A Year of Maturity for Payments (#44)
2021 Recap: M&As and IPOs, healthier economics, CBDC launches, formalising BNPL, and more
Welcome to the 44th and the year’s last issue of Unit Economics. Continuing the ritual, today’s write-up hopes to provide a snapshot of all that transpired over the last year. The trends, as you will notice, point to an ecosystem that is becoming increasingly mature – without compromising on innovation or progress. Given this theme, I will jump straight to what I believe were the highlights for the payments industry.
Large-scale M&As and a line-up of IPOs make exits more commonplace
The year saw many landmark exits, with acquisitions of BillDesk (PayU, $4.7Bn), Afterpay (Square, $29Bn), and of multiple other niche operators (Payback, Fave, Pago Fácil, etc.). The consolidation was somewhat expected, but more interesting has been the pace of public issues with Wise, Paytm, Nubank, Kakao going public – successfully in most cases. The headlines suggest that this is the beginning of a longer-term trend with the expected IPOs of Pine Labs, Chime, Mobikwik, Ant group (hopefully), Nuvei, AvidXchange, India1 in the year to follow.
These exits will continue to keep the investor money flowing into the industry and make founders spirited, both of which should do enough to keep pushing payments innovations.
Businesses move towards healthier unit economics
A positive consequence of the surge in exit opportunities is the renewed focus on business health. What this means is that in the hope of appearing more attractive as an acquisition target or in the eyes of the public, businesses are working towards profitability with more seriousness – even if it comes at the cost of some growth.
This is best highlighted with the shift in focus towards the higher-margin segment of digital lending for some. Lending is, no doubt, a solid avenue for monetization. But it also allows payments companies to use the existing transactional data to build sophisticated underwriting tools, which I believe can seriously impact how lending organizations underwrite in the future.
Moreover, with the focus on healthier unit economics, a higher proportion of discussions – like with digital lending – are shifting from acquiring-more-users to monetizing-existing-users, which is a good sign.
CBDCs go live, face adoption challenges; Cryptocurrencies remain popular but struggle for use cases
The year was a mixed bag for digital currencies. For the currencies backed by the central bank (CBDCs), the pace of research, experimentation, development continued to be high, with almost 87 central banks exploring a CBDC and 9 of those launching the CBDC for use within the last year. China, popularly, has been the most aggressive with the e-Yuan issued to over 140 Mn digital wallets and 10 Mn merchants already in the country.
However, there have been concerns over the security and utility of CBDCs, which has kept the adoption muted for the likes of Sand Dollar (Bahamas) and e-Yuan, despite the large-scale issuance and bank push. BIS and central banks, given the learnings from experiments and pilots, continue to explore how a retail CBDC might look in the future since CBDCs are, no doubt, a long-term bet. The promise remains as strong for the CBDCs, and central banks have plenty in mind.
As expected, the developments for cryptocurrencies have not been as straightforward. The institutional interest-led popularity of crypto only bought more skepticism for the currencies, centering around the limited payments use cases due to the low transaction handling capability, high gas fees, and complicated user experience. The involvement of who’s who in tech also made the markets more volatile.
This, however, did not stop El Salvador to make Bitcoin legal tender. On expected lines, the development has not been accepted with all smiles and instead, the currency has seen slow adoption, citizen protests, and even international advisory.
Another, and more, important change in the crypto world has been the shift in narrative towards more real-world use cases, with Ethereum – which has been the currency of use for NFT platforms – rising in ratio versus the seemingly less useful Bitcoin.
Lastly, in the world of digital currencies, stablecoins likely had their most productive year – seeing a dramatic rise in both trading volumes and regulatory scrutiny. But for Meta, the cryptocurrency dream remained unfulfilled yet another year, although progress is being made to launch the Novi wallet.
Real-time payments systems continue high growth
2021 was another great year in the progress of real-time payment systems, with UPI (India), Pix (Brazil), and NPP (Australia) seeing ~$100Bn, $100Bn, and $70Bn worth of monthly payments transfers – respectively - by the year-end. The progress in Europe, however, has not kept pace, with the planning of the European Payments Initiative (EPI) seeing criticism from merchants and banks alike.
Given the adoption rate of newer RTP systems, the following year should continue to see the volumes rise in the high double digits. Moreover, as discussed in the last issue, the next frontier for real-time payments is to diversify the use cases, with the focus on B2B, international, and offline transactions – and we should expect more discussions on all three over the year.
Credit landscape: BNPL become formalized, and credit cards are cool again
The last few years had validated the customer and merchant acceptance of buy now pay later (BNPL), but 2021 was a year where the industry moved towards more solid regulatory acceptance. FCA supervision in the UK, the introduction of BNPL code in Australia, and suggestions to formalize BNPL and treat it as part of balance sheet lending in India were all steps in the direction.
Additionally, with the entry of large technology players and banks, the BNPL industry progressed to the shakeout phase of the life cycle, signaling the need to acquire, cross-sell, and price for profitability. The regions continue to differ in the degree of maturity for BNPL, but there exists a heightened sense of progress across all regions – especially with the newfound industry validation through the Afterpay acquisition.
For credit cards, the year was equally transformative. Plastic was replaced by metal or recyclable material. The card number was taken off the face. Rewards became personalized and simpler to redeem. Biometric cards were part of more discussions. And more control was given to the user than ever before. The combination of all such features is helping startups disrupt the credit card market that has – for long – seen little innovation. My view, at least for India, is that in the year to come – we will see the consumer credit card space from startups become highly crowded and competitive, to the benefit of the users. The companies can only hope that it does not translate to cashback-wars.
Final few thoughts
The focus on business economics, the launch of CBDCs, high-growth in real-time payments, and sophistication of credit payments all point to a healthy, growing, and maturing payments industry. The trends also suggest an industry expanding horizontally from simple debit to forms of credit and digital currencies, which must invoke excitement for founders, operators, and investors alike.
The trends highlighted, however, do not give a complete view of the developments over the year. Especially, they miss out on the changing surface of merchant acquiring and financial crime, both of which are covered here.
Also, if there is an industry trend that you feel should have made the list, do write back to me. With that, we can go back to our festive moods and hope for the best for the next year.
In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a couple of weeks!