State of US Payment Industry
Industry background
We can divide the payments universe into four key categories based on their position in the market. The first are the merchant networks (Visa, Mastercard). These networks control where credit cards can be accepted and facilitate transactions between merchants and credit card issuers. The second are merchant acquirers — companies that act as a link between merchants, issuers, and payment networks. They provide services like authorization, clearing and settlement, and dispute management. Third, there is a new breed of B2B-related payment networks that facilitate merchant-to-merchant transactions. Fourth, there is a group of money transfer companies that facilitate transfers for a fee.
Major KPIs
US payment card volumes is approaching $8 trillion in total, with most of that volume touching Visa and Mastercard. Card issuers are taking most of the revenue in the value chain along with card issuers who earn interchange.
The large opportunities exist in working capital, payroll, issuer processing, security, and loyalty programs. Within these segments, I am particularly excited about applying technology to fraud detection, mobile payment checkouts, and omni-channel payments/attribution (not losing checkouts across devices).
Trend 1: Consolidation
The first major trend in payments has been consolidation. Three mega-mergers have driven scale and pricing power in the industry (GPN/TSS, FISV/FDC, and FIS/WP). In addition to these large mergers, public players have bought some emerging companies (Plaid was bought by Visa for $5.3 billion in Q1 2020).
Trend 2: Large private players
In addition to consolidation, the availability of cheap capital has lead to the emergence of large, private players in the payments ecosystem. Some examples include Stripe ($35 billion valuation), Paytm ($16 billion valuation), Nubank ($10 billion valuation), and Marqeta ($2 billion valuation).
It is interesting to note Bill.com’s successful IPO shows that there is public market demand for new players, but many are choosing to stay private as they build out their risk models and do not have to disclose their operations.
Trend 3: Big Tech is becoming Big Fintech
Apple has made a big move into the industry with the launch of Apple Card and Apple Pay. This is 3% cash back card that launched in August 2019 in partnership with Goldman Sachs.
Google launched Google Checking in November 2019. These are checking accounts that can be used with Google Pay. Its initial partnerships are with Stanford Federal Credit Union and Citigroup for its launch “Cache” project in early 2020.
Facebook launched Facebook pay across its properties (notably, Instagram and Messenger). It is learning from Chinese messaging apps that allow individuals to send and receive money through social networks. Many believe the value of a social network is augmented by the use of payments, which increases both stickiness and utilization of social properties.
Alipay announced expansion outside China to US and Europe. It currently has 500 million users and is expected to hit 2 billion in the next 10 years.
Uber launched Uber Money in October 2019. This allows for real time earnings for drivers, introduces a debit and credit card, and Uber Wallet (a digital wallet for drivers and riders).