Let me kick off this article with a bold statement which stems from a very longstanding personal belief and desire: ‘2023 is the last year where we lift payments as a “vertical” out of the fintech space’. In the 2024 report, we will see that the investment space recognises that the true value of the fintech sector lies in viewing payments as a vital, but fully emersed part of a transaction value chain. It will then take a few more years before we see in terms of valuations that those executing transactions of any underlying and recognised value, fiat currency, digital currencies, crypto, or even data are the value builders of the future. Any exchange of any value is where we are heading and where the money must and will flow.
Much has been written about the ‘tech wreck’ of 2022, which followed a few years of pure abundance in terms of funding and valuations. I refer to the excellent overview in CB Insights’ State of Fintech 2022 report. Global funding in payments fell to its lowest level since the end of 2020. Where the last quarter of 2021 still saw 295 deals representing over USD 11 billion of investments, 2022 closed off with a fourth quarter investing in 188 deals totalling USD 3.4 billion.
Around the world, we also saw a change as Asia with 51 deals totalling USD 1.1 billion surpassed Europe (33 deals USD 1 billion) and the US (65 deals USD 0.9 billion) in payments funding in the last quarter. In terms of the amount of deals, it is interesting to note that Africa grabbed a steadily increasing share of 8%, compared to US (35%), Asia (27%), Europe (18%), LATAM & Caribbean (9%), and Canada and Australia (each 2%).
Much has been written too about the fact that later stage deals, needing additional funding for high growth business plans, had the hardest time to raise money, which is clearly demonstrated in the fact that the early-stage deals in 2022 reached a five-year high, grabbing 65% of the pool compared to 58% in 2021. Mid and later stage deals took 26% of the pool, compared to 35% in 2021.
Finally, exits tailed off – and the final quarter of 2022 made history by only producing one unicorn in payments. An earlier article in The Paypers gives additional and extensive insights.
While the IPO route for fintechs, in general, has slowed down dramatically, the key exit route for them remains M&A. FT Partners research shows that off the total exit volume of 2021 of USD 380 billion, only USD 34 billion was IPO-based, and USD 345 billion M&A. The much lower full fintech exit realised in 2022 of USD 130 billion was purely achieved through M&A.
Having said all this, there are record levels of VC ‘dry powder’: over USD 500 billion dollars are ‘waiting’ for the right target, time, and price. Pitchbook predicts that although a lot of investors’ attention will turn to AI in fintech and tech in 2023, payments are still considered a ‘darling’ in the fintech space as people and businesses continue to move online for ecommerce purposes, even in the post-pandemic world.
As a non-executive director of the UK’s only publicly listed fintech venture capital firm Augmentum Fintech plc, I have asked for one of their leading analysts and investment managers Ellen Logan, who is daily focused on this space, to couple her views with mine. Neither of us can predict where the market goes, as we live in complex and uncertain times, in a globally interconnected world, where ‘butterflies’ create opportunities and storms in unexpected places.
Most of the payment unicorns and fabled successes have been in the PSP space and often surprisingly to me we still see the emergence of new PSPs on a frequent basis. Don’t we already have enough PSPs? This is a question we often ask ourselves. Ellen has a clear view on this: ‘Specialisation is the key theme in PSP success, whether in distribution, verticalisation, or APM coverage'. Take for instant Toast in the US restaurant industry, MindBody in the wellness space, and Mews in European hotel booking – more vertical winners will emerge in other retail categories and in B2B.
Increasingly, we see a move away from pure card play PSPs as the number of alternative payment methods (APMs) is growing around the world, and so too is the market share they command. There is room in the market for PSPs that focus on a single market or region and deliver high quality, broad coverage, and management of the APMs used there. They have the opportunity to grow through direct merchant relationships but also through aggregation by the major global PSPs who still struggle when it comes to finding reliable last-mile APM coverage in less established payment markets.
So, what will happen to the multitude of standalone payment orchestration platforms we know today, and how will they fit into the future PSP landscape? These platforms tend to talk about PSPs as commodity service providers and promise payment optimisation by easier switching and connectivity. However, we think this is an oversimplified view of the value that the best PSPs deliver through the wrap-around services they provide. Large merchants are more likely to unbundle payments with wrap-around services, and they have the volumes that could make the orchestration model viable. Many of these merchants however prefer to manage orchestration in house, with some expectations such as in complex sectors, like travel, and in markets/regions with particularly challenging last-mile connectivity.
