Reflecting on ‘two years’ of turmoil in the global payments sector, the Payments Innovation Jury’s 2024 report projects traditional banks to cement a leadership position in digital wallets.
Published this week, the report noted that payments companies have seen high valuations and increasing investment in recent years – but this funding is now being redirected to other sectors catching investor attention.
Notably, venture capital funding in fintech start-ups amounted to $480m between 2016 and the report’s writing with over $1.1trn in exit value created during the same period. As a result, fintech start-ups are now worth $3.7trn, of which two-thirds of the value is held privately.
Various national and regional fintech scenes have sprung up as a result of this. Take the UK, for example, where although London remains the dominant fintech hub, regional sectors have developed in Manchester, Newcastle, Edinburgh, Cardiff and Belfast and Birmingham, among other major cities.
However, this private sector investment is changing, the 136 jurors of this week’s report believe. This is because huge payments funding rounds were driven by investors bidding up deal prices and paying ‘insufficient attention to profitability’.
This view was shared by investors themselves who were canvassed for the report, it outlined. Investors now focused more on early profitability instead of hyper-growth when investing in payments firms, but are also being drawn to other sectors.
Notably, and perhaps unsurprisingly given the public prominence the technology has gained in recent years, artificial intelligence (AI) has been listed as one of the areas which ‘will benefit from the diversion of investment from payments businesses’.
This does not mean that investment interest is moving away from fintech at large, rather that investors are looking at different subsectors of the industry and less at payments. Climate fintech tools and technologies were also highlighted alongside AI.
Additionally, investment in AI can still be positive for payments as numerous stakeholders in the sector have become increasingly drawn to the potential advantages the technology presents.
In the churros view, fraud prevention and back office development will be the ‘obvious target areas’ for AI investment due to the cost savings potential. Additionally, the widespread rollout of Open Banking has also been noted as a trend which could tie in to AI development.
General improvement and personalisation of the customer experience was the final area which could benefit from AI pinpointed by the jurors, but the respondents did assert that overall use of AI ‘is in the very early stages’.
The rapid development of AI over the past few years has been heavily driven by Big Tech companies – Google, Microsoft, Meta and OpenAI, the latter being the operator of the hugely popular ChatGPT, are some of the big names in this.
However, the jurors believe that start-ups are ‘just ahead in the innovation race’. This may have been noticed by Big Tech though, as the four aforementioned tech giants signed an open letter last week calling for companies to join the AI development journey.
Regionally, the Asia-Pacific area will continue to be the geographic source of most payments innovation. Given this region is home to huge fintech sectors in Japan, South Korea, China, Singapore and other countries, it’s easy to understand why 60% of jurors held this view.
“The wallet-based systems in China and Indonesia are well known, NPCI in India has had a major success with its UPI system and investors have been prepared to deploy very substantial funds to the region,” the report explained.
“Africa & Middle East is the clear second choice of the Jury. The Middle East has been investing heavily in payments technology although the size of national markets clearly limits the potential for companies that operate in a single country.
“Africa remains somewhat of an enigma, retaining its second ranking from previous studies despite challenging economics in many markets and a relative lack of investment funding for companies needing to scale.
“The ranking is a tribute to the resourcefulness of the continent’s entrepreneurs operating in innovating in often difficult conditions.”
Europe did not receive a favourable view from the jurors, despite the continent being home to ‘large markets, stable economies and a sophisticated investment sector’. It is also interesting that the report does not note Europe’s extensive Open Banking adoption, far ahead of other regions.
On the topic of Europe, the jurors also shared a view with the European Central Bank (ECB) regarding cryptocurrency – that being that the digital assets are ‘overhyped’, as the report put it.
One juror member remarked: “Extreme price fluctuations, limited transaction processing capacity and concerns around security breaches and money laundering raise questions about the practical use of crypto as everyday payment methods.”
Lastly, the report also addressed cards. Debit and credit cards have become the dominant payment method in established markets like Europe and North America.
However, in emerging ones they will ‘struggle to gain cut through when competing with account-to-account payments and mobile money’, the report emphasised, with Brazil’s Pix coming to mind.
In contrast, in the developed markets debit cards will retain their leadership position although growth may be more difficult. Finally, the jurors expect banks to ultimately take the leading mobile wallets globally, rather than fintechs or mobile network providers.
This is an interesting observation in the context of findings from other reports. For example, a Temenos study earlier this year found that traditional banks have been investing in fintech to meet the challenges posed by neobanks and other challengers – the Payments Innovation Jury seems to expect this investment to pay off.
Commenting on the findings of the report, John Chaplin, Founder and Chairman of the Payments Innovation Jury, concluded: “Looking back on the last two years of market turmoil, it feels like this unique insight from industry leaders has never been more needed.
“Our Jurors’ deep understanding of the causes and effects of macroeconomic changes and their impact on the long-term direction of the payments industry helps all of us understand how we can best move forward and continue to weather the storm
“I am immensely grateful to each of the 136 members of the Jury for thinking through such complex issues and sharing their views, as well as to the World Bank, Interswitch, FIME and HPS. Their participation and support makes the publication of these insights possible, and this report is very much their report.”
