The $110 trillion payments business is facing further and major disruption from the FinTech revolution that will upend the traditional financial services industry and create new opportunities for venture-backed companies with breakthrough technology, according to a new research report from SharesPost.
Today, consumers pay bills, transfer funds, and purchase goods and services through smartphones. There is strong belief that cryptocurrencies and Blockchain will be the newest technologies to transform payments.
The $1.75 trillion industry, which includes credit cards, account related liquidity, cross border transactions and domestic transactions for consumers and enterprises, will grow at annual rate of 7% over the next 3 years. Thanks to mobile devices, payments now make up 34% of overall banking compared to 27% in 2011. That number will grow to 36% by 2021, driven by growth in developing nations in Asia and Latin America.
The global payments industry presents a market opportunity that exceeds $100 trillion, including several services at least $1 trillion in market size. Checks, credit cards and other forms of non-cash payments make up the largest share at $55 trillion.
The industry also covers a broad range of services, including account services from the big banks, cross border payments/ remittances and peer to peer money transfer via messaging applications like WeChat and AliPay.
Big banks have long dominated the payments industry. However, technology companies are now disrupting their business models. At first, PayPal, Vantiv and First Data focused on processing between financial institutions and vendors. Then Square and iZettle expanded into the direct relationship between businesses and consumers, including point of sale and peer to peer transactions.
With the emergence of mobile devices, Stripe and Adyen created whole new infrastructures to manage multiple payments along the chain, including point of sale, online, peer to peer and app-based transactions. These companies can also help businesses identify customers who use all these methods.
“We are witnessing a once-in-a-generation shift in the financial services industry,” said Rohit Kulkarni, Managing Director of SharesPost. “New technology, such as blockchain and peer-to-peer networks, are creating faster, cheaper and better ways to execute both domestic and cross-border payments. Emerging technologies, evolving consumer preferences, and new FinTech business models could disintermediate the major banks and credit card companies that have dominated the payments business for decades. Many new unicorns will emerge.”
Key findings:
Payments is now the single largest recipient of FinTech investment. Over the past four years, investors have spent more than $130 billion on FinTech, led by blockchain companies. That includes $40 billion on 1,800 deals in 2017 alone. The first half of 2018 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% of the FinTech deals since 2014, including 500 startups and Y Combinator. Each participated in over 100 deals, followed by Digital Currency Group and Sequoia. Over 30% of venture capital and seed money went to payment startups.
New business models are changing the face of payments. 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. Incumbents with dated technology are trying to remain relevant by expanding into adjacent markets, including point-of-sale and peer-to-peer services. Competition will intensify as tech giants such as Apple, Google and Samsung move further into the space.
Blockchain may fundamentally redefine financial services. 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 parties. Blockchain is making cross-border payments and remittances much cheaper because of less paperwork and intermediaries. Transactions can be completed in minutes rather than days and weeks.
The bank monopoly on customer data and relationships 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. As a result, banks will be challenged in a way they have not experienced to date.
To download the report click HERE
