2021's changing payments landscape (Part I)

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Joel Van Arsdale along with a team of experts from Flagship Advisory Partners have put together an extensive analysis of the current payments landscape, from facts, figures, to a dissemination of the high-rising trends and future prospects

 

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. 

  1. 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. 

  2. 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. 

  3. Cross-border payments, both P2P an B2B, are being reinvented and innovators are thriving with new proposition-enabling technologies. 

  4. 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. 

  5. 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. 

  6. 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

Sources: Central Bank of Ireland, UK Finance

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

Sources: Swiss National Bank, UK Finance

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…

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Read More:2021's changing payments landscape (Part I)