and in addition to BNPL, this will see retailers put under pressure to make payments increasingly frictionless over the next five years. Consumers have become accustomed to the one-click purchases available through the likes of Amazon and expect these quick, seamless transactions to be prevalent across all purchases, no matter what retailer they end up purchasing from.
Sustaining growth in an uncertain climate
Whilst growth itself has been no mean feat, especially in today’s rocky economic climate, sustaining growth is the bigger challenge. New market entrants within the payment’s ecosystem, who have established a model, must now focus on the industrialisation of that model. For companies experiencing rapid growth, quality can often fall by the wayside – despite being one of the most crucial components for success.
From a merchant’s perspective, reliability and a high conversion rate for online payments is a key priority, so payment service providers (PSPs) must ensure they are able to facilitate this from a technical standpoint. Whilst offering cross-border customers the freedom to pay for goods in ways that are familiar to them, businesses need to ensure that the checkout experience is a seamless one from a user perspective to avoid cart abandonment.
Global payments infrastructure that supports fast and easy payment integration will be crucial to the success of payment platforms. Integrating – and then managing – local payment methods (LPMs) is costly, complex, and time-consuming – often taking as long as a year and costing more than $1mn to integrate a single LPM. Each LPM brings with it a unique funds flow, compounded by numerous operational, regulatory and legal complexities. And that’s why there will be a leaning towards partnerships – buy vs make!
The journey continues…
The pace of change within the payments and wider fintech industry is showing no signs of slowing down. With increasing e-commerce growth, payment providers and merchants must get ready for a series of new regulations, as security threats will also continue to rise. With every new innovation comes additional risk as fraudsters grow increasingly savvy. Therefore, consumers must be offered a layer of protection and safeguarded when using new digital payment methods. After all, consumer confidence and trust above all things will drive digital payment method adoption.
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It is certainly an exciting time for the industry, but payment providers cannot afford to rest on their laurels. Further growth can be found on the horizon for those who are equipped with the right knowledge and partnerships to be able to pursue it. Even before Covid-19, 50% of online shoppers stated they will abandon a purchase at checkout if their preferred or local payment option isn’t available, and the demand for personalisation has only grown greater since then. Merchants are recognising that, not only do they need to offer a diverse range of local payment options in order to compete, but they also need the right infrastructure in place to enable them to react with agility to the changing landscape. It is now up to payment service providers to work together with global infrastructures to make this an accessible reality.