How the Corona Crisis and European lockdown will affect payments fintech?

Economic crisis stemming from the COVID-19 pandemic will affect all the industries, although the size of the effect and its longevity will vary. Intrinsically, payments business is relatively more stable and less susceptible to shocks than airlines, hotels or production businesses. Long contracting times bring price and relative volume stability to payments acceptance business, while customer stickiness and spending patterns give stability to issuing business. Nevertheless, COVID-19 crisis and global lockdown are rapidly changing the ways customers pay and businesses accept payments. All companies of a comprehensive payments eco-system are affected — although each group is affected in its own way. Within next couple of months (or more) some companies are going to get hurt and some might get bankrupt, while others will get a strong push for their business.

POS Acquirers/PSPs

(e.g. Worldline, Elavon, Concardis)

Downsides:

• Sharp decline (up to 60–80%) in POS payments in travel, hospitality, non-food retail, and services.

Upsides:

• Short-term increase in food retail (+20–30%) and healthcare sectors due to an increase in customer spending in those two segments
• In addition, there is a surge in POS card transactions at the expense of a decline in cash usage, especially in markets with high cash penetration (Italy, Germany, Spain, Eastern Europe), as people are trying to use cash less to stop the coronavirus transmission

In this situation, short-term volume winners could be POS players with large share of food retail (e.g. MarketPay), while biggest potential losers are acquirers serving sectors largely affected by shutdowns, such as hospitality, travel, fashion (e.g. Elavon, First Data, Adyen). Players with a more balanced sector portfolio (e.g. Worldline) also will experience margin eradication as with volume shifting towards less profitable food retail segments.

Clear long-term winners are acquirers rooted in previously cash-centric markets (e.g. Nexi in Italy, Comercia in Spain, Concardis in Germany) as an increase in card penetration might be retained and after the crisis.

eCommerce Acquirers/PSPs

(e.g. Adyen, Wirecard)

Downsides:

• Sharp short- to mid-term drop on travel and hospitality transaction volumes (up to 100%)
• Potential mid- to long-term decline in non-essential retail volumes (fashion, etc.) due to economic downturn
• Drop in recurring payments volumes, as many customers may temporarily cancel non-essential offline subscriptions (gym, transportation, club memberships)

Upsides:

• A drastic surge in online retail due to closure of offline shops and fears over going out for shopping
• Fashion retail, healthcare, DIY, games, entertainment and media sectors will drive the online volume increase for acquirers/PSPs
• A drastic surge in digital subscriptions, as people have more time for digital content

In short-term eCommerce, acquirers/PSPs focused on digital goods and online retail will be the biggest volume winners among payment providers. Given the situation uncertainty and formation of new customer habits over the course of the crisis, that can be translated into a significant growth push to already high-growing online payments acceptance business. On the other hand, providers serving to travel retail will be the biggest losers, experiencing up to 80–90% volume drops in those segments.

In reality, most PSPs have pretty diversified sector portfolios and volume losses in one sector will be offset by gains in another. However, given that travel transaction fees are normally 30–50% higher than those in retail, average pricing per transaction is likely to go down, hurting end-year revenues.

Card-focused Neobanks

(e.g. Revolut, N26, Monzo)

Downsides:

• Travel-oriented product propositions clearly lose their customer appeal during the pandemic (and potentially for some time afterwards). Companies like Revolut might see their active customer base dropping down for some time, which is a death-like scenario for an aggressive high growth business. Re-positioning early and quickly is going to be vital. New proposition could be centered around cross-border payments, investments, credit, etc.
• A crisis is a tough time for high-growing cash-burning businesses and can lead to wave of neobanks fallouts or consolidations (unless they secured 500M financing just before the crisis, like Revolut did)

Upsides:

• Neobank’s propositions featuring short-term credit, overdrafts, payday loans and business financing (e.g Monzo, Starling) are likely to get swamped with loan applications. However, a surge in borrower might be followed by a surge in non-performing loans

Different value propositions will pay off differently during the crisis. Neobanks are quite fast to adjust, but, nevertheless, they are entering a period of a tough time.

Traditional Card Issuers

(e.g. Banks)

Downsides:

• A decrease in card transactions, leading to an increase in interchange revenue
• Potential brief increases in ATM withdrawals in panicking regions

Upsides:

• More savings left on individual accounts of customers with stable uninterrupted cash flow (e.g. salaried employees in less affected industries)
• Inflow of savings from neobanks into accounts in traditional banks, as customers look for safer heaven. Also rising potential of 0% to negative deposit interest rate for customers
• Higher credit card balances with customers and businesses experiencing liquidity problems (e.g. freelancers)

While banks might experience many problems arising from the coronacrisis, issuing business is clearly not one of them. Higher credit card usage from some customers and increased unused savings from other will

Card schemes

(e.g. Visa, MasterCard, American Express)

Downsides:

• Juicy revenues from cross-border transactions are going to dry out for the period of lockdown (Mastercard and Visa already issued statements revising earnings)
• High margin hospitality sector revenues are vaping out for the same time
• American Express revenues might fall off the cliff since business travel is stumbled across Europe and North America
• General drop in transactions across markets in lockdown

Upsides:

• Increased card penetration at POS in cash-centric markets due to sanitary concerns around coronavirus. Potentially can lead to increased adoption even after the pandemic is over, creating long-term revenue opportunities for Visa/Mastercard

Cross-border P2P payment providers

(e.g. Transferwise, WorlRemit, Remitly)

Downsides:

• A sharp decline in remittances as some expat workers in Europe and US might temporarily lose (a portion of) their income in the future in case of a lasting economic downturn
• Freezing of business-related payments (e.g freelance, small B2B), due to many projects going on hold over the economic uncertainty

Upsides:

• New volumes arising from payments that otherwise would be carried over in cash, but could not due to travel restrictions

New volumes stemming from travel bans are unlikely to cover all volume losses from remittances and traditional B2B. Moreover, in Europe many short-term workers from Eastern Europe already went back to their home countries on the onset of the crisis, and many more are likely to follow in the event of a lasting downturn. This implies we are most likely to see cross-border P2P payments volumes down by 10–20% in 2020, with the largest players, such as Transferwise, Moneygram, Western Union, Worldremit and Paypal being affected the most.

Alternative payments methods and wallets

(e.g. Apple Pay, Klarna, Payconiq)

Contactless payment methods that can eliminate touching the terminal are in an upswing, with Apple Pay and Google Pay adoption accelerating over the sanitary concerns. Alternative payment methods like Swish, Payconiq and MobilePay might also get increased adoption if they position themselves wisely.

In e-commerce, while there is rising uncertainty with delivery times, immediate bank transfer-based payment methods (e.g. PaybyBank) may slightly lose share, while credit-drive Klarna and Afterpay will become a method of choice for many customers.

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Despite many downsides, the crisis also offering many payments players the emerging niches and evolving opportunities to increase volumes and customer adoption. In order to do so, they need to be quick with changing their strategies and repositioning their products at a crisis mode speed.