The global payments industry is one of the fastest evolving industries. Its swift evolution creates many investment opportunities as the players race to innovate, merge, and acquire competitors.
The global pandemic has accelerated the shift away from cash, turning the trend into a global one. Even consumers in emerging economies feel the effects of this trend, and it is only one of a series of tendencies that will define the payments industry in the years to come.
Investments in fintech continue to break records as humanity races to optimise and simplify the flow of value in economies world-over. Although it is impossible to make long-term predictions, some of the short-term trends that will shape the global fintech industry and create investment opportunities are obvious.
- Buying now and paying later is more popular than ever.
- Cashless payments will continue to grow.
- Ecommerce continues to gobble up a larger and larger share of global consumer purchases.
- Real-time payment systems are expanding quickly all over the globe.
- Incumbent payment processors race to scale up, but the market leaves plenty of room for new actors.
- Gen Z and Millenials are keen on adopting new technologies.
- India and Latin America are increasingly attractive destinations for fintech investments and expansions.
Buying Now and Paying Later
Many of the large payment processors have been integrating buy-now-pay-later features realising the immense moneymaking potential of the setup. Square, Zilch, Zip, and Affirm all ventured into the vertical over the last year. Even PayPal has embraced the buy-now-pay-later business model, launching credit services in the US and a handful of European countries. The company is expanding in Japan as well.
Cashless Payments are Taking Over
Going cashless has been a trend for some time. Lately, however, this trend has accelerated. Between 2020 and 2025, there will be an 80 percent growth in digital payments. By 2030, cashless transaction volumes will have tripled. The global potential for growth is immense in this regard. The Asia-Pacific region is bound to take the lead in digital payment adoption, but regions like Africa, Europe, and Latin America still have untapped potential.
The US and Canada, where cashless payments are already widespread, won’t grow by as much as other regions.
The digital payments trend features two underlying parallel sub-currents.
One is an evolutionary sub-trend that consists of the transformation of currently used payment systems and their front- and back ends. Users demand smarter and more accessible payment services. As part of this trend, we will see bill payments and instant payments evolve. Payment requests and digital wallets are also evolutionary iterations of this trend.
The revolutionary sub-trend delivers structural changes and radical innovations to the payment ecosystem. This is where cryptocurrencies and central bank digital currencies come into the picture, together with buy-now-pay-later offerings.
Ecommerce is the Future
According to Shopify, eCommerce is set to grow by around $11 trillion between 2021 and 2025.
Digital commerce has been notoriously inclusive. And it will continue to demolish barriers to entry, leading to more and more online retailers. This explosion of competition will trigger several trends across the industry.
- Rising direct-to-customer competition
- Rising advertising costs
- Brands rethinking personalisation
- New opportunities on the big social media platforms
Social media is a natural fit for eCommerce. In the future, eCommerce activity through social media channels will likely intensify. Brand marketing through social media will gain additional weight. Customer service lends itself well to social media, and shoppable advertising is already driving revenues.
The likely evolution of social media aligns well with the eCommerce narrative. Video increases user engagement, and innovative social platforms with new features allow brands to re-imagine and reinvent customer engagement.
Real-time Payment Systems Likely to Explode
The real-time payments market seems primed for a massive explosion as consumers chase instant gratification payments-wise.
From 2022 to 2030, instant payments may grow by ~35 percent yearly. The driving factors of the growth are the increasing proliferation of smart mobile devices and cloud-based solutions.
The impact of artificial intelligence and the Internet of Things may also contribute to the growth of instant payments, in addition to increasing investments from corporations and governments.
The Race to Scale Up
Scaling up effectively is always a challenge for organisations, small and large. Scaling requires skilled leadership and creative solutions. Incumbent payments organisations are keen on keeping up with the trends and customer demands, and many possess the resources scaling requires.
For incumbents, scaling up also means adding new, innovative services to head off the competition and stay on the right side of disruption.
Cryptocurrencies and digital assets will probably have a hugely disruptive impact on the payments industry over the next couple of decades. Blockchain technology and decentralised applications complete with smart contracts can contribute to the radical transformation of the industry, rendering all legacy solutions obsolete.
Skrill and Klarna to Keep Up with Trends
Well-established payment companies like Skrill are scrambling to jump aboard the cryptocurrency train. Like some of its peers, Skrill has made it possible for its clients to buy cryptocurrencies through its digital currency wallet.
Skrill users can sign up for a free crypto wallet and begin buying and selling cryptocurrencies in minutes. Skrill also supports instant payments and real-time payments.
Skrill itself is not a cryptocurrency exchange. It merely partners with exchanges to provide cryptocurrency trading services to its clients. Users don’t need a separate account to buy digital assets with Skrill. They can use their regular accounts. To buy crypto, one can access the crypto tab, select the amounts and confirm the transfer.
With Skrill, some users can withdraw cryptocurrency to an eternal crypto wallet. Most similar services only allow the purchase of “paper bitcoin.” With Skrill, however, users can buy real bitcoin and withdraw it by sending their balances to an address they provide.
The payment processor offers a virtual wallet its clients can use to transfer fiat currency to overseas bank accounts.
Klarna has identified several interesting budding consumer trends that it intends to exploit in the future.
According to Klarna founder and CEO Sebastian Siemiatkowski, classic interest- and fee-laden credit no longer attracts consumers. The new generation of online money spenders prefer debit over tricky revolving credit and demand smarter and quicker ways to pay, bank, and shop online or otherwise.
In June 2021, Klarna raised USD 639 million through an equity funding round, giving some institutional investors the opportunity to directly profit from the success of the company.
Many of these investors hope to reap the benefits of Klarna’s global expansion and its adoption of innovative technologies.
Klarna’s buy-now-pay-later position in the market is an incentive for many retail investors who may soon gain direct access to the company’s stock.
Klarna’s leadership has confirmed that they plan to have an IPO to help the company scale up. One of the rare fintech companies to turn a profit for 14 straight years, Klarna lost money over the last two years as its expansion efforts taxed its bottom line.
Siemiatkowski has made it clear that Klarna would opt for an IPO instead of a SPAC to raise the funds it needs to turn its expansion and scaling plans into reality and return the operation to profitability.
Investment Opportunities and Risks in the Payments Industry
A Klarna IPO would be the perfect opportunity for investors to jump onto the buy-now-pay-later wagon. When eCommerce customers buy a product through Klarna, they can split the cost of the purchase into several short-term, interest-free payments or opt for a longer-term payment plan that carries an APR. The business model of the company allows it to generate revenue from the retailer as well as the customer.
A Klarna IPO is not a risk-free investment opportunity. There is at least one precedent for failure in the buy-now-pay-later industry. In the wake of its IPO, Klarna competitor Affirm saw its share value plunge by 70 percent as it failed to meet its earnings expectations.
Other risks include regulatory arbitrage, increasing competition, and data-harvesting practices that may cross ethical and legal boundaries.
Despite its luster and appeal, buy-now-pay-later is another form of debt consumers take on when they use such services.
New payment technologies will continue to surface as long as the concept of value exists. And the party capable of transferring value quickly and simply, will always enjoy a competitive advantage.
Although currently, people don’t seem to care much about privacy and decentralisation, in time, these factors may emerge as trendsetters in the digital payments industry.