What makes Payments such an attractive space in FinTech?
Despite accounting for only 4% of banking profits, retail payments has received the second highest amount of FinTech investments after retail lending and accounts for almost as many FinTech companies as in the retail lending space.
This insight is based on an analysis of Citi’s Global Perspective and Solutions recently released report on Digital Disruption in Banking with impressive data and insights on FinTech’s disruption of the Banking industry. A section of the report highlights FinTech investment and in different segments of the banking industry.
Here is a derivative chart that correlates data from the report on the incumbent banks’ high profit product and customer segments and data on the product and customer segments in terms of both FinTech investments and the number of FinTech participants. Typically, segments with high profit contribution attract high FinTech investment and participation.
Personal/SME — Lending accounts for 29% of banking profits. Correspondingly, 49% of FinTech dollar investments and 29% of FinTech companies focus on this segment. Similarly, the Personal/SME — Savings and Investments accounts for 12% of profits and correspondingly, 10% of investments and 25% of companies are focused on this segment.
However, the Personal/SME (Retail) Payments segment is a conspicuous exception. Despite its low profit contributions, retail payments has received 26% of all FinTech investments and accounts for 28% of and almost as many FinTech companies as Personal/SME — Lending.
What makes a highly commoditized and low profit segment so attractive to FinTechs? Here are a few key reasons:
Entry point
- Payments is one of the most used retail financial services products on a day to day basis.
- Payments are also quite simple when compared to other financial products and services.
- Additionally, payments is probably one of the least regulated spaces in financial services.
Hence, for companies looking to enter the financial services space, payments services are a low hanging fruit to enter the financial services space. They offer a path to quickly go to market with a value proposition, acquire customers rapidly and at lower costs. This customer base can then be leveraged in the future to easily roll out additional financial services. For example, PayTM a mobile wallet company in India has more than 100 million customers — all acquired in a 4 to 5 year period. It now plans leverage this massive customer base as it ventures into becoming a full-fledged payment bank and as it enters into partnerships with other financial services companies to sell other products and services. The story of Tencent in China is quite similar.
Data
Being a payments service provider allows the capture of extensive data on customers — what are spending on and where they do so (companies, geographies, channels etc.). This data is a veritable goldmine to any company from any industry trying to build insights on a customer. This data and follow on analytics could be a huge potential source of additional revenue directly (through the sale of insights) or indirectly (leveraging the data to build new products/services). For example, Paypal leverages its payments data on small and medium businesses to build more accurate credit scores thereby enabling it to offer more competitive loan products than many banks.
Value Chain
Though a simple service from a customer perspective, the underlying payments value chain is quite complex and highly segmented. Apart from banks there are different types of players that play specific roles like digital wallets, payments processors, gateways, point of sale technologies, mobile payments providers, remittance services, telecom companies etc.. These companies are able to achieve higher margins than banks which typically play limited roles in the payments value chain. This results in a higher attractiveness of this space and pushes up the number of companies that participate.
Fees
Apart from the typical transaction and merchant fees, companies in this space can also tap into many other sources of fees like interest fees on credit products tied to payments (eg. credit cards), annuity fees for cards and similar products/services, transfer fees and even incomes from float despite constantly reducing settlement time period. This makes the segment potentially more attractive than what it may seem.
These characteristics of the payments segment make it an attractive space for FinTechs — which is manifested in the huge amount of investment and participation the segment has witnessed despite it being low value and low profit.
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