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The world economy continues to enjoy a long runway on its steady transition from cash to digital payments. Cash still represents 60% of total consumer payments globally,1 but many countries are swiftly moving toward cards and other forms of digital payments. This shift has only accelerated during the COVID-19 pandemic as consumers and businesses do their best to avoid the physical exchange of cash. The crisis has led to an expanded rollout of contactless payments globally. Consumers are becoming more comfortable with mobile wallets, peer-to-peer payments, and other digital transaction technologies, a trend we believe will continue long after the pandemic recedes.
For example, in our view, markets like Brazil will have card volume growth greater than 10% per year over the next decade (Figure 1). Notably, card market share is currently concentrated in bank-owned incumbents. Like much of the fintech revolution, we believe this represents significant potential for disruptors with newer technologies and innovative product offerings.
Within this shift, we are particularly intrigued by the potential of software-enabled payments. The growth of software-enabled payments has been especially relevant in the COVID-19 era. For many merchants, this crisis has been a significant catalyst to take part in an ongoing industry evolution.
For the entire history of the payments industry, the first step in a merchant’s life was a trip to the bank to seek financing to start their venture. A payment-processing product was a natural cross-sell for those banks. But that distribution arrangement is rapidly changing.
Today, a merchant’s first step is often figuring out what software to use to help manage their new business. That change is driving a shift in payment distribution, away from banks and toward software-enabled payment providers. More and more, new software technology is offering highly integrated systems that have payments as a central hub. Combining point-of-sale payments systems with software provides merchants with an opportunity to better manage inventory, customer loyalty, rewards, and other modules critical to their businesses.
This integrated capability was often not available in legacy systems and is gaining importance in the post-COVID environment. As customers were unable to go to physical retailers, it has been critical for merchants to have an online presence. Companies with more modern technology were able to respond better to an increasingly digital customer base.
To capitalize on the growth of software-enabled payments, payments companies are acquiring software vendors that serve various industries. For example, we’ve been following a US company that has been buying vertical-specific software assets that are then connected to a common payment platform and back-end infrastructure. Their software-integrated payment systems cater to a range of industries such as food service, event management, veterinary offices, and nonprofits. In each vertical, their software creates stickiness with their customers, while the company generates revenue from selling both software and payments-acceptance capabilities. We expect payments companies like this to continue to acquire software to expand their addressable market and capture incremental payments opportunities within new verticals.
In our view, volume in the US payments industry will see strong growth over the next decade. But within that, we think software-enabled payments will drive substantial growth and take share from bank-led models. We estimate software-enabled payments have about a 10% share of industry volume today and can grow at a double-digit CAGR (compound annual growth rate) over the next decade. Importantly, even with such strong growth, software-enabled payments would still only represent about 19% of industry volume (Figure 2). We believe fintech innovation will continue to fuel these trends.
We think the next stage of the payments industry’s revolution will take place in business-to-business (B2B) payments. B2B is a multi-trillion-dollar market that rivals the consumer payments industry in size. It is just beginning to shift to more modern payment technologies and away from checks and other manual processes. We believe it will drive growth for the payments industry for many years to come. During the pandemic, many businesses turned to digital services to improve cash flow and modernize their payment ecosystems, citing speed, security, and transparency as key benefits.
For example, we’re following companies that have digitized the signature process and significantly improved the efficiency of financial contracts across industries, geographies, and use cases. We believe B2B payments, enabled by new fintech, is a natural extension of these businesses that they are just now beginning to execute against.
For years, the growth of the payments industry has been driven by the cash-to-card shift. Current opportunities are further being powered by innovative software-enabled payments. But, despite both trends being significantly accelerated by the recent health crisis, the industry still has considerable room to grow in these and many other areas. As the cash-to-card shift and software-enabled payments continue to evolve, we believe business-to-business payments will emerge as another massive opportunity for fintech disruption.
1Combined estimates by Wellington Management, 31 December 2020.
All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment.
Forward-looking estimates are based on internal research and views of the author and are subject to change. They should not be taken as advice or recommendation.
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