The Future of Payments (and how to invest in it)
...and round up of the biggest venture deals in the last week.
Market leadership of financial institutions in many of their core businesses are under attack from newcomers. The most significant signs of disruptive innovation in financial services have appeared in payments.
Traditionally dominated by a handful of established players, payments are now dominated by more than two-thirds of the world’s fintech companies valued at above $1 billion.
Cash may not be dead in most part of the world but the world of digital payments is evolving really fast. Transactions between consumers and businesses are mostly done online now and have been accelerated by the global lockdown in 2020.
Online payments have brought about numerous new payment methods, such as mobile money, digital wallets, in-app purchases, P2P payments and a lot more. Virtual currencies have also come in to remove the frictions in cross-border payments, remittances and data transfers by being instant, cheap and secure.
This year, the biggest payment stocks like Visa, MasterCard, Paypal and Square have eclipsed the value of Wall Street’s biggest banks. Also, we saw the acquisition of Nigeria’s Paystack for $200 million this year, a valuation that rivals the top banks in Nigeria.
Three factors are contributing to the maturing of digital payments
Regulatory policies
Nigeria’s central bank’s financial inclusion drive, which includes revising Know your Customer (KYC) requirements for lower-tier accounts. Also, payment firms are fast adopting digital currencies, which means lower oversight from regulatory authorities. However, over the past few months, with most African currencies under-pressure, fintech startups have had to deal with more regulatory scrutiny.
Leveraging existing infrastructure
Most fintech companies have found ways to engage with the existing ecosystem of banks and build their solutions off them. Successful payment firms have partnered with banks—for example, by acquiring customers that banks cannot serve or acquiring small-businesses with a software-as-a-service offering to run the business overall while a bank partner supplies the credit. An example is the Chinese fintech juggernaut Ant Group.
Customer-centric experience design
The proliferation of smartphones and shifting demographic groups to young people means that customers expect real-time, cross-channel capabilities and fast resolution of issues. Payment firms are increasingly shaping customer expectations. You don’t have to go to a physical bank branch to get your debit card. Debit card processing doesn’t have to take weeks. A customer can make a real-time payment from his or her phone to split a dinner check. There’s increased transparency on fees.
How to invest in the growth of the top digital payments firms
There is an index that tracks Card Networks, Infrastructure & Software Providers, Processors and/or Solutions companies. The index has gained about 30% this year alone and ~150% in the last 5 years.
The ETFMG Prime Mobile Payments ETF (IPAY) has outperformed both the S&P 500 (the market’s benchmark) and the Financial Select Sector SPDR Fund (tracking the major traditional banks).
Weekly Roundup
Top fintech venture deals done in the last week and the top upcoming IPOs.
Upcoming IPOs
Food delivery giant DoorDash plans to raise as much as about $3.1 billion. It could get a massive $35.7 billion valuation.
Airbnb intends to raise $2.44 billion with a possible valuation of $25.3 billion.
Venture deals
Pockit, a London-based fintech, raised $20 million in Series B funding. One of the investors was Sir Alex Ferguson (former Manchester United manager). You could also invest in them in their ongoing crowdfunding round.
Pave, a company that allows you to manage and benchmark compensation, raised $16 million in Series A funding led by Andreessen Horowitz.
Fisdom, an investment advisory firm, raised $7 million in Series B.
Amount, a Chicago-based provider of digital banking services to financial institutions, raised $81 million in Series C funding.
Monzo, the U.K.-based challenger bank, raised $81 million.
Step, a San Francisco-based financial services company for teens and families, raised $50 million in Series B funding.
ConnexPay, an Atlanta-based payment technology company, raised $61 million in Series A funding.
CredPal, a Nigerian-based consumer credit technology company, raised $1.5 million in a recent funding round.