Just a few years ago, having a recognized brand and a loyal customer base used to be key indicators of a payments company’s strength. However, relying only on these put many established players in a difficult spot over the past 18 months. Instead, the COVID-19 pandemic favored the most digitally-forward, especially those who demonstrated an ability to rapidly pivot and adjust to what has become one of the key new realities of commerce – the need to orchestrate demand and supply-side ecosystems at scale.
At the onset of the pandemic, the consumer demand curve virtually shifted online almost overnight, but met a supply curve that was massively unprepared for this radical shift. By quickly solving the real, urgent pain points that emerged, fintech innovators such as Shopify, Square, Instacart, and Patreon, were able to gain massive market share, regardless of their size and relevance pre-pandemic. They quickly displaced incumbents and formed strong loyalties with their newly acquired user base – which they are now monetizing by extending their offerings way beyond their original niche. Square, for instance, capitalized on the rapid market shifts to grow its Cash App user base. PayPal did the same with its Venmo app and, in fact, tripled its profits during the pandemic year.
For legacy providers, this meant one of two options: either radically accelerate their transformation to become digital-first platforms or be relegated to the ‘unused apps’ section of their clients’ devices. Triggered by survival instinct, we have seen legacy banks and payment companies compress decades worth of innovation into what is likely the greatest acceleration of digital payments in history.
Even central banks and government authorities recognized the urgent need to transform their market infrastructures – typically characterized by outdated, centralized systems with many points of failure – into open and distributed networks that can more dynamically support global trade and commerce. The acceleration of real-time payment schemes, contactless payments, and the increasing focus on digital currencies, are examples of the urgency with which governments are leaning into a digital-first approach to money.
In less than 18 months, we have witnessed a rapid un-bundling and reconstruction of many parts of the payments and commerce value chains – something that would have otherwise taken at least a decade.
As the race for our attention, loyalty, and our money accelerates, the rules of the game have changed. Digital is no longer a channel (as in digital vs. physical), but the underpinning of every payments, commerce, and financial transaction. And, in a digitally-native economy, many of the lines between commerce, payments, finance, and banking are being blurred.
New and fundamentally different business models are emerging, underpinned by digital payments
Headless, Composable Commerce Platforms
Using technology to dynamically orchestrate demand and supply ecosystems, platform businesses are finding unique ways to enter what have traditionally been highly vertically-integrated markets. The supply side can be anything, from bespoke physical products sourced through online supply chain networks to highly specialized digital services from a new generation of online creators. And, through headless go-to-market strategies, demand can be generated through a wide range of channels, from social media platforms to mobile wallets, to physical points of sale, to smart devices like vehicles and refrigerators. Payments providers are quickly reconfiguring their offerings to intercept and enable this trend, positioning themselves at the center of a rapidly growing transactional ecosystem.
Autonomous financial supply chain networks
The pandemic exposed major fault lines in the traditional approach to supply chain management. Small businesses, typically the weakest link of most supply chains, suffered the most. The combination of new sources of liquidity and capital (beyond traditional banks), paired with new technologies (such as blockchain and IOT), are giving birth to a new generation of connected, intelligent supply chain networks that more efficiently create and distribute value across all participants. Resilience, flexibility, working capital, visibility, efficiency, compliance – and even ESG – are now being programmatically embedded into the supply chain itself.
De-centralized, programmable, digital-native money
Multiple factors are driving this shift. First, global trade and commerce is becoming faster, more ubiquitous, and increasingly digital – demanding new mechanisms for real-time, always-on, borderless payments networks. Second, human rights such as privacy and autonomy are permeating every aspect of our daily lives, placing new requirements onto the ways in which we create, store, and transfer value. Third, adoption of crypto currencies, both by consumers and institutional investors, is demonstrating the appetite for digital currency. And fourth, there is an accelerated focus on the digitization and traceability of the money supply through Central Bank and FIAT-backed digital currencies – as ways to platformizeand strengthen country infrastructures for a digital-first economy.
Embedded, personalized offerings underpinned by a secure digital identity
As all aspects of our lives become digitally enabled, the different dimensions that make up our existence are increasingly intersecting. Financial wellness, healthcare, commerce, education, productivity, etc. are all digitally intertwined into a complex data ecosystem that surrounds us and our households. Value will migrate from individual products or channels to holistic, omni-channel ecosystems that can customize and choreograph best-of-breed solutions and cohesive personalized experiences – all while guaranteeing our privacy, independence, and overall safety.
Entrepreneurial commerce networks
We are seeing a major shift towards ‘platformization’ and ‘everything as a service’. Between the gig economy, crowd funding, cloud computing, artificial intelligence, and low-code platforms, traditional barriers to entrepreneurship are disappearing.
