The Future of Payments and Financial Services
Image is Titian’s The Tribute Money (1518), National Gallery, London - Jesus asks the Pharisees if it is right to pay taxes to the romans. The evidence is the coin itself. Symbolic of the interchange fees under disruption in the card issuer ecosystem.
Here is an excerpt of an interview I did with paybefore magazine about the future of payments
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More than $8.5 billion in investment funds have flowed into financial services innovation since 2010, said Sumon Sadhu, Director of Intelligence at Quid, a San Francisco-based text analytics firm that studies mobile payments industry developments. Innovations in payment processing accounted for the largest share of investment so far, at $812 million, followed by $626 million invested in e-commerce and mobile commerce, $583 million invested in online financial services, and $250 million invested in mobile payments, according to Quid. According to the rate of investment growth from 2010 to 2011, investments surrounding payments processing, lending, virtual currencies and online gaming are sone of the fastest-growing categories attracting venture capital, Sadhu said. The average venture capital investment for mobile payments companies is $2.7 million, he noted, and that figure is on track to rise this year.
–Why exactly is venture funding flowing into mobile payment ventures? How many of these ventures are likely to become IPOs? Or is it that backers hoping to make money when larger companies buy smaller ones as the industry matures?
SS: “The global payments market is huge. According to data from BCG It is estimated to be worth $782 trillion in non cash transactions and $492 billion in cash transactions by 2020. Therefore there is ample room to support new independent companies that have stable value on the public markets. In addition to being a large market opportunity, there are fundamental shifts in technology that are enabling new forms of payments. The rise of mobile devices, the digitization of transactions and cheaper storage and processing applied to deriving value from that data will drive new conceptions of how money flows within society. The combination of the size of the market opportunity coupled with changing times is what is igniting venture investment. Just like the first coins, printed notes or credit cards, innovation that is happening now will be looked back on in the history of our species as a significant landmark in the evolution of money.
Companies that are able to be strong enough to IPO will be taking approaches to the payments problem that are ignored or orthogonal to what large public companies are doing. So for example peer-to-peer lending companies like Lending Club, or loans companies like Wonga where users are qualified for loans with algorithms instead of humans. These companies are pioneering approaches that seem contrary to established logic, by lending directly between people or removing human decision making entirely from the process. These approaches will form the basis of future financial services companies, so by the time big companies realize that these approaches these companies can reach scale and have the revenue run rate to go public.
Companies that will be bought by larger players will be those that have good user experience but no scale. Fortunately there are some strong incumbents that exist in payments like PayPal, or the card issuers like Visa, Mastercard and American Express. A company like Card.io, which was acquired by PayPal for its ability to read the credit card on the phone using its camera, was acquired for their ability to augment what these large players already do.
Outside of these categories most of these companies will fail, as returns follow a power law distribution.”
–Do the potential opportunities for investors in mobile payments match the reality? Or is there a lot of “irrational exuberance” in the notion of payments going mobile?
SS “The future of innovation in payments will make user’s lives significantly easier, with benefits like rewards for loyalty, but without providing any friction or change in behavior. We have the enabling technology to do that. It will be easier than using cash. Good venture investments must achieve a meaningful change in user experience and achieve scale with respect to the number of people they reach in order to succeed. Not every company will achieve scale or win on user experience. So the irrational exuberance will be demonstrated in chasing all the companies pursuing the payments opportunity, or focusing on features like NFC instead of the end user experience.
Very good companies will be able to realize the aspiration of making users lives better at scale. Since the future is grounded in changes in underlying technology the opportunity is very real. These companies will make a lot of money for investors. However, not every investment can be a good company.”
–What effect is Silicon Valley’s interest in mobile payments having on the industry?
SS “Silicon Valley’s focus is on designing experiences for users that makes their lives better. Typically this vision for the future challenges many existing assumptions. To succeed at doing so requires an unusually intense combination of optimism, design, engineering and business development. This is a Silicon Valley specialty. So the net result for the payments industry is driving forward higher standards and quality for what the end user will get, while at the same time reevaluating existing assumptions. Companies like Stripe and Square epitomize this philosophy."