Home Slider The Past Decade Transformed Payments, But Wait for the Next 10 Years

The Past Decade Transformed Payments, But Wait for the Next 10 Years

by internationalbanker

By Hans Morris, Managing Partner, Nyca Partners

 

 

 

 

Almost exactly 10 years ago, we at Nyca Partners wrote a note announcing our formation, which was interesting to reread as we looked back at our predictions from a decade ago. Here’s one section from our March 2014 memo:

Most of us can see that technology holds the promise to transform the way financial services are provided to individuals and businesses. Technology has improved financial services, but not transformed how we make payments, borrow, lend, and manage our investments. But the simultaneous availability of new data sets, ubiquitous smart phones, cloud computing, and even digital currency protocols fundamentally change how financial processes could be organized.

This prompted me to think about how much, in fact, has changed over the past 10 years. I concluded that while significant changes have occurred since 2014, specifically in payments, many problems remain to be fixed. Our current prediction, however, is that much of the infrastructure is in place today for the next decade to be transformational. Are banks ready for this?

To set the stage, let’s paint a picture of the payments world in 2014 versus today:

  • Retail payments:
    • In 2014, point-of-sale (POS) systems throughout the United States (and most of the world) were either Ingenico, Verifone or similar “brick” terminals. Stripe, Braintree (acquired by PayPal) and Square were only a few years old, so most merchants had to undergo a long onboarding process before accepting payments. Smart terminals and NFC (near field communication) tap-and-pay systems were rare, and virtually no retailers had integrated their POS systems into their ecommerce systems. At the time, ecommerce comprised 6 percent of US retail volume and was even lower globally.
    • In 2024, 90 percent of new POS systems are “smart” terminals, many with customized software for different industry verticals. And the retailer now either has payments embedded into its operating system (e.g., Toast), or the payment system has effectively become its operating system (e.g., Square, used by more than two million retailers). Vertical software systems and payment facilitators (Payfacs) have replaced independent sales organizations (ISOs) as the primary merchant-processing distribution systems. Onboarding now takes minutes for new merchants, and the lower onboarding friction and the explosion of smart terminals have greatly expanded the universe of potential users; micro merchants that were unacceptable risks or unprofitable to merchant processors now have instant global payment access. Verifone and Ingenico’s combined share of the POS market fell from 58 percent in 2009 to 18 percent in 2021. And ecommerce now makes up 15 percent of total sales.
  • P2P payments:
    • In 2014, P2P (peer-to-peer) payments existed, but volumes were tiny. Venmo—which had just been acquired by PayPal in 2013—had a payment volume of $2.3 billion in 2014. Cash App (then called Square Cash) was launched in late 2013, but the initial version was a bust. Visa Direct and Mastercard Send were both introduced in 2015, and Zelle was launched in 2017.
    • In 2022, 69 percent of US consumers used P2P payments. This included 57 percent of US adults using PayPal, 38 percent Venmo, 36 percent Zelle and 26 percent Cash App. In 2022, Venmo’s volume was $244 billion, and Zelle’s was $490 billion. Visa announced Visa+ in April 2023, enabling cross-network P2P transactions for the first time at scale.
  • B2B payments:
    • Business payments used decades-old infrastructure in 2014, and both small and large businesses relied on inflexible, primarily paper-based systems. Virtual credit cards (VCCs), a one-time card number a business can use to pay an invoice, were still in their infancy, and ACH (automated clearing house) and SWIFT (Society for Worldwide Interbank Financial Telecommunication) allowed counterparties to swap only a limited amount of information, which meant that manual reconciliation was typically required. Different systems managed accounts payable (AP) and accounts receivable (AR). Corporate-card systems were decades old, required long lead times for onboarding and were matched with heavy expense-management systems for corporate users. In 2014, other than Fedwire (only available to members of the Federal Reserve System), there were no real-time payment (RTP) systems in the US. There were only 12 such systems globally, of which the Faster Payments Service (FPS) in the United Kingdom was the largest (launched in 2008). Transactions would take days (or longer) to complete.
    • In 2024, new platforms (e.g., Bill.com, AvidXchange, Payoneer, Brex, Ramp, Flywire) automate AP, AR, VCC issuance, marketplace payouts and cross-border payments. Data-enriched standards, such as Enhanced ACH and SWIFT 20022, are live, providing essential context for B2B payments. More than 50 countries have real-time payment systems, including every major economy. In the US, same-day ACH went live in 2016, The Clearing House RTP system launched at the end of 2017, and FedNow commenced in July 2023. While payment infrastructures are in place, volumes remain small, partly because business infrastructures aren’t ready to manage real-time payments. There is still a long way to go; MasterCard has estimated that $20 trillion of payments are left to process digitally.
  • Open banking:
    • In 2014, Plaid was one year old, and the European Union (EU) was still a year away from publishing its PSD2 (Revised Payment Services Directive), which did not take effect until 2018. While it was possible to initiate transfers digitally, doing so usually required manually entering account and routing numbers via an online form.
    • Open banking is now ubiquitous and has changed the financial services landscape. Twelve thousand fintechs (financial-technology firms) use Plaid, and PSD2 has forced European banks to make customer data available in a standardized format. Account-holders find it much easier to transfer funds between different institutions. This was especially evident following the collapse of SVB (Silicon Valley Bank), with estimates suggesting the deposit beta of primarily digital banks was 40 percent lower than that of primarily brick-and-mortar banks. Section 1033 of the Dodd-Frank Act (Dodd-Frank Wall Street Reform and Consumer Protection Act) required that the CFPB (Consumer Financial Protection Bureau) create standards for US open banking; 13 years after its enactment, the CFPB recently released its proposal. While market forces have already made much of this new rulemaking a reality, standards for access should accelerate open banking even further in the US.
  • Transformation of payments in emerging markets:
    • Mobile-money schemes in emerging markets were well on their way to mass adoption in several markets, even in 2014. More than 78 million Chinese consumers and businesses adopted Alipay and WeChat wallets in 2014; the volume was $97 billion. More than 90 percent of the Kenyan population used M-Pesa, the mobile-money service with a national network of agents that had launched in 2007. Yet many of the “faster payments” solutions in other markets had not yet been initiated, including India’s UPI (Unified Payments Interface) (2016) and Brazil’s Pix (2020), and wallet schemes in other countries were nascent.
    • Payments in emerging markets are dramatically faster and far more digital today than in 2014. Non-bank digital payments in China exceeded $40 trillion in transaction volume in 2022. Pix in Brazil is just three years old but already accounts for 30 percent of Brazil’s electronic payments; remarkably, Mastercard has estimated that it has reduced the number of unbanked Brazilians by 73 percent. Across the world, the explosion of mobile wallets has enabled merchants to drive greater loyalty and created opportunities for new sorts of payments companies. In Southeast Asia, for instance, the mix of QR (quick response) code payment methods, prepaid digital cards and digital coupons has led to companies, such as Nyca’s portfolio company PortOne (formerly known as Chai), that enable merchants to accept a wide range of payment methods and facilitate cross-border transactions. And this hasn’t happened only in emerging markets; several advanced economies (e.g., Sweden, Finland, the UK, South Korea and the US) are more than 75 percent non-cash as a percentage of all transactions. What’s next?

