Covid-19 has propelled certain trends that were in place before the pandemic. One of those trends has been the demand for e-commerce. This, in turn, has significantly affected the global payments sector, with the shift toward electronic payments accelerating over 2020. Cash was used for 20.5% of global point-of-sale transactions in 2020, a 32.1% reduction from 2019. Overall, cash transaction values fell sharply around the world in 2020, with a reduction of 21.9% in North America, 33.6% in Europe, 34.7% in Latin America and 36.6% in APAC1. With declining in-person purchases because of Covid-19, it has become a necessity for consumers to purchase goods in a seamless way. In addition, consumers are now more cost-conscious and demand lower transaction fees. They are also more mindful of fraud risks.

Figure 1: Cash usage by country

Source: McKinsey Global Payment Map

Emerging payment solutions

Traditionally, large banks and card networks, such as Mastercard, have dominated the payment sector and high barriers to entry in the past have prevented new companies entering the sector. Still, the need for better payment solutions has intensified with the rise of e-commerce and cross-border commerce. Businesses now need to accept multiple payment methods and alternative payments, such as e-wallets. Advancing digital payment platforms are essential for businesses.

Innovative payment systems are a disruptive trend that is here to stay. We have watched this trend closely and have taken active positions in companies such as Stripe and Wise, both offering payment platforms, within our private market funds. The payment sector is thriving and has proven to be resilient throughout the pandemic.

This disruptive trend is also an opportunity for venture capital (VC) firms if recognised early. Across the sector, emerging technology has made it possible for smaller innovative companies to break through the high barriers to entry if they have significant VC backing. Ample levels of VC funding have gone into payment companies, especially during 2020. The sector maintained strong growth over the year, with $11.7 billion invested across 773 deals2. This was a record high and a large proportion of the total VC deals. One notable deal is Stripe, which raised $850 million in the second quarter of 2020, the largest US Fintech VC deal since August 20153. Stripe is now valued at $95 billion, making it Silicon Valley’s most valuable private company4.

Innovative payment systems are a disruptive trend that is here to stay

Figure 2: Payment VC Deals

Source: PitchBook, as of December 31, 2020

Find a niche and adapt quickly

However, opportunities are not without risk. It is a competitive sector with large, well-financed industry leaders, such as Visa and PayPal. Newcomers need to find an exclusive niche in order to prosper. In addition, margins are thin and significant scale is needed to attain revenue; another challenge to overcome for newbies. Ultimately, the key to success in the sector is how quickly businesses can adapt to the speed of change. Enhancements in digital payments will require infrastructure to be nimble and responsive. The future is in smart technology, which will optimise the consumer experience. Those that can adapt the fastest will top the leader board.

Figure 3: Global point of sale payment methods, Source: Global Payment Report, FIS Global, 2021

Source: Global Payment Report, FIS Global, 2021

Responding to consumer demand

The pandemic has highlighted the risks around a company’s ability to operate without the implementation of technology. With the decline in cash expected to continue, the future is set to be cashless. Cash is no longer king. Consumers demand contactless, convenient, instant and safe payment methods. Looking ahead to 2024, forecasts show that cash usage will decrease by a further 38% from 2020 to represent just 12.7% of global point-of-sale volumes by 20245. We expect that most of this will be absorbed by mobile wallets, which are likely to account for 33.4% of global point-of-sale spending by 20246.

The opportunities across the sector are abundant. Instant payments are a feature of all parts of life, from checkouts, to food deliveries, gaming and transport. It is clear that companies that don’t adopt technology will be superseded by those that do, which will directly affect their appeal for investors. It is important, therefore, for investors to gain exposure to emerging technologies through the companies in which they invest. In addition, allocations to a diverse range of private market asset classes, such as infrastructure, private credit and real estate will help position portfolios to take advantage of any dislocation and future trends within the markets.

1 Global Payment Report, FIS Global, 2021
2 Pitchbook, 2021
3 Pitchbook, 2021
4 Financial Times, March 2021
5 Global Payment Report, FIS Global, 2021
6 Global Payment Report, FIS Global, 2021