Fintech start-ups challenge payment card empires

The payments industry thrives in the niche where buyers meet sellers. So when the coronavirus made it impossible for buyers to meet sellers — in real life, at least — payouts must have moved quickly.

“The pandemic has had a profound effect on digital payments, due to two key factors,” says Rodney Bain, co-founder and US president of payments fintech Apexx Global. “Consumers’ fundamental inability to transact in-store during shutdowns and general discomfort with exposure to physical environments; and the economic pressure felt by consumers during the pandemic.

The full consequences are still emerging. But one change that is already clear is a significant heightening of the threat posed by fintech start-ups to established payment card networks, especially in emerging markets.

This is not to say that the debit and credit card empires that emerged in the second half of the 20th century – notably Visa and Mastercard – are unchallenged in their wealthy countries.

The most notable development in the pandemic era has been the rise of “buy now, pay later”, a form of short-term credit popularized by start-ups like Klarna that allows consumers to spread installment payments.

A merchant in Mumbai uses a Paytm terminal. Fintech promises easy access to financial services © Dhiraj Singh/Bloomberg

“Consumer costs are negligible or non-existent for using some BNPL products and studies show that even with late fees, the cost of using BNPL for short-term loans is lower than using debit cards. credit,” Bain says. Apexx’s platform supports a number of BNPL providers.

The outlook for the sector remains unclear – Klarna’s latest results showed its losses had quadrupled as the cost of listing in new markets weighed on its bottom line. But decisions by banks and tech giants like Apple to launch their own BNPL offerings suggest traditional credit providers will continue to face disruption.

Even so, Visa and Mastercard have continued to grow in markets with developed payment networks, such as the UK, where 99% of card payments in 2021 relied on their systems.

At the same time, liquidity has steadily declined in these markets. In the UK, for example, while millions of people still prefer notes and coins, cash transactions were overtaken by debit card payments in 2017.

In emerging economiesThe picture is different: Here, the use of cash has tended to be more widespread than in developed countries, and the shift to fintech alternatives has been more pronounced, according to Philip Benton, financial services analyst at the technology research company Omdia.

“If you look in emerging economies where they embraced smartphone technology, where merchants relied on cash [pre-pandemic] they have increasingly embraced digital wallets and real-time payments,” Benton says, citing India and Brazil as examples.

Among the companies trying to capitalize on this trend is payment company Paytm, which raised $2.5 billion last year in what was then India’s biggest-ever initial public offering. a dramatic drop in its market value. Backed by Japanese tech investment group SoftBank, he made a name for himself by promising “no paperwork [and] no account opening”, thereby giving easy access to its services to millions of Indians outside the country’s financial system.

The Next Technology Growth Markets in Payments

A customer uses the Globe Telecom mobile payment application on her smartphone in a cafeteria

Countries to watch 2022-2026

Philippines The first digital banking licenses were issued in 2020, leading to wider adoption of digital wallets and payment cards. “Buy now, pay later” services are also becoming increasingly popular.

Indonesia A combination of widespread mobile phone use and digital-only neobanks is rapidly increasing financial inclusion, which is expected to reach 67% by 2026.

Mexico While cash dominates at the point of sale, digital payments are advancing rapidly. Omdia expects debit card transaction volume to grow at a compound annual growth rate of 13% by 2026.

Brazil The introduction of Pix, a real-time payment network, has accelerated the shift to digital payments, while the popularity of neobanks is helping to drive strong growth in debit card transactions.

Source: FT-Omdia Digital Economy Index

Many customers in emerging markets are turning to so-called neobanks – digital-only banks. These have made inroads in countries like the Philippines (Komo) and Vietnam (Timo and Tnex), where the share of the population with bank accounts is lower than in more developed economies.

“Neobanks have completely raised the bar for onboarding,” says Nicole Perry, director of digital business growth strategy at fintech consultancy 11:FS, referring to the ease with which new customers can sign up.

“They also played an important role in familiarizing [people with] digital payment,” she adds, noting that neobanks have focused on customizing their apps to meet the most common customer needs, such as repaying friends or ensuring a direct debit leaves their account.

“Neobanks have made those experiences enjoyable,” says Perry. “They made them native, intuitive, and easy, and through that, they made them enjoyable and repeatable.”

Another challenge to the dominance of conventional payment cards in developing countries has been the development of real-time payment rails – digital payment channels that enable instant transfers.

Benton says that while these have emerged “relatively slowly” over the past decade, Brazilian network Pix has recently seen “explosive growth”.

Launched last year by Brazil’s central bank, Pix has since processed more than a billion transactions, Benton says, and has become the leading method for interbank transfers.

Does it all mean that nimble emerging economies have, as some suggest, outgrown established markets to embrace the digital future? Stavros Stratas, Apexx’s vice president for merchant strategy, issues a cautious note. He points out that traditional financial institutions are much more common than digital payment options in countries with even moderate levels of development.

Additionally, he adds, for digital payments to succeed at scale, there must be ubiquitous access to smartphones and mobile data. The support of governments and the commitment of financial institutions and retailers are also essential.

Meanwhile, real-time payment rails are also growing in markets with long-established card networks, including the United States. FedNow, a real-time rail designed by the Federal Reserve and expected to launch in 2023 or 2024, will be the first new payment network in the United States since the early 1970s.

Cost is a big factor, with traditional card rails being more expensive than newer alternatives. “We’re in a world where all banks are connected to all retailers and all customers all the time,” says Bain. “The cost of an A2A [account-to-account] transaction is much lower for retailers compared to traditional card transactions. »

Still, Benton points out that, for cards, competing with real-time payments isn’t necessarily a zero-sum game, even in emerging markets.

“On the one hand, real-time payments are trying to take some of the business out of card payments, but at the same time they’re accelerating the adoption of modern technology by merchants, to the point where they can also accept cards,” he said. . “At the end of the day, it’s about giving consumers options.”

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