    This represents an extraordinary amount of change in 10 years, but many things didn’t change. Despite the hype and billions in investment, cryptocurrency is not used in payments in any material way outside the crypto ecosystem. And while BNPL’s (buy now, pay later) annual volume is above $70 billion, it accounts for only 0.7 percent of ecommerce sales. The large incumbents, Visa and Mastercard, have become even more dominant.

  • Given the changes in underlying infrastructures and digital tools developed over the past decade, we believe the transformation in payments will be profound over the next decade. Here are five observations on the likely future of the payments ecosystem:

    1. Real-time payments will be ubiquitous, with many settlement options, transforming working capital but adding complexity. The world of payment options will become much more diverse and difficult to navigate, with every country having at least one real-time system, and merchants, consumers and businesses will have many settlement alternatives for B2B, POS, ecommerce and bill pay. These already exist, but their use will explode and include innovations in push debit, P2P, A2A (account-to-account), wallets and “on-us” accounts sitting in marketplaces, regulated stablecoins, central bank digital currencies (CBDCs) and digital drafts (or payment “tokens”). Merchants and consumers will need tools to manage and mitigate this complexity, especially tools to optimize for risk, cost and speed of settlement. This trend will lead to greater downward pressure on interchange fees and more personalized digital rewards and incentives to drive consumer and business preferences.
    2. Business infrastructure must adapt to this new environment. We expect all business payments to become digital over the next 10 years, reaching $25 trillion in annual volume in the US. As part of this shift, the walls between enterprise resource planning (ERP) tools, accounting systems and payments will come down, allowing enterprises to sync ERP tools (the source of truth for business operations) with real-time cash positions. Businesses and marketplaces will also need to more effectively and securely manage the high volumes of transactions that are pending final settlement, as well as the large customer balances awaiting reconciliation.
    3. Risk systems must adapt to a real-time world with fragmented payment systems and sophisticated, continuously evolving fraud. Current risk systems are inadequate for an ecosystem with much faster payments and potentially dozens of alternative settlement options. This speed, combined with the fragmentation of systems and rules, will benefit fraudsters, which may include state actors. AI (artificial intelligence) and quantum computing will add to the power and sophistication of these criminals. Businesses, retailers and financial-services companies will all need more sophisticated technology and, in some cases, fundamentally new approaches to establishing identity, monitoring business behavior and providing real-time transaction analysis.
    4. Embedded payments will be everywhere. Virtually every industry vertical is adopting new SaaS (software as a service) systems to replace its core infrastructure, creating opportunities for software platforms to embed payments that are integrated into this core. Advances will continue in areas of what we call contextual credit, enabling more accurate and quicker credit decisions. Vertical software platforms will transform into financial operating systems, becoming hubs for various B2B payments. This will also enable B2B to be smarter, with “programmable money” automating many processes using real-time operating data.
    5. TAM (total addressable market) will continue to expand as more countries and specialized payments rails turn digital. Many segments remain paper-based and are hard to change (e.g., the US healthcare system), as are many countries (even rich countries such as Japan) with low digital penetration. Many other areas haven’t been impacted by the digital revolution but are ready to embrace the future. As just one example, Nyca’s portfolio company Forage enables online merchants to accept EBT (electronic benefit transfer) cards, allowing SNAP (Supplemental Nutrition Assistance Program, formerly Food Stamps) recipients to make purchases online.

    How much value might be created? If we consider that the market capitalization of payments companies increased by more than $1.5 trillion over the past decade, we think a lot. Stay tuned.

 

 

ABOUT THE AUTHOR
Hans Morris is Managing Partner of Nyca Partners, a fintech VC firm in New York and San Francisco, founded in 2014. He is the Chairman of LendingClub’s board and a board member of several private companies, including SigFig, Thought Machine, Fidel, SentiLink, Gr4vy and Necto. Previously, he was a Managing Director of General Atlantic, President of Visa Inc and also worked at Citigroup in several operating and management roles.

 

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