IV. Crypto is thriving and moving into mainstream payments
Since its inception in 2009, Bitcoin enjoyed ongoing growth in valuation, but it largely remained a niche store of value without successfully evolving as a means of payment. 2021 marks the clear beginning for cryptocurrencies as mainstream means of payments. As shown in Figure 10, Bitcoin and other cryptocurrencies grew massively in value over the past year. Today there are more than 5000 cryptocurrencies worldwide with a value of more than USD 1.5 trillion.
Figure 10: Market valuation of select cryptocurrencies
As cryptocurrencies emerge into the mainstream, we see growing merchant acceptance and PSP and network enablement. Tesla, Microsoft, Expedia, Home Depot, and Virgin are some of the merchants that now accept crypto payments. PSPs such as Paypal, Square, and Nuvei now offer crypto payment services to their merchants and/or consumers. Paypal announced in its 2020 Q4 earnings call that it will allow its wallet users to use crypto as a funding source for ecommerce payments globally. Specialised crypto PSPs and exchanges that offer merchants with crypto acceptance solutions are also thriving, for example, Coinbase, CoinPayments, and Bitpay. Payment networks are also positioning to benefit from crypto, extending their network support for crypto settlement. Visa for example now supports 35 crypto currencies through its core network infrastructure.
Figure 11: Winning cryptocurrencies and enablers
Source: Flagship Advisory Partners
V. Convergence of SaaS and Fintech
In US merchant payments, the 2010’s were largely defined by the convergence of software and merchant payments. This trend continues to expand and spread globally, and we expect the convergence of SaaS and fintech to be a defining trait of European payments this decade. The potential value creation for SaaS platforms in fintech is massive. Deeply embedded payments improve the value-proposition for SaaS customers and enhance the revenue generating potential of the platform. Most software providers are still in the early stages of evolving and scaling their strategic payments propositions. Furthermore, payments are only the first of many potential integrated fintech products. Leading SaaS platforms are now adding an array of financial services such as lending, card issuing, bank accounts, payroll, and cash management services.
Software providers on the cutting edge of the convergence between SaaS and fintech are big winners given the tremendous monetisation potential for payments and other fintechs within SaaS platforms, particularly those focused on serving the small business segment. Shopify illustrates well the potential for SaaS-fintech convergence. In 2020, Shopify grew revenues by 86% boosted by 108% growth in payments volume.
Saas-fintech convergence is not just about ecommerce and retail verticals but comes from a range of software verticals. SaaS focused on membership, subscription, property management, fundraising, accounting, and other B2B services are all winning in payments and fintech. While most of the best-practice companies listed in figure 12 are headquartered in North America, we see exceptional growth coming from SaaS fintech convergence in Europe in 2021 and beyond.
Figure 12: Best-in-class ISV/SaaS-payments platforms
*Selected examples, not comprehensive
Source: Flagship Advisory Partners
SaaS companies generally rely on partners to enable their fintech offerings. Among these payments partners, no one is benefitting from Saas-fintech convergence more than Stripe. Since 2014, Stripe’s valuation has grown from $4 billion to $95 billion, driven by more than 100% annual growth in processed volume (see Figure 13). While Stripe’s success has many drivers, its SaaS proposition is the crown jewel for this winning fintech.
Figure 13: Stripe valuation
Sources: Flagship Advisory Partners; Stripe; CB Insights; Forbes; Bloomberg.
Investors are also benefitting hugely from the value-creation potential of SaaS-fintech. As shown in figure 14, the share prices for a sample of publicly traded SaaS-fintech companies have on average increased by 321% since 2019. Private investors are also benefitting by making savvy investments into software companies with an eye for growth in fintech revenues, for example, PE firms such as Advent International, Vista Equity Partners, and TCV, among others.
Figure 14: Stock performance of select SaaS fintechs
Note: Lightspeed and Bill.com started trading in March 2019 and December 2019, respectively
Source: Yahoo! Finance
Figure 15: Convergence of SaaS and fintech winners
Source: Flagship Advisory Partners
VI. Payments-led digital disruption of banking and lending
Years ago, Citigroup tried to create a global financial services supermarket, offering a broad range of financial services – payments, lending, working capital etc., under one roof across a global footprint. Citi’s strategy was ultimately unsuccessful, and the idea of a winning in financial services via product breadth was replaced by strategies build on specialisation, led by payments. Throughout the 2000’s, winners in payments, particularly merchant payments, were increasingly non-bank specialists.
Today, digital technologies are reversing the trends towards siloed payments. Enabled by mobile and cloud technologies, the idea of the financial supermarket is back. We now see payments market leaders leveraging their massive customer bases and powerful digital platforms to attack the banking and lending markets.
Ant Group is the exemplar of this platform concept (though not beloved by the Chinese government). PayPal also continues to expand its consumer and small-business platform into an ever-broader array of financial services (as shown in Figure 16). Other fintechs are now following with a similar pattern: identify a key customer pain point, hyper-specialise to become the category killer that solves that pain point, then use the digital platform to expand into adjacencies. Revolut is another clear winner leveraging this strategy.
Figure 16: PayPal’s product expansion journey
Source: Paypal annual reports, company website, Crunchbase
Open banking fintechs, many of whom are payments led, have the potential to further disrupt traditional banking. In C2B payments, we now see fintechs such as Trustly exploiting the potential of open banking to enable consumer direct bank payments more-easily. There are also many other fintechs positioning to serve the massive demand for enablement of open-banking payments. Some, such as Plaid, Tink, and Token, are positioning primarily as platform providers to other financial services providers. Others, such as Modulr and Volt, are positioning more directly with merchants and corporates to enable value-added, open-banking payments (layering on fraud management, reconciliation etc.).
Figure 17: Open & virtual banking winners
Souce: Flagship Advisory Partners
Buy-now-pay-later fintechs such as Klarna, Affirm, and Afterpay are also thriving by addressing consumer credit with innovative, real-time lending technologies coupled into the checkout experience. Transactional credit is also just one of a broader array of potential banking services into which Klarna is expanding.
Finally, there are also specialised fintechs thriving by addressing the lending needs of small and mid-market businesses with digitally enabled factoring and working capital lending propositions. A segment, notably the underserved by banks, these fintechs are winning by fully digitising distribution, onboarding, and servicing lending into the SME segment. Payment service providers such as Square and American Express are thriving with the cross-selling of lending, leveraging the unique underwriting data that comes from processing the merchant’s payments. Software platforms such as accounting providers (Intuit, Xero, Sage) are also growing revenue rapidly via partnerships with fintechs, given their natural placement for distributing these lending products.
Read More:2021's changing payments landscape (Part II)