One word that few people would have traditionally associated with payment services is ‘sexy’, yet the appeal of the industry has increased remarkably in the last few years, as technology has improved, and the banking sector has started to find it distinctly more attractive.
Most banks in Europe even as recently as five to 10 years ago would have been primarily focused on asset management and investment banking, leaving their card businesses languishing in what had been considered a ‘niche’ role. Yet the decline in cash use in the past couple of years and an unprecedented surge in demand for contactless payment has led to major technology companies that offer digital payments seeing their stock market performance improve significantly.
Why are payments ‘sexy’ now?
It is the rapid consolidation of the payments industry that has driven the boom and appeal of payments as a sector, thanks to the high scalability of the payment transaction business. The process had begun years ago with high levels of consolidation in the USA, but the accelerator pedal was pushed down on the European consolidations when the Single Euro Payments Area was introduced. By now, many providers of card payment solutions (acquirers) as well as transaction processors have gradually combined to form regional and pan-European players.
Companies involved in payment transactions have seen their valuations soar. Visa and Mastercard have a market capitalisation of nearly $500 billion and $370 billion respectively, while Apple, Amazon, Facebook, Samsung, Alibaba and Tencent – all technology giants – have each launched their own payment methods. To date, they have primarily co-operated with other payment processors, although plans to introduce their own currencies are in the wings. Facebook, for example, has its Libra initiative, which has recently been renamed Diem.
Scalability is key
The strict security requirements around payments systems in combination with the requirement of constant availability requires the development and maintenance of very complex IT systems. The criticalness of today’s electronic payments infrastructures is also reflected in the increasingly dense regulatory framework we see around the industry, where transaction processing means investing millions of pounds to set up, maintain and develop IT systems to match technology advancements and the requirements of regulators.
Yet whether one million or one billion transactions are processed through this infrastructure has little bearing on costs, which is why banks acting as acquirers in many countries have insufficient scale to keep their card business in-house, resulting in an outsourced solution.
In the last 10 years, the payment industry has shown highly stable growth rates, with equally stable cash flows – in Europe alone the economic growth and the continuous substitution of cash accounted for annual volume increases of 6-8% in recent years. This is despite barely half of all payments in European countries being made by card or mobile devices, suggesting there is huge growth potential here.
New technology providers create new competition
However, it is not just consolidation that has pushed forward transformation in the industry. Technological progress has created a variety of new forms of payments, allowing consumers to benefit from a countless choice of payment methods and electronic wallets. This has increased the complexity for acquirers and processors as retailers move to offer customers their preferred payment options.
Cashless payment is clearly the future as technology giants continue to leverage rapid development to boost both customer loyalty and experience by integrating payment cards into electronic wallets and acquiring additional data. The largest tech players have also forced a shift in the payment ecosystem, as the much-cited “disruption” within the banking sector is already in full swing. For example, Apple, in cooperation with Goldman Sachs, has already started to fully disintermediate banks by promoting its Apple credit card to US customers.
The rise of the platform economy
Large digital marketplaces like Amazon or AliExpress have a huge customer base that can offer smaller retailers the benefit of their online presence – creating the so-called ‘platform economy’. The fact they also provide payment processing services to these merchants helps them bundle payment volumes for hundreds of thousands of small merchants into a single marketplace, cutting contact between traditional payment providers and these smaller entities. Instead, incumbents work solely as transaction processors in the background.
The likes of Shopify and GoDaddy are undertaking similar developments, as their easy e-commerce solutions make it simpler for merchants to set up their own online shop with an integrated checkout solution. Depending on the platform operator’s own strategy, this can lead to the replacement of incumbent payment providers in the long run.
Regulations: a catalyst or a threat?
The second Payment Services Directive (PSD2) in the EU has further accelerated the upheaval in payments, as some players involved in card transactions traditionally are left out due to customers allowing third-party payment service providers access to their accounts directly to make the payment. Open banking – a huge benefit for neo-banks, fintechs and technology platforms – could also challenge conventional banking services as they are not able to replicate the added value.
However, do not think for a second the established players are going to give up their position of dominance so easily. Mastercard, for example, has acquired Vocalink and Nets Group’s account-to-account payment business, which expands its footprint outside of the card business and puts it a step ahead in Europe. Worldline is also already offering its retail customers the option of accepting crypto currencies such as Bitcoin or Ethereum as well as account-to-account payments as part of pilot projects.
Going forwards, with the expansion of payment services worldwide, it is hard to see the sector becoming any less sexy anytime soon. The decline of cash payments, emergence of new payment methods, the expansion of digital currencies and advances in e-commerce create the perfect environment to ensure sustained growth of digital payments.
The face of the industry may change as new players enter and consolidation continues apace. But as technology continues to evolve, there are no limits to the new ways that payments can be made. The future looks bright for the payments industry and its continued status as ‘sexy’ seems to be assured.
