With the almost historic levels of disruption caused by COVID-19, one might have expected deals in every sector, financial and non-financial, to have all but dried up over the last few months.
But data from PitchBook shows that there is in fact a very revealing exception: the payments space. Last year (2019) was the biggest ever for paytech deals – over 300 acquisitions and investments worth a combined USD$77bn. This year, in the three months from 1 March there have been even more deals than that in just one quarter – with 420 recorded. These deals were of relatively low value – approximately USD$12bn in total – but the rate of them is remarkable1.
The deals span a wide range of payment related areas, from payment platforms themselves (involving the likes of Kyash, ADDI, Karma), to ecommerce platforms (Stripe, Finix, AirWallex), the software that supports them (SpotOn, Bill.com), online payment services such as ‘buy now pay later’ (Klarna, EVO, Worldline), business service management (OrthoFi, Apsiyon), and content management and identity authentication solutions2 (Fundbox, Red Flag, Asensys).
That there have been so many deals when we are supposed to have been in a crisis is truly striking. It isn’t that fintech as a whole has been insulated from the effects of COVID-19 – activity in other segments has significantly dropped. Across fintech as a whole, predictions are running at around USD$60bn of deals in 2020, whereas in 2019 Pitchbook recorded activity worth more than double that at USD$143bn.
It is payments specifically that has held its own. It shows the continuing confidence of investors to put their money behind what they recognize as central to the future of the digital economy.
But this isn’t the whole of the story either. The other aspect that leaps out is the significant proportion of deals that have involved non-financial services businesses rather than ‘traditional’ fintechs or banks.
In recent years, we have become accustomed to big tech-based players such as Uber and Airbnb running their own payment systems outside the banks’ payment rails. Now, the lines are blurring further as the distinctions between traditional FS businesses, ecommerce players and non-banking payments institutions, supported by cloud service providers, narrow. The whole economy is becoming a digital platform as the digitization agenda accelerates. There are parallels with the model we already see in China with its highly developed digital banks and huge marketplace players like Tencent and Alibaba.
Consequently, we need to rethink our mental models for what the FS payments ecosystem is as new and different players increasingly disrupt the market. The disruptors in payments used to be traditional fintechs; now they are also being disrupted by other new players.
For banks that are trying to compete and find a niche in the new payments ecosystem, this latest data shows that they are competing not only with fintechs but with a rapidly widening set of other businesses too who are, in various ways, occupying the end consumer-facing space squeezing traditional providers like merchant acquirers and banks into a commodity pressed middle. These consumer-facing applications, across retail and B2B, are primarily designing new or re-imagined digital services using payments data and other data sourced through APIs.
Interestingly enough, the digital change doesn’t just stop with new end user service design. An ecosystem of software developers has emerged that is also rewriting business software to upgrade payments platforms themselves taking on a traditionally slow moving part of the industry. And other “content” providers are enriching payments with adjacent services in the areas of identity, security, meta data management, security and open banking.
For me, banks’ response must be to focus less on developing their own digitized products and services (although these are important of course), and a material pivot to partnering with fintechs, ecommerce players, software developers and Cloud services by connecting with them through their APIs.
It will be fascinating to see what the rest of the year holds for payments activity. I don’t foresee a let-up. Payments are not only the lubricant in the ecommerce and financial services markets, but the data they generate is at the heart of the digital value chain. Payments data enables service providers to really understand customer behaviour and create the right services, at the right time, in response to emerging demand.
In the digital economy that will likely accelerate in the wake of COVID-19, the payments ecosystem will be one of the most fiercely contested, and important, battlegrounds. I welcome the creative destruction that we will see as we emerge from COVID-19 far more digital than when we went in.
Original article by Anton Ruddenklau, Global Co-leader, Fintech