Payments Processing: The Hyper Growth Opportunity in Next Generation Payments
By Joanne Dewar, Chief Executive Officer, Global Processing Services (GPS)
What an incredibly exciting time to be at the heart of the fintech ecosystem.
The significant inflow of capital into the payments industry globally during the pandemic, as highlighted by yesterday’s successful Marqeta IPO (MQ), demonstrates that the investment community continues to believe that the immense promise of fintech and digital payments is here to stay long after the economic headwinds of Covid have subsided.
For nearly a decade, the merchant acquiring space has been the key focus for investors, as players such as Checkout.com, Stripe and Adyen disrupted and revolutionized payment acceptance around the world, lowering barriers in enabling the flow of money between consumers and merchants. Investors have bet big on these players with fantastic results – these three companies alone processed over $600 billion of payments last year. Stripe was valued at an impressive $95 billion earlier this year, making it one of the most valuable private fintech companies in the world, Adyen’s current market cap is now almost $60 billion, and Checkout.com saw its most recent fundraise push its valuation to over $15 billion.
As merchant acquiring disrupted the payments industry and has seen company valuations skyrocketing, attention is now turning to the issuing processing space – the often-overlooked side of the payments coin.
Issuer Processing: The Unsung Hero of Payments
Given the comparative lack of coverage to date, it feels important to shed light on what an issuer processor is. This is the technology behind the cardholder side of the payments equation – a vital part of the payments process. It delivers the crucial connectivity between a fintech and its issuing bank, the relevant card scheme, such as Visa or Mastercard, and card bureau to authorize transactions and enable cardholder interaction.
Fintechs thrive on speed and agility, leveraging the capabilities of partners to do the heavy lifting whenever possible. Issuer processing has become one of the most common capabilities to outsource, providing economies of scale and cutting-edge technology. This has culminated in some of the biggest fintech unicorns in the world being powered by issuer processors, thereby contributing to their exponential growth by allowing them to focus on creating innovative customer experiences without the operational complexity of, and high costs associated with, building their own payments processing capability.
Additionally, certain next generation issuer processors often provide highly flexible and configurable platforms, including rich functionality via a suite of APIs which creates a far more personalized experience for the end user, including the ability to freeze or unfreeze a card, have a PIN reminder, add a gambling block, receive real-time alerts, and more. These are features which legacy financial institutions have only recently begun integrating into their service offerings.
The intrinsic value issuer processors bring is increasingly being reflected by the post-M&A valuations of some of the biggest companies in the space, from SoFi’s $1.2 billion acquisition of Galileo and its recent SPAC merger taking its market cap to $16.9 billion, to SaltPay’s acquisition of Tutuka and its subsequent $700 million fundraise now valuing the company at over $1 billion. This is further highlighted by increased investor interest in Marqeta’s IPO, demonstrating that the year of the issuer processor has now arrived.
Lifting the Lid on the Global Payments Opportunity
The next generation payments opportunity is a global one, and we are only really at the cusp of exploring its largely untapped potential. This has primarily been driven by the acceleration towards the digitization of payments around the world, as well as the increasing uptake and adoption of alternative payment methods.
While card payment volumes continue to rise in the U.S., checks and cash are still both widely used, with the former making up 11 percent and ATM withdrawals 4 percent of total card payment volumes, highlighting the cash and check-to-card conversion opportunity.
On the other side of the globe, Asia Pacific, which is the fastest-growing region in the world, contributed the lion’s share (45 percent) of global payments revenue in 2019, with the region’s fintech darling Singapore seeing fintech investments rise by 355 percent year-on-year in 2021. Meanwhile, the Middle East and Africa (MEA) now has 2,800 fintech startups and has seen tremendous growth in a short space of time, despite the fact that fintech investments in the region accounted for just one percent of total global VC investment.
The market opportunity is huge in the U.S., with issuers processing $6.7 trillion worth of transactions in 2020. However, as the tailwinds that accelerate the move towards digital payments and increasingly cashless societies replicate simultaneously across all geographies, we believe that the global opportunity could be almost five times that amount.
Powering the Next Generation Payments Segments
Next generation fintechs are providing some of the hottest payment innovations in payments and are being powered by issuer processors who are only now beginning to emerge from the shadows in their own right. While commonly associated with challenger banks, issuer processors are now often servicing an enormous range of payments products including expense management, B2B payments, crypto, lending and credit (including Buy Now Pay Later propositions), digital banking, FX, remittance, open banking and more.
