As we look back on the madness that was 2020 and look towards the future of fintech emerging in 2021, we see an acceleration of numerous trends that are reshaping the payments marketplace.
COVID-19 drove significant changes in commerce and payments behaviour, boosting ecommerce and mobile payments. Cash declined at an unprecedented pace and many countries are approaching a cashless end-state.
The acceleration of ecommerce spurred the ongoing globalisation of merchant payments. Meanwhile, the pace of M&A in merchant payments shrugged off the pandemic and the ongoing trend towards global consolidation in merchant payments continued unabated.
Cross-border payments, both P2P an B2B, are being reinvented and innovators are thriving with new proposition-enabling technologies.
Cryptocurrencies exploded in both valuation and legitimacy and there are no longer questions as to the viability of the medium as both a store of value and a means of payment.
Continuing a trend that began in the US throughout the 2010’s, SaaS platforms are now increasingly major actors in payments globally, with rest of fintech on the horizon.
Payments, which for decades had migrated towards specialisation and separation from the rest of financial services, now forms the launching pad for fintechs to attack banking and lending revenue pools using superior digital technologies.
We review each of these trends in the sections that follow.
I. Impact of COVID-19 on the payments industry
For the past year, COVID-19 has been a catalyst for disruption and change in payment behaviours, while abnormal commerce patterns altered the fates of payment services providers. The pandemic has catalysed digital commerce and digital payments, at the expense of cash. Regrettably, travel has also remained suppressed for more than a year. Some payments providers (e.g., retail-focused PSPs) have benefitted while others (e.g., T&E card issuers) have been damaged by these trends.
Consumer Shift: POS to online
COVID-19 lockdowns drove retail spend online. This was particularly pronounced when lockdowns were most strict. While some of this behaviour will persist, the point-of-sale is far from dead. As illustrated in Figure 1, POS card spend rebounded well in Europe during the summer as prevention measures were relaxed and consumers happily returned to cafes and retail shops. We fully expect and hope for a return of in-person activities and payments this summer.
Figure 1: Card turnover growth – Ireland & UK examples
Consumer Shift: cash to cards
COVID-19 accelerated the multi-decade shift from cash to cards by altering the mindset of consumers away from cash, a payment form that is now perceived as unclean by many. Consumer usage of cash dropped dramatically during the pandemic and this change in behaviour seems to be persisting. As shown in Figure 2, the pace of cash-to-cards shift in several European markets accelerated by over 5x during the pandemic.
Figure 2: Cash to cards – Spain & Switzerland examples
Sources: Bank of Spain, Swiss National Bank
Acceleration of contactless and mobile payments
COVID-19 correspondingly accelerated consumers’ preference for contactless payments. Contactless payments were already growing rapidly prior to COVID-19, but the pandemic accelerated this growth. As shown in Figure 3, monthly growth in contactless payments in select European markets accelerated by 2x post lockdowns. In fact, over 80% of all Visa card transactions at point-of-sale in Europe are now contactless.
Figure 3: Card turnover growth at point-of-sale – Switzerland & UK examples
Much of the growth in contactless transactions comes from mobile payments. Mobile payment schemes are now ubiquitous, and many consumers turned to their phones as a replacement for cash. As shown in Figure 4, mobile schemes benefited from this rise in utilisation with 1.5x or more incremental increases in usage during the pandemic.
Figure 4: Mobile payments – Poland & Turkey examples
Sources: Polis Payment Standard, Turkish Interbank Center (BKM)
Sector winners and losers
Dramatic changes in spending behaviour triggered by COVID-19 rippled through payments verticals idiosyncratically over the past year. The travel and (physical) entertainment sectors were most negatively impacted with potential for lasting impacts for years to come. Restaurants slowly recuperated as the industry gradually started to adapt to delivery and take-out business models, yet many continue to struggle to survive even today. Payment providers that were over-indexed on travel and entertainment pre-pandemic have had a tough year (Amex revenues declined 29% in Q2 2020).
Digital entertainment and online retail, however, benefited from pandemic-led behavioural changes. Grocery merchants thrived as consumers were forced to displace eating-out with eating-in. Online retailers profited from a dramatic channel shift as buying moved almost entirely online for stretches of time. These sector impacts are illustrated from Ireland in Figure 5. Payment services providers servicing these sectors benefitted, often with record performance and leaps in valuation through 2020.
Figure 5: YoY card turnover growth by sector – Ireland example
Source: Central Bank of Ireland
Figure 6: COVID-19 impact winners
Source: Flagship Advisory Partners
II. Accelerated globalisation and consolidation of merchant payments
Ecommerce naturally gravitates towards cross-border expansion as virtual commerce presents fewer barriers to expansion than physical commerce. Leading ecommerce companies are now global, or rapidly becoming global. These merchants demand payment services which are local, but ideally from a small number of vendors who are globally capable.
Localisation is key to optimising payments. Local payment methods, local smart routing, local languages and currencies are all needed to optimise merchant sales conversion. However, using local payments vendors in every country is an untenable operating model. Therefore, global merchants demand payment service providers who can localise across many countries or regions. This demand for global and local payments is creating clear winners, who are often naturally ecommerce focused.
Adyen is clearly winning on the base of its unique global footprint built to serve the needs of multi-national merchants. Despite 2020 being a challenging year for the travel vertical (a focus for Adyen), Adyen still generated 37% growth in gross revenue, including 66% growth outside of their European home region. There are also several PSPs that specialise in alternative payment methods (APMs) and local payments who are also thriving, boosted by strong demand for their localisation services during the pandemic. PPRO, Netbanx, dLocal, PayU, and AsiaPay are all examines of PSPs that support both merchants and other PSPs by providing extensive coverage of APMs as well as local acquiring connections.
