“Dry January” is a social phenomenon that has garnered more and more popularity over the years. The idea is that individuals participating will take a month-long break from alcohol (often in the wake of ample consumption in the months leading up to and throughout the holiday season). While sometimes this practice may result in longer term change, the movement is typically short lived and treated more as a recovery. As we turn the page on a new calendar year, we can’t help but find the payments landscape in a similar situation. Similar to other highly VC-funded sectors, payments rode the free-money tidal wave and has since seen a resulting crash in valuations and funding rounds (and in some cases, companies are shutting down altogether). See below from FT Partners and Bain & Co.:
In 2023, we expect the “dry” period to continue, as the hangover continues to linger with the possibility of a further plunge. Technology companies and investors simply partied too hard from 2020 to early 2022. Despite this hangover, PeakSpan still sees ample opportunity to invest actively in this space and remains incredibly bullish across a number of pre-existing and emerging investment theses. This is not a blogpost on broader macro bullishness or the valuation environment, but rather on the continued growth and adoption of payments technology. See below for PeakSpan’s top 10 payments commandments for 2023:
1. B2B Payments
One of the last major frontiers of paper checks and manual payment processes, the B2B payments market accounted for a $900B addressable market in 2021 and is forecast to grow at a 10% CAGR, reaching $1.6T by 2026. From a processing volume standpoint, estimates indicate more than $100T in B2B payments processing volume by 2025. These figures get cited a lot and yet we still think the size of this market is overlooked! There is simply too much greenfield to ignore in the B2B payments space. Plucking out just one subsegment: digital invoicing is projected to grow at a CAGR of 20.4% from 2019 to 2027. In what other software markets is that true! One of our portfolio partners in the space, Simfoni, automates tail spend procurement, consolidating all supplier payments into a single invoice for the enterprise, cutting down drastically on time/expense on behalf of the finance team and replacing manual processes/paper checks with virtual card payments for suppliers.
2. Vertical SaaS
ISVs who can earn the trust and stickiness of a niche end market have “earned the right” to monetize payments. Whether that be through becoming a PFAC, a Stripe partnership, or via collaboration with a PFAC-enablement platform (Payrix, Finix, Stax, etc.) — we see multiple avenues towards significant payments monetization for software products and have witnessed the success of such strategies within our portfolio at CloudBeds, PetVisor and FinPay. Business and consumer buyers have now grown accustomed to using financial services provided by non-banks. Financing is offered at checkout, on the invoice, and through mobile devices. Any software or technologies that sit in between the business and consumer are strategically positioned to own the payment/financial experience.
3. Embedded Finance
The FinTech monetization opportunity does not stop at payment processing. We have witnessed the maturation of embedded financial products over the years and feel we’ve reached a watershed moment in the world of FinTech user experiences. ISVs can now offer bank accounts, lending, payroll, and insurance, without having to refer users to a third-party institution that candidly does not meet muster on the software side as their technology-driven counterparts do. We believe this is one of the more fundamental changes that has occurred over the past few years (thank you free money environment). With a plethora of payments infrastructure providers in market, ISVs have ample options when looking to pursue a financial services roadmap. See here for PeakSpan’s Payments Infrastructure Landscape.
4. Virtual Cards in B2B Payments
The B2B virtual card payments market is expected to reach $533B by 2024. We see several use cases being successfully pursued across all segments (SMB, MM, and ENT). Not only do virtual cards act as a tool to digitize payments, but they also offer finance teams greater control and security. We have seen a flurry of spend management startups over the last few years, and for good reason — virtual cards offer companies an array of tools to manage and track spend while also ensuring a consumer friendly experience for business users who span multiple departments outside of finance. PeakSpan’s portfolio company, Finally is leveraging the power of virtual cards to automate B2B payments and accounting for main street America. See here for PeakSpan’s B2B Finance Automation Landscape.
5. Payments Fraud
Chargebacks are front of mind for merchants to protect the health and safety of their merchant accounts and to stay in good standing with the card networks. Ecommerce losses to online payment fraud were $41B globally in 2022 and are expected to grow to $48B in 2023. Growth is expected to continue at 23% annually, reaching $111B by 2027. With the rise of online commerce, connected devices, mobile, and social — attack surfaces are expanding faster than security infrastructure which is a story we saw play out in the early 2000s when the internet experienced widespread adoption. However, it is not only true fraud that is making headways. Friendly fraud has quickly emerged as a previously unaddressed grey area that is now a priority on fraud prevention agendas, especially in a recessionary environment where friendly fraud is more rampant. Why does this matter? Every $1 of fraud costs U.S. retail and ecommerce merchants $3.75. Breakout your ROI calculators, it’s time to invest in payments fraud prevention.
