Move money or make money?
From embedded finance to real-time payments (RTP) to tokenization, payment technology is changing not just how transactions occur, but also the payment ecosystem as we have known it so far.
🌎 Macro Opportunity: according to McKinsey, payments revenues surpassed $2.2 trillion in 2022 (an all-time high), and the growth rate for electronic transactions has been nearly triple the overall growth in payments revenue over the past 5 years. This growth trajectory is fueled by digital adoption, particularly through mobile devices, consumer demand for fast, contactless and secure payment options, and even regulatory support for cashless economies.
📊 Market Trends: with the integration of financial services into non-financial platforms, any business can now offer payment, rewards, BNPL or insurance directly to users—even through TikTok! New integration modalities like Open Banking also enable non-banking entities to offer financial services via APIs. Partnerships between fintech firms and traditional banks are increasing, although regulatory scrutiny may intensify following recent incidents (read: Synapse). Real-Time Payments (RTP) are making instant transactions the new standard, and tokenization is enhancing security and reducing fraud. Technology also allows for tailored payment solutions across industries (checkout for e-commerce, patient medical billing for healthcare, illustrated by the recent Waystar IPO).
💥 Impact on business models: by automating processes, digital payment technology expands access and cuts transaction costs. Businesses can better serve and retain customers by embedding payments and value-added services in their user flows. For solutions providers, the traditional take-rate model may prove its limits, despite increasing volumes, as efficiency and sometimes regulations are driving transaction fees down.
In short: RTP and A2A (Account-to-Account) on the one hand, web3 and its disintermediation on the other hand, will lead to a gradual erosion of interchange fees. Neo payment businesses solely relying on take-rate may be caught in a race to the bottom, challenged to maintain decent net revenue growth despite higher processing volumes. Unless they add a compelling service layer that can justify minimum commitments or subscription from their client base, or unless they solve a uniquely complex problem in specific (regulated) verticals, many may end up being “consolidated” on unfavorable terms. They should revisit their revenue model and recalibrate their current operations with new backers able to provide capital runway and operational support. So they can make money by moving money.