Merchants, grown savvy fast, will increasingly claw back power and make choices for themselves rather than merely ‘follow’ the PSP’s roadmap.
At a recent Banking Scene event in Brussels, the assembled audience took a view on the state of PSD2 and Open Banking in general, including the development of schemes like SEPA Payments Account Access Scheme (SPAA) and Request-to-Pay, a highly valued, easy to use, secure, and low cost alternative to online card payments.
A good five years since the introduction of PSD2 and UK Open Banking, it is fair to say that participants on both sides of the aisles are underwhelmed by its impact. Regulators tend to focus on elements of the directive that left too much space or too little, banks have made serious attempts at building value around it, but initially maybe too much for the fickle consumer and too little for the traders and entrepreneurs in need. A void that fintech and their investors quickly jumped in, nibbling away at this profitable and growing segment.
As eluded at the start of this article, the secret has always been in the intelligent reuse of data, an issue which also gained a lot of attraction on its own over the last five years.
With any new (consumer) payment technology, trust and familiarity, in particular around the use of that vital underlying data, are key to unlocking adoption. No matter how disappointed we are about the lack of speed, we see promising momentum building across A2A in Europe.
The latest data from January 2023 showed that UK Open Banking hit the 7 million user mark. Marquee deployments such as the UK tax authorities collecting self-assessment tax revenue through A2A (>GBP 2.3 billion collected in January 2023) play a role in driving this alongside the promotion of the method to customers by other well-known merchants and apps. Augmentum is an investor in Volt, driving A2A global payment connectivity to international merchants and PSPs, including WorldPay from FIS which really drives change in an established market. This and many other initiatives prove that once the trust barrier is crossed, individuals can experience the strong user experience of A2A, which is particularly smooth on a mobile due to deep linking with mobile banking apps, a marked improvement from typing in card details. A2A payments are also visibly and increasingly the driving force behind embedded payments and banking for SMEs, a vast addressable market both in and outside the vast incumbent financial services marketplace. Request-to-Pay initiatives are the hidden gem in this field. For trader, SMEs, but also large ecommerce players, a request to pay creates the opportunity for an instant order, invoice, part of the whole payment, and even consolidation with an accounting package when deployed in an innovative manner.
New technologies have already won the market in Asia in terms of consumer trust and adoption. Consumers pay using QR codes, rather than cards, and interface with digital wallets or mobile money apps rather than bank accounts. As a result, banks have risked disintermediation from a growing share of payment activity.
However, there is now an active push around the world, coming from both industry and central banks, to bring payment activity back into the banking system, or prevent it from leaving in the first place. Many markets are taking an approach that is similar to Open Banking/PSD2 with the creation of interoperable account-to-account payment systems and allowing the unbundling of payment initiation from banks. This means digital wallet behaviour can continue but banks remain the movers of money and managers of data and risk.
India is a very interesting case where the Unified Payments Interface (UPI) enables real-time transfer of funds in and out of a growing number of banks across the country. Making transfers easier and faster, along with other demonetisation measures, has digitised payments at an unprecedented rate. Customers interact via mobile money apps PayTM or GooglePay, but money moves account-to-account through the UPI network. Pix in Brazil is similar and has also seen adoption at an extraordinary rate. Another hugely interesting development is Asian central banks driving interoperability between their real-time payment systems, opening up digital payment flows across borders. India and Singapore announced interoperability between UPI and Singapore’s PayNow network in February 2023 – and Malaysia, Singapore, Thailand, and the Philippines signed a deal to integrate their QR systems in 2022.
Through these systems, even if payment interactions happen outside of banking apps, banks continue to play a role in managing risk and identity, and they can continue to extend services such as lending.
The central banks and regulators – and in uncertain times many of us with them - feel more comfortable that this activity takes place within regulated entities and can better monitor money movements and design policy accordingly. CBDCs would be a further extension of this oversight, interoperability, and convenience, and we may well see the first scaled deployments of this technology in Asia. India is pushing ahead with pilots for both retail and wholesale CBDC programmes.