6. Subscription Payments
The subscription economy has boomed in recent years. Gartner estimates that 75% of businesses will offer a subscription service to consumers by 2023. The benefits for businesses should be obvious at this point (more predictability, greater lifetime value, more visibility into inventory/delivery). D2C food & beverage brands have been nice early adopters of this trend and offer solid discounts for monthly subscriptions. At PeakSpan, we see the rise in subscription payment volume as a catalyst for several categories of payments infrastructure software, including recurring billing management, failed payments recovery and churn management, revenue recognition, and analytics / forecasting. Modern payments infrastructure purpose-built for subscription revenue is now needed.
7. Mobile Payments
Apple Pay has grown from $4.2B to $6.5B in the last two years alone and is poised for continued growth as contactless payments gain more traction. More broadly, growth in mobile payments is supported by several macro shifts including mobile app usage, social commerce, and mobilePOS. Americans spend 5.4 hours per day scrolling and 2.5 hours per day on social media — trends which brands and retailers are acutely aware of and as a result are now leveraging the infrastructure required to close sales embedded within a social media platform (typically a mobile wallet). Mobile POS is yet another great category supporting the rise in mobile payments, allowing for “built world” commerce to flourish. With a single card or phone “tap” — we’ve now circumvented lines, receipt printing, invoicing, cash-handling, etc. Mobile POS technologies cut down on time and headaches which promotes even more commerce. It’s never been easier to accept payment which opens up an array of possibilities for small business merchants.
8. Digital Wallets
Broken out from mobile payments because the transformation we saw was just that big! Mobile wallet payments were $75B in 2016, a figure which is expected to grow to $500B by 2024, implying a 50%+ CAGR. WOW! We’re similarly seeing a wave of merchant infrastructure being built, with 60% of merchants having added digital wallets and QR-code payment acceptance (that’s a BIG shift!). An estimated 4.4B global consumers will shop with a digital wallet by 2023, accounting for 52% of E-Commerce payments globally. Further 1.6B global consumers will pay by digital wallets at the point of sale in 2023, accounting for 30% of POS payments. QR codes are also projected to maintain momentum globally. By 2025, QR-code payment users are expected to exceed 2B, equating to 29% of all mobile phone users globally.
9. Alternative Payment Methods and BNPL
We see the rise in Alternative Payment Methods (or APMs) as a major trend to watch. APMs are essentially “non-credit card payment methods” and can include bank transfers, BNPL, virtual cards, PayPal, crypto, etc. Most notable in 2022 has been BNPL. Back to our hangover analogy, maybe now is this time for a “hair of the dog” reference? Yes, despite silly over-valuations, BNPL is expected to experience further adoption and, ultimately, we believe it will be a pillar of ubiquitous payments across both consumer and B2B use cases. 65% of merchants added BNPL as an option in 2022. It’s hard to say what steady state volume looks like given the intense inflationary and interest rate environments, but medium/long term outlook is strong for BNPL. We don’t view this as a particularly innovative concept — similar to mobile wallets being a natural evolution away from physical wallets, BNPL is a concept that has existed for decades and is now fully productized, digitized, and embedded into most (soon to be all) purchasing flows. BNPL is expected to account for roughly 24% of all global ecommerce transactions by 2026, up from just 9% in 2021.
10. Real Time Payments
What better way to cap off our list of commandments than to touch on real time payments (or RTP). RTP in the US just hit 1.8B in 2022, a figure which is expected to climb to 8.9B by 2026, especially with the upcoming launch of FedNow in 2023 (other countries such as China are already past this). With more and more payments going digital, the payments community and ecosystem is eager to roll out the next generation of rails and payment modalities with the goal of upleveling the speed and efficiency of payment flows. One such example in the PeakSpan portfolio is Tapcheck, a leading earned wage access provider. Tapcheck works with restaurant and healthcare organizations to offer hourly wage worker employees access to the wages they have earned, prior to the culmination of a two-week pay cycle. Tapcheck is able to deem, calculate and disperse earned wages over the RTP network and into the employees bank account or via a pay card. EWA is just one example, we see RTP as opening up endless possibilities for new payment experiences, helping further satisfy our need for immediacy as consumers. Broader industry change and adoption is going to take the vigor and cooperation of leading financial institutions, several nations and their payments/regulatory bodies. We are confident that RTP will eventually mature into a global payment network that can also handle cross-border transactions.
Payments and financial technology valuations have been a rollercoaster ride to put it lightly, but to be clear — we see zero impact on the resilience, importance, and ongoing adoption of digitization in 2023. Even if we enter a recession and consumer spending drops, the above trends will still hold proportionally and follow the same trend lines (i.e. maybe you make two less purchases, but that single purchase is still on Instagram and still using Apple Pay). Even sectors such as BNPL which feel most exposed have nonetheless forever solidified their placement at the online and offline checkout counters. And so whether you are severely hungover, practicing dry January, or neither — the opportunity to invest in payments is still robust as ever.