Think of the Amazon FBA entrepreneur
[For reference, Fulfillment by Amazon is a service for third-party sellers to automate their order fulfillment and shipping services. Anyone enrolled in Amazon FBA can let Amazon handle all shipping, including returns and refunds, as well as product warehousing in Amazon’s warehouses, picking and packing, etc.]
Anyone can become an FBA entrepreneur overnight. Tapping into flexible and readily available talent and supply chain networks, entrepreneurs can design, create and source new products, which are in turn delivered to Amazon who takes care of scaled global fulfillment. Entrepreneurs can focus their energies on becoming the number one seller in their categories without having to deal with complex administrative aspects of running a business, such as collections, payments, logistics, etc.
Successful FBA entrepreneurs are increasingly leveraging the supply chains they have assembled to leap beyond the Amazon ecosystem and access other marketplaces such as Walmart to further amplify distribution. And, when the business is large enough, they are selectively unbundling parts of the FBA value chain, such as shipping or payments processing, and shifting them over to other providers with more attractive pricing or better features.
New technologies as strategic enablers
As businesses pivot from being producers of products and services to becoming scalable orchestrators of demand and supply ecosystems, technologies like cloud, AI, and blockchain and digital play a fundamental role.
A robust cloud foundation is critical in achieving economies of scale and minimizing time to market. Among other things, cloud allows businesses to only consume (and pay for) the services they require at any point, rapidly scale in an automated fashion, and embed security, automation, and compliance into every line of code. This drives great unit economics which is critical for payments and commerce business models.
Advances in AI are flipping the innovation model on its head. Traditionally, product designers would come up with hypotheses, then test them, and then build products based on the results. Through smart use of AI, platforms can generate insights from the live data they are seeing, in order to algorithmically orchestrate and launch new propositions on the fly. By capitalizing on wide sets of data (including recent data such as the exact weather in a given zip code or the traffic patterns outside a user’s home), AI-enabled platforms can create highly personalized micro-moments where they can benefit from greater cross-sell rates and accelerated consumption. Just in the last year, the number of affinity and micro-segment focused fintech offerings has shown the power of these technologies. AI also makes every aspect of the business and the transaction lifecycle fully observable in real-time, enabling highly dynamic compliance and risk management which are imperative for rapid scaling.
Furthermore, the ‘API-fication’ of payments and commerce is empowering providers to acquire users and distribute services to them through an unlimited set of channels. This means services are always made available when and where customers need them, regardless of where these customers choose to interact. This allows brands and providers to be ‘omni-present’ and consistently relevant, while minimizing the amount of proprietary digital real estate they have to own and operate.
Finally, blockchain – and blockchain-adjacent technologies – have continued to demonstrate the power of de-centralization in the formation and scaling of more autonomous global networks. Concepts like ‘money as software’ and ‘programmable money’ are giving birth to disruptive propositions across almost every industry – from automated insurance claims, to carbon track and trace solutions, to connected multi-level supply chains.
No such thing as a free ride
The accelerated transformation of payments, commerce, and trade does not come without risks that need to be carefully managed.
Cyber security. As more aspects of our payments and commerce lives become digital, fintechs are prime targets for cyber criminals. Network security, data breaches or even denial-of-service attacks can create irreparable customer and brand damage.
Customer experience. As all sorts of companies look to embed payments and financial services into their flows, a whole new set of transaction patterns is emerging and, with them, many new potential points of failure in the customer experience.
Regulation. Taking the credit card space as an example — Dodd Frank and the Credit CARD Act created the regulatory environment that allowed early banking as a service provider (such as Bancorp) to create pricing arbitrage opportunities due to their relative size. Today, many Fintech unicorns – which in fact rely on these banking as a service provider- have much higher valuations than top tier banks. This is raising fundamental regulatory questions. For instance, should a $10B fintech be treated like a software company, a local credit union, or like a super-regional bank when it comes to interchange and other regulations? On the digital currencies and asset tokenization space, lack of regulatory clarity and international consistency is forcing innovators to either tread carefully (and as a result slowly) or take important risks without a thorough understanding of downstream implications.
Digital Transformation limbos. As many legacy enterprises accelerate their shift to digital, gaining escape velocity in transformation can be a challenge. Old applications and ways of working can be difficult barriers to overcome for those without a solid strategy, strong architecture, and flawless transformation execution.
The road ahead
Habits are made and broken in times of crisis, and the COVID-19 pandemic was no exception. The fundamental shifts we have witnessed in consumer behavior, attitudes, and expectations towards payments will not only stay, but continue to accelerate. For payments companies, the successful adoption of emerging technologies to disrupt and re-invent business paradigms will mark the difference between the next wave of winners and losers