These fintechs include Revolut, the financial superapp with a global customer base of 15 million (and which has recently applied for its U.S. banking charter); WeLab Bank, one of Hong Kong’s first homegrown virtual banks which recently announced it has grown its customer base to 100,000 in less than a year since its launch; Razer, the gaming giant that is building a major fintech proposition, starting from one of the most unbanked regions in the world, south-east Asia; Ziglu, a challenger bank which allows customers to acquire and spend cryptocurrencies as easily as fiat currencies on a single payment card; and Zilch, Paidy and Laybuy, all BNPL firms based in the U.K., Japan and New Zealand respectively which offer greater convenience at a time when consumers may be financially stretched as a result of Covid.
While there will be specific market entry and operational requirements from region to region, there is no mistaking that the opportunity truly is a global one.
The Incumbent Challenge
The global payments industry could not have foreseen the tremendous impact 2020 would have on the pace of change in the sector. While discretionary spending declined by 40 percent as an immediate result of lockdowns, buying behavior shifted significantly to benefit electronic payment options, leading to a decline in the use of cash.
In March 2020, reports claimed the World Health Organization (WHO) had warned against using cash amid fears it could be spreading coronavirus, sparking a global acceleration to cashless payments. Mastercard reported a 40 percent jump in this method for payment in the first quarter of 2020, 51 percent of people in the U.S. started using mobile wallets like Apple Pay and contactless payments, and the National Retail Federation said that 1 in 5 consumers made a contactless payment for the first time.
The nimbleness of fintechs and their ability to quickly pivot and introduce innovative functionality to address specific needs saw the likes of Starling Bank bring its Connected Card to the UK market within 10 days of the first lockdown and at the height of the pandemic – helping friends and family of the vulnerable or those self-isolating to shop for groceries and necessities on their behalf.
It is this kind of innovation that is causing legacy players to rethink their digital strategy and look harder at the partner integrations available to them. It has taken traditional banks an average of four years to replicate a single feature launched by a fintech challenger, such as freeze cards, and the benchmark of expected functionality adopted by fintechs as standard will only continue to rise. This is especially true in Europe and Asia Pacific, where innovative propositions and superapps are increasingly challenging the previous stronghold of incumbents.
Without leveraging the capabilities of agile partners, the traditional banks will almost certainly be left behind.
2021: The Year of the Issuer Processor
This accelerated shift to digitized payments and increasingly cashless societies have shifted consumer expectations, revolutionizing how we transact across the world. This requires all of us to rise to meet this new customer demand – through agile, innovative and globally scalable solutions that create additional value beyond the transaction.
The future has never looked brighter for fintech, with the first three months of 2021 seeing the largest, most active quarter ever for fintech financing activity with over $29 billion in transaction volume and the total number of transactions reaching an all-time high despite the impact of the pandemic. We are seeing increased focus on our space from not only investors and fintechs, but consultancies and banks who are now recognizing how to leverage the foundational platforms that issuer processors bring in building the next generation of payment solutions.
As Marqeta’s IPO has shown, the opportunity ahead for a diverse set of global players in our space is truly enormous and we believe that 2021 is now the year of the issuer processor. We can’t wait to see where the journey takes us.
Joanne Dewar is Chief Executive Officer of Global Processing Services (GPS), the trusted and proven go-to payments processing partner for today’s leading challenger fintechs, including Revolut and Paysafe. GPS has to-date issued over 170 million cards, enabled in over 48 countries, and last year processed over 1.3 billion transactions through its platform.
Since joining the company in 2013, Joanne has spearheaded the transformation of GPS from start-up to private equity-backed scale-up, cementing the business’ position as the bedrock of the fintech ecosystem, as it continues to accelerate the delivery of better financial experiences for every customer.
Joanne is a recognized leader and influencer in the payments industry, having been selected as one of the top 50 fintech CEOs of 2021, alongside leaders from Stripe, Klarna, Wise, Coinbase, Marqeta and more. She was also one of just two women on the 2019 Payments Power 10 list, which recognizes payments industry leaders with an ongoing commitment to pushing boundaries in the payments sector.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.