Introduction

The world has now become a global village, you can now dial up and speak to a person in the farthest part of the world in seconds, have video calls with them and transfer money to them instantly.

Since being birthed in the early 1990s, the global digital industry has grown to 2.1 trillion dollars in just over 30 years with a double-digit growth rate in Asia -Pacific (APAC), Europe, the Middle East, and Africa (EMEA) markets in 2021. The industry is expected to have a size of 3 trillion dollars by 2026. [1]

The rapid expected growth rate in the payment industry is majorly due to shifting global trends such as Central Bank Digital Currency (CBDC), embedded finance, and changing macroeconomic environment (high inflation and interest rates) affecting consumers’ and businesses’ behaviours and consequently business models of payment companies. These trends are expected to alter the global landscape, bring in new disruptors, change the industry dynamics and increase the pie for industry players.

In this article, I will discuss current trends and opportunities in the payment industry and how existing and fresh players can position to benefit and gain market share.

Key forces creating new opportunities in the payment industry

Before we dive into the new opportunities, let us understand what is creating them in the first place.

1.     The global environment: The war in Ukraine has been having a significant impact on the global economy affecting energy, diesel, and wheat prices thus causing inflation to go up in most countries of the world. Several countries have been raising interest rates to curb this and avoid recession. This is expected to cause businesses and consumers to rethink their cash management strategy for liquidity and investment purposes thus affecting payment companies earning from per-transaction pricing.

2.     Tightening capital market and fall in valuations: Over the last few years, the flow of capital from venture capitalists, and angel investors have reduced due to economic conditions and low returns on investments in fintech companies. Within the last 12 months of August 2022, new payment companies returned a negative 70% returns to shareholders compared to a negative 26% from incumbent companies [1]. These conditions make it difficult for new payment companies to access funds to grow. For established payment companies, this creates an opportunity for acquiring struggling companies, consolidating, and growing market share.

3.     Technology: As is well known, technology evolves rapidly. For players in the payment industry, this means another round of heavy investment in recent technology systems to make their payment processing real-time efficient, meet the open banking requirements, and have a robust mobile and web platform. Again, players who invest in this are well-placed to be in a strong position in the coming years.

Latest trends and opportunities in the payment industry

1.     Embedded finance: embedded finance is when non-financial providers offer financial services such as lending, payment, and insurance to their customers along with their other business services. The industry in Africa and the Middle East grew annually by 45.3% to reach $10.3 billion this year and is expected to reach 39.8 billion in 2029. [2]

With changing consumer behaviour, technology, and digitization of commerce, most consumers now buy goods, keep track of their businesses, borrow money, and access funds online. This creates a strong opportunity for payment companies to integrate, partner with, or acquire smaller companies within this space to play in more areas of the value chain and capture more value. Companies like Flutterwave and Aster have already launched a fintech as a service (FaaS) solution which allows businesses to receive payments and manage their businesses finances, respectively.

2.     Central Banks Digital Currencies (CBDC): Over the last decade, cryptocurrencies have become increasingly popular and have been subtly threatening the position of central banks as the sole provider of currency in a sovereign country. That is why in Nigeria for example, the central bank banned cryptocurrencies and introduced its digital currency.

In Europe, over the last 8 years, cash usage has reduced by over one-third. This has made several central banks to re-assess their roles in the monetary system over the medium to long term and position to become even more relevant by keying into creating digital currencies. It is no surprise then that Nigeria and China have already started large-scale pilot testing of the E-Naira and E-CNY and almost 90% of central banks globally are now in the process of creating a digital currency for their country.

CBDCs are here to stay. They are digital coins to be backed by the central bank deposits, therefore, guaranteeing a stable value and regulatory backing in contrast with cryptocurrencies. They are also going to help the central banks with achieving some of their strategic objectives such as increasing financial inclusion, reducing money laundering and fraud.

CBDCs are expected to be held on the central bank ledger with customers assessing and transacting through their digital wallet application linked to the central banks’ ledger through APIs. CBDCs would also help the CBN (Central Bank of Nigeria) increase its oversight on key areas such as settlement systems and achieving efficiency in cross-border payments.

Although CBDC poses risks to existing banks, payment companies and the financial ecosystem business model, it could fuel a new phase of innovation that benefits the consumers, government, and new businesses that key into the initiative.

Conclusion

Globally within the last 4 years, retail non-cash payment has increased by a compounded annual growth rate (CAGR) of 13%. In emerging markets, the rate is 25%. Key factors influencing the growth include the Covid-19 pandemic, governments’ push for a cashless economy, and increasing investments into fintech companies by Venture capitalists.

Within the next 5 to 10 years, digital payment is expected to become the main way of making payments in developed markets whilst in developing markets it is not expected to become the dominant way of making payments yet as 95% of payments are still carried out through cash. A 15% CAGR is still expected, nevertheless.

References:

[1] McKinsey 2022 global payment report

[2] Tech cabal on embedded finance

Written by:
Habeeb Olusanya

Financial analyst at Leonine