Five Reasons The Payments Business Is Ripe For Big Change

The wholesale disruption of the payments industry has finally begun.

Major banks, credit card companies and financial giants have long controlled payments but their dominance looks increasingly shaky. Since 2014, investors have poured $130 billion into ground breaking technologies like Blockchain and mobile payments. Fears about customer data and privacy and regulatory changes may impact the industry in unprecedented ways. Thanks to next generation payment methods that bypass banks and credit cards, the unbanked and underbanked have been increasing their  economic activity.

In fact, we believe we are witnessing a once-in-a-generation shift in the financial services industry.

The fintech revolution is changing the way banks and payments companies have won and retain customers. Traditionally, one institution could serve all of your financial needs. In the near future, business and consumers will interact with multiple companies in a more decentralized, technology-driven system.

We highlight 5 key reasons why fintech will disrupt business models of major financial institutions. These observations are based on our new 23-page report on the payments industry. 

1. A huge market opportunity awaits

The global payments industry is a $100 trillion plus market consisting of large and small companies fiercely competing for retail, cross border transactions, peer to peer services, and e-commerce. Big financial companies like Citi, JP Morgan Chase and Bank of America collect consumer deposits, provide low-cost funds to support loan origination, and facilitate retail and cross border payments. Startups developing Blockchain and smart contracts will redefine the relationship between customers, suppliers, and vendors. MasterCard and Visa are heavily spending to preserve their dominant market share in credit cards. With so much at stake, the category is attracting considerable investment.

Exhibit A: Payments is a $110 Trillion opportunity 

2. Global private investment in fintech is rising, with payments as the single largest sub-sector

Over the past 4 years, investors have spent more than $130 billion on fintech, led by Blockchain companies, including $40 billion on 1,800 deals in 2017 alone. The first half of 2018 already saw 800 fintech investments, including $2 billion on just four companies: OneConnect, Credit Karma, Armour and Robinhood. The top 10 venture capital firms accounted for over 8 percent of the fintech deals since 2014, including 500 startups and Y Combinator, each with over 100 deals, followed by Digital Currency Group and Sequoia. Over 30 percent of the VC and seed money went to payment startups.

Exhibit B: Over $40 billion invested in FinTech space in 2018

3. Mobile, messengers, and P2P models are expanding payments’ footprint

The payments industry is experiencing significant transformation because of changing consumer behavior. The industry has moved from traditional checking/savings accounts to seamless “one-click” messenger applications like Alipay, WeChat and PayTM. Payment firms such as Stripe, Adyen and PayTM are disrupting banks, credit card companies and payment processors. Stuck with out of date infrastructure, these incumbents are trying to remain relevant by expanding into adjacent markets, including point of sale and peer-to-peer services. Tech giants like Apple, Google and Samsung all provide cash-less and card-less payment solutions for consumers at the point-of-sale. Major retail chains are already using their platforms. Big tech’s sophistication and considerable financial resources pose a unique competitive threat to legacy financial services providers.

Exhibit C: Mobile transactions rising steadily at over 50%

4. Blockchain may finally upend financial institutions Blockchain will reshape many industries, but the distributed ledger technology is already changing the banking industry in ways not seen since the ATM. Blockchain is disruptive because it can bypass financial institutions altogether and allow for direct payments between between parties. At a minimum, the technology will prompt financial institutions to re-engineer their systems and value propositions. Blockchain is already making cross border payments and remittances much cheaper because of lesser need for paperwork and middle men. Transactions could be completed in minutes rather than days and weeks. Although regulators are still developing the legal framework for Blockchain, some banks are already partnering with companies like Ripple and Circle to pilot this technology across the globe.

5. Banks’ monopoly on customer data and relationship is gone

Besides deposits, banks’ most valuable asset is customer data and direct-to-consumer relationships. But the European Union PSD2 directive weakens banks’ monopoly on consumer data. With permission, the merchants or processing companies can directly access customer account information thus making payments faster and more efficient. Banks must also share their APIs, which means third party service providers can access valuable consumer data. This opens up a new opportunities for processing companies such as Stripe and Adyen who can now get access to this data and provide useful analytics and insights on customer spending to merchants who can then create focused products. Although the directive currently applies only to the European Union, we expect other countries to adopt this regulation over the next few years.