Unpacking the Payments Tech Stack: 4 Pockets of Opportunities
At Inkef, we strive to invest in technologies that bring about fundamental change, and payments infrastructure is one of the areas within FinTech (the others to follow in the next blogs!) which we want to double down on.
Ever since the concept of money as a medium of exchange was originated about 5,000 years ago, payments has become one of the most fundamental aspects of human life. While the notion of payments in itself is constant, the history of money is still being written and the monetary system will continue to evolve. In this post, we pen down our thoughts on what makes us excited about innovation in payments and what’s keeping us on our toes.
Before diving into the pockets of opportunities, we’d like to touch upon what we see as three pillars driving the future of payments:
· Cutting edge technologies: State-of-the-art technology is central to paving the future of payments innovation; but banks and traditional financial institutions have been one of the slowest to adopt modern technologies (cloud infrastructure, APIs, AI/ML, etc.). With fintechs breathing down their necks, they can no longer afford to use legacy systems and need to re-think their architectures and operating models.
· Regulations: Payments is a highly regulated sector and rightly so. Whether new and coming regulations are headwinds or tailwinds will depend on how companies set their sail. Companies need to think ahead and drive innovation in a reliable and sustainable manner.
· Consumer behavior: Ultimately, it’s the consumer behavior that drives the adoption of new payment frameworks. The pandemic led to the skyrocketing of digital payments as a result of people adopting digital behavior, which will continue to evolve swiftly.
Now, let’s look at few areas we find interesting:
A2A payments — alternative to mainstream?
Account-to-Account payments have been around for a while. Bank transfers is a classic example, but this could never compete with other methods of payments like cards. So why are consumers, merchants, and investors now all very excited? Hint: The three-pillars!
Enhancements in the API infrastructure (technology), roll out of PSD2 (regulation), and boom in e-commerce (consumer behavior) are supporting A2A payments to become mainstream. While we are excited about the market potential for companies building payment initiation services, we are mindful about the growing competition and risk of commodification in the space. As we say at Inkef, a good business case does not necessarily make a good investment case. That said, keep an eye out for companies that can stand out in the space by targeting very specific use cases (but still representing a huge market opportunity). One of those companies is Kevin whose PSD2 rails-based multi-tokenization platform is doing away with the need for authentication for every transaction. This is of particular use in high-volume/low-value transactions, not merely in the online world but potentially also in the (brick-and-mortar) POS market.
Card infrastructure — monoliths to micro-services?
While A2A may be the talk of the town, we have the contrarian belief that cards are here to stay, albeit not the with the dominance that they may traditionally have had. The number of cards issued is growing rapidly (350m new Visa and Mastercard cards were issued in 2020) as merchants and tech companies are looking to “bank” their customers and embed financial services in their offerings. On top of that, the sheer level of intelligence (chargebacks, insurance, loyalty, reservation and deposit requests etc.) that has been baked into cards payments rails remains unrivaled (as we will point out in one of our next blog posts) and we believe that, what used to one of the key drawbacks of cards in the online world, namely the burden of having to key in card details, will be solved as both Apple Pay and Google Pay further penetrate online checkout pages.
All of this being said, the four party model of card payments is no doubt expensive and riddled with legacy technologies that need to give way. We see opportunities right from the infrastructure layer (payment processing, reconciliation, authorization..), to the middle-ware (tokenization, routing, analytics) and front-end systems (checkout, POS, loyalty..). The deeper into the infrastructure stack, the more excited we are — as you could guess from our investment in Silverflow, which is upending the world of acquiring processing. Another one to watch is Enfuce, which sits on the opposite side of the payment transaction with its novel issuer processing and cards-as-a-service platform.
SoftPOS — Tap with phone to Tap on phone?
SoftPOS refers to a software-only mobile application solution enabling individuals to accept contactless payments, from cards or NFC wallets, on their personal smartphones, without the need for any additional hardware. Use cases stretch from penetrating millions of underserved merchants, fueling the gig economy, queue busting in busy periods, transacting on the go. While the core technology has been around for a while, the massive adoption of contactless payment methods was a pre-requisite for the limelight on SoftPOS. For us, it’s not a question of if, but when, SoftPOS will become big. The journey will not be straightforward, though. Following the footsteps of Square, companies would have to wrap this payment method with business management capabilities like merchant on boarding, business analytics, invoicing, lending, and many more to own the merchant relationship.
Cross border payments — local to global?
Cross-border e-commerce is becoming an increasingly important component of the overall online commerce market and as a driver of cross-border payments volumes. The expected global cross border payment flows in 2022 is $156tn. However, payments habits have remained very local, fragmented and culture specific. The correspondent banking networks that have long served as the medium of cross border cannot keep up with the speed of modern day. Back-end networks are emerging that have direct connections in local banks and APMs. The “plumbing” for cross-border payments needs a re-doing, and not just for the low value C2C transactions but also the higher value B2B transactions.
At Inkef, we are extremely enthusiastic about what the future of payments has in store and would love to hear from you if you are a founder, investor, operator, or anyone who is as excited as us about payments! Look out for future blog posts on the space and do reach out to kunal[at]inkef.com and kyang[at]inkef.com to have a chat.