Navigating payments: emerging markets, COVID-19 and M&As
Marjan Delatinne, Global Head of Banking, Ripple discusses how to effectively navigate a rapidly evolving payments
The last 12 months has seen monumental change in the payments industry. In an almost domino effect, some of the market’s most notable names have announced landmark acquisitions which have quickly laid precedent for the future of payments.
For instance, FIS, Global Payments and Fiserv have all announced acquisitions over $20bn, helping industry consolidation deals jump from $31.8 billion in 2018, to $116.6 billion in 2019.
While this may seem like a mad rush to drive growth via acquisitions, there's a method to the ‘madness.’ This consolidation is driven by the need of incumbent players to remain competitive in a rapidly moving financial services market, where a lot of the latest innovations come from agile, digital start-ups that are not burdened by old legacy infrastructure.
In this market environment, acquiring or partnering with digital disruptors can be a much more effective way of achieving a competitive advantage than overhauling old IT infrastructure.
What’s more, these acquisitions have never been more pertinent. With market uncertainty led by COVID-19 developments, payment companies must continue to offer the services that users need and trust, or find themselves quickly out of business.
In the last five years, the payments industry has seen greater change and disruption than it has in the previous 30.
In the UK and elsewhere in Europe, card payments have now overtaken cash for the first time ever, and in light of COVID-19, the contactless transaction limit is being raised to support a decline in willingness to physically carry paper money.
In invoicing and settlements, automation has replaced manual human-led processes, speeding payment times and helping finance departments compile more accurate balance sheets.
While these are certainly examples of innovation, for incumbent and established institutions, the pressure to keep up is arguably most felt in the realm of cross-border payments. This is because the way in which money has moved internationally has remained fairly stagnant since the 1970s.
It relies upon a correspondent banking model where money hops from bank to bank several times over to reach its destination account. The system is slow and costly, as each ‘hop’ takes a handling fee, and is quite opaque.
The good news is that there are far cheaper, faster and more transparent alternatives to this outdated payment model.
From traditional remittance services like MoneyGram and Ria, to digital upstarts such as TransferGo and Azimo, as well as those offering blockchain solutions, there’s partnership options available to those looking to move away from legacy processes.
In today’s COVID-19 business climate, it’s a case of deciding to move with the trend, forming industry partnerships or falling behind.
Ripple’s 2020 predictions for the financial services industry
Yet, consolidation in the market can be traced back to much more than technology innovation. It’s also reflective of how emerging markets are dictating the services they’re provided.
Emerging markets today in Africa, Latin America or Southeast Asia offer a big growth opportunity for payment companies. Thanks to the rise of global e-commerce businesses and online marketplaces, like Alibaba or Amazon, these markets are increasingly reliant upon alternative payment models - those which are seldom offered by established institutions in western economies.
Consumers now need to be connected instantly with suppliers, merchants or service providers, so the expectation is that payments will work the same way. This means that they cannot afford to wait three - five days for payments to settle. Instead, they need their payment networks to have a global reach; existing outside of the traditional banking system and extending to non-traditional payment networks such as Alipay, M-Pesa or Venmo.
With exponential demand for services brought about by COVID-19, businesses need to serve customers - whether corporates or consumers - immediately.
They cannot afford to wait the requisite time to batch payments, instead needing to process vast amounts of low-value payments on-demand, at a high velocity. Major players in the payments industry that do not possess these capabilities in emerging markets, are cooperating - not competing - to meet this customer demand.
It’s an easy solution to an otherwise challenging financial obstacle.
In addition to the implementation of new technologies, the industry has seen an accommodating regulatory environment that has allowed start-ups to grow and become influential.
In the UK, for instance, Open Banking has allowed fintech companies to access banks’ customer data and provide safer, more bespoke service. Not encumbered by legacy technology, fintechs can innovate faster and differentiate themselves from their established peers.
The combination of disruptive technology and a regulatory environment that encourages competition has led to a bloom of new companies.
For instance, in remittances alone, there are now over 80 different providers all offering similar services. However, as recent acquisition and partnership trends show, this proliferation is unlikely to last much longer.
Consolidation is already happening as the market reaches critical mass. Too much choice can be damaging, not just in terms of splitting the customer base, but also by diluting the utility of the technology.
It’s therefore only natural that the industry will trend towards cooperation, not competition, with one another and provide streamlined services.
The last few years have seen considerable changes rolled out that have transformed how payments are made, processed, cleared and secured. None more so than in international money transfers, where the market has been upended by emerging technologies such as automation, machine learning and digital assets.
Now, as COVID-19 simultaneously increases market uncertainty but requires more from payment providers to support customers’ demands, it’s never been more important to focus on robustness and reliability of services - the world quite literally depends on this.
For large incumbents, this is an opportunity to take a leap of faith and embrace new technologies with both hands. Some already are, as seen by the unprecedented level of M&A and partnerships announced this year, but given what’s commercially at stake, there needs to be more.
This article was written by Marjan Delatinne, Global Head of Banking, Ripple
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