Many more verticals linked to, but outside pure payments, are driven by industry and economic developments. Whereas digital lending and varieties thereof like BNPL were ‘hot’ opportunities in a low interest rate and buoyant economy. Funding and deals in digital lending dropped to their lowest levels since 2020. Klarna’s recent 82% nosedive in valuation and UK SumUp’s 60% drop in valuation demonstrate how key it is to keep an eye on macroeconomic tail and headwinds when it comes to investing in fintech and paytech. Societal developments around creating a sustainable and accessible landscape for all also have sparked the interest of governments in financial health and consumer protection. More regulation around lending and BNPL is in the making.
When combining societal and technological development into the fray, the landscape becomes more challenging and interesting. Behaviour across consumer and businesses clearly demonstrate that the move towards digitisation shows no signs of abiding at all. Wrapping our lives and businesses around technology becomes the norm, rather than bringing digital elements into it. As such, anything embedded shows all signs of inevitability. And more promising, this goes both ways. We see banks offering embedded finance through their channels and portals as well as businesses offering embedded finance through their apps.
Whoever holds the user’s trust and loyalty is in pole position, and when topped with secure and easy-to-use technology, we can see the winners. Because this happens on both sides of the aisle, the opportunities for payment technology providers are huge.
Here’s a few markers to consider when investing in or founding a payment technology company:
Banks and regulators are (re)claiming land, which is to be expected in a turbulent economic climate, and this generates a massive opportunity for those embracing anything embedded and white label.
Big techs already have the data on which most value-add payments technology thrives, they will face more stringent regulation, but they have the deep pockets to invest in safe and secure embedded environments. Banks, bigtech, and fintechs alike must prepare for true collaboration, if not co-creation.
The move from fiat money to ‘any asset of value’ is unstoppable. People look for alternative ‘currencies’ as public trust fluctuates from gold to crypto and more. Businesses look for alternative rails to transfer money on, particularly in light of geopolitical pressure and technological advances. Alternative infrastructures are being built as we speak, and blockchain-based (inter-company) banking rails will develop, often heavily supported by the incumbent banks in a range of initiatives. PSPs will have to prepare for the transfer of any asset of value, being multi-currency is no longer enough.
Trust is everything. Payments technology will have to be built around secure identities, KYC in the sense of knowing the past credentials of your customer might be the norm under current regulation, real-time security and (reusable and shareable) proof of identity will be the basis of any secure transaction platform.
Is this all there is? Not by far, in a next article we will focus on so many more new technologies and initiatives. What are the new possibilities Generative AI will bring to transactions-based environments in terms of product innovation and productivity? Can crypto ever be part of a ‘regulated financial services’ environment, and what will MICA’s impact be? Will new rails carry more and new data assets around the world and when?
For now, having digested all of the above, remember, investing in tech is investing in a company. Companies that have a never-legacy attitude towards talent, culture, collaboration, and technology are the winners to look out for.
This article was first published in ‘The Global Overview of Payments Providers 2023’, the most recent market overview and analysis of key payment providers in the B2B and B2C commerce payment ecosystem.
Conny is a fintech entrepreneur and non-executive Director, currently chairing the Supervisory Board of Cobase, a multi-bank payment, cash management and treasury software provider for corporates and a non-executive Director at Augmentum Fintech plc. As a keen advocate for young talent in fintech, she is a mentor for many startups and programmes like Techstars. She previously held global roles at Clear2Pay and FIS.
Ellen is a Principal at Augmentum Fintech, the UK’s leading publicly listed, fintech focussed fund. Within fintech, Ellen has a particular interest in digital payments and emerging technologies such as blockchain and AI. Prior to joining Augmentum, Ellen worked for startups and strategy consulting firm OC&C.
Augmentum invests in fast growing fintech businesses that are disrupting the financial services sector. Augmentum is Europe’s leading (and the UK’s only) publicly listed investment company focusing on the fintech sector in Europe, having launched on the main market of the London Stock Exchange in 2018, giving businesses access to patient capital and support, unrestricted by conventional fund timelines – and giving public markets investors access to a largely privately held investment sector during its main period of growth. Their portfolio of 24 companies includes Tide, Zopa, Onfido, and Monese.
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