In 2021, “acceleration”, “investment” and “hypergrowth” were all words associated with fintech. Global investment into the space reached $210 billion, up from $124 billion in 2020—a record level. In fact, already by the first half of 2021, Europe broke the record for annual fintech investment by raising €10.4 billion. This year is looking rather different.
In 2021, the fintech sector at the centre of this boom was payments. A new generation of payment services and providers rapidly responded to a range of quickly changing consumer behaviours brought on by the disruptive COVID-19 pandemic. Offline commerce was forced online and the need for digital payments surged. On the back of this, the payments sector received the overwhelming majority of fintech funding, notching $51.7 billion across the globe.
Now, that landscape has changed quite dramatically.
With rising inflation and the strong likelihood of an economic slowdown, the momentum in fintech investment is cooling. Companies are bracing for lean years and the technology industry in general is reining in spending and making noticeable job cuts. Despite this, as of Q1 2021, fintech VC funding is still going strong but slowing noticeably.
Given this climate of uncertainty, where will the payments ecosystem go from here?
Consumer convenience is still key
For consumers, convenience has always been key. This was accelerated by the COVID-19 pandemic where digital payments blossomed.
Buy Now, Pay Later was the undisputed star of the ecosystem. As these credit-style offerings became popular with consumers, especially younger generations, governments have been keeping a closer eye on the industry, citing concerns around debt accumulation in a largely unregulated market. In fact, the UK recently said it plans to increase rules around BNPL to protect consumers, including requiring BNPL providers to run checks to guarantee they can afford the financing schemes.
In this environment, with increasing regulation around BNPL, coupled with rising inflation, consumers will be less focused on the ease of spending and more focused on cutting down on spending. Consumers will still want one-click, frictionless payment options across all channels and retailers. It’s just that the development rate of these options may slow as belts tighten amongst payments providers and they begin to think about how to maintain what they’ve developed so far.
Sustaining growth in an uncertain climate
For payment companies, while growth has never been easy, maintaining it has always been the bigger challenge. This is especially the case when facing economic headwinds in an already competitive market.
Payment companies that are now coming out of a period of rapid growth should focus on building or maintaining quality offerings, options or models. New companies with established models should put efforts behind industrialising those models while also keeping an eye on how they can add value to a market in which consumers are spending less and saving more. Some larger payment companies with recently -raised funds have already started doing this. Stripe, for example, is offering business loans, identity products, card issuing and is mulling over adding more services.
Another way that will allow companies to survive and grow is by partnering with other companies that can complement their offerings. Although this has always been important, it’s even more so in today's competitive market if payments companies want to get and stay ahead.
Some payment companies, both large and small, have already partnered up. Last year, Mastercard partnered with TSYS, a global payments provider, to extend its instalment offering. Earlier this year, Visa acquired open banking platform Tink to give consumers more control over their finances and businesses more tools to operate in a digital world.
Provide support to merchants
For merchants, the reliability and a high conversion rate for online payments that has defined the industry will remain important. Here, the role of payment service providers (PSPs) is equally key as they have to maintain the infrastructure that makes all of this possible.
Merchants will still have to deliver seamless checkout experiences for consumers, even if they spend less. This includes offering the digital payment methods they’re used to paying with, especially if they’re buying cross-border. Failing to offer these, merchants risk a massive decline in conversion and losing customers.
The payments industry is changing rapidly, and the future is impossible to predict. Even though the fundamentals of concentrating on consumer preferences and providing easy payment experiences still hold true, there will be changes in the ecosystem—many companies will be forced to think about how they add value for consumers in order to survive. This could spark yet another wave of innovation in payments. Combined with embedded finance and decentralised finance (DeFi) offerings, this could truly make payments even more accessible to everyone, wherever they are, no matter what they’re paying for.