No one illustrates the benefits of global ecommerce enablement better than PayPal, who benefitted significantly from both customer and investor demand during the global pandemic. PayPal’s active user base, processed volume, net revenue and share price all accelerated in 2020 as shown in Figure 7.
Figure 7 - PayPal’s 2020 acceleration
Sources: PayPal annual report, Yahoo! Finance
Global card schemes also thrive based on the demand for cross-border commerce. Visa and Mastercard are two of the most global companies in the world having for many years worked to address the market need for global payment networks. Visa and Mastercard today drive a disproportionate amount of their profit from cross-border commerce given that scheme fees on interregional transactions are 5-15x higher than domestic scheme fees. In 2020, while the global macro-economy contracted, Visa and Mastercard still managed to grow their transaction volumes at 2% and 1% respectively, though each clearly suffered from the contraction in travel caused by COVID-19.
Finally, merchant demand is not the only driver of accelerating globalisation in payments. Operating scale and synergies also motivate the biggest companies in payments to get even bigger via global M&A. Companies such as FIS, Global Payments, Nexi/Nets, and Worldline continue to buy companies with a focus on operating scale and synergies. Worldline recently closed its merger with Ingenico and Nexi will close on its merger with Nets.
Figure 8 - Globalisation winners
III. Cross-border payments thriving on innovation
Cross-border trade continues to grow (7%), despite the pandemic. We estimate that B2B cross-border payments will account for more than USD 30 trillion in 2021. Businesses working with suppliers and partners in international markets operate complex supply chains and rely on timely and reliable cross-border payments. The vast majority of cross-border B2B payments, however, still flow through traditional correspondent banking, which is typified by high costs, often slow speeds, and lack of traceability.
Specialised cross-border PSPs are attacking traditional corresponding banking payments and winning market share with superior technologies and propositions enabled by global networks of virtual accounts and rapid money movement. Banking Circle and Currencycloud, for example, are emerging winners in this category working with a variety of one-to-many client segments to bring cross-border payments propositions to market. There are also winning cross-border payment PSPs that are more end-user focused (i.e., marketing directly to corporates), often using software integrations as a key means of differentiation (TransferMate, AFEX and Ebury are examples). Interestingly, large treasury banks now adopt a ‘if you can’t beat them, then join them’ mentality towards cross-border fintechs.
Gig-economy payouts have emerged as a lucrative and fast-growing segment of cross-border payments. Global gig-economy payments generated close to USD 300 billion in payment volumes in 2020, with a growth of 17% (according to Mastercard). Gig-economies are also not well served by traditional bank-driven cross-border payments. PSPs such as Payoneer, Transpay (acquired by Mastercard in late 2019) and Airwallex have emerged as strong category specialists who are thriving by exploiting new technologies such as virtual cards and Visa/Mastercard original credit transaction (OCT) technologies.
Lastly, fintech specialists such as Wise (recently rebranded from TransferWise) are also thriving in P2P cross-border remittance with impressive topline and margin growth, despite constant pressure on FX spreads. Wise achieved revenue growth of 70% in 2020 benefiting from increased customer demand during the pandemic. Part of Wise’s success also comes from its expanding customer segment focus and aggressive partnerships (e.g., Mastercard, Visa and Alipay).
Figure 9: Cross-border & P2P winners
The full analysis has been published in The Paypers' Who’s Who in Payments Report 2021. To learn more about the payments industry's high-rising trends, M&A activity and investments, startups to watch, along with detailed accounts of all the relevant capabilities and distinguishing portfolios of players activating in the B2B and B2C ecommerce space, download the full report here.
About Joel Van Arsdale
Joel is a trusted global advisor to the payments and fintech marketplace with more than 20 years of experience around the world. He is a recognised thought leader on strategy and value creation in digital payments. Joel is also a trusted M&A advisor having advised clients on more than 100 M&A transactions globally.
About Erik Howell
Erik combines practical experience as Head of Transactional Banking for a publicly traded bank with deep expertise as a trusted advisor on payments strategy. During 20 years in payments, Erik has developed and implemented winning roadmaps, growth initiatives, new digital channels, technical migrations, successful partnerships, and M&A.
About Yuriy Kostenko
Yuriy is a senior payments specialist with over 15 years of payments industry experience. His primary focus is M&A support where he has advised clients on dozens of M&A explorations and completed transactions. Yuriy also supports clients on growth strategies and is an expert on ecommerce and payments market structures globally.
About Anupam Majumdar
Anupam is a senior payments advisor with 15 years of payments advisory experience across Europe and Asia. Anupam specialises in B2B payments, transaction banking, bank payments and merchant acceptance, and has led and delivered more than 50 engagements in these areas.
About Elisabeth Magnor
Elisabeth is an advisor with 6 years of experience in the payments and fintech. Elisabeth has broad experience across Europe on digital payments, merchant acceptance, card issuing, and payments processing and has delivered a variety of payments strategy and M&A engagements.
About Flagship Advisory Partners
Flagship Advisory Partners is a boutique consultancy and M&A advisory firm focused on payments. We provide strategy, delivery, and M&A support to financial institutions, PSPs, fintechs, technology providers, brands, and investors. We are based in Europe but also serve clients in North America, MEA, and elsewhere globally.
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