Ryan Frere, EVP Payments at Flywire writes for Payment Expert of the role verticilisation could play in boosting payment firms through the increasingly challenging period.
The global payments market has seen steady growth over the last decade, with 5.9% growth from 2018 to 2019 alone (BCG, 2019). But the pandemic has completely altered that trajectory. McKinsey now predicts that global payments revenues could drop by up to 10%, a fall of $210bn (£167bn) when compared to its pre-pandemic prediction of 6% growth. Such a big contraction is likely to bankrupt a number of payments firms unless they have the right contingency plans in place.
To counteract a downturn, fintechs must reconsider who they target. A mass-market or consumer audience is too broad and the larger players who are well established in this area are dominant and hard to compete with.
As payment fintechs approach this tipping point, they must look to verticalisation if they are to be profitable. Within underserved verticals like travel and healthcare, there is a market opportunity that is lacking elsewhere. This will be the key to combating a post-pandemic slump.
Changing market conditions
The coronavirus pandemic has rocked markets worldwide, leaving no sector untouched – the fintech industry is no exception. UK fintech investment alone has slumped by 40% and more gloomy market reports are published every day. Even Klarna, which was just valued at over $10bn, reported losses of $59.8m. If this is what is happening at one of the biggest names in fintech, then smaller players should be worried.
The market downturn is a big ‘hit’, and one that will hurt firms struggling with profitability or who are scraping the bottom of the barrel from their last funding round. Payments fintechs who have focused on user acquisition in the highly competitive consumer space are likely to fall into this category. These firms needed to demonstrate large scale volumes of users to investors and had the tough job of standing out in an oversaturated market. But as we’re now seeing, widespread adoption doesn’t equate to profitability.
With the market bracing for further uncertainty, it is time many payments fintechs reconsider their approach. Verticalisation could be the answer.
Veering away from cookie-cutter payments
In payments, one size fits no one. The only successful mass-market players are the hugely established firms who already have the lion share of the market. They are impossible to compete with. But this is also their weakness. These large firms can’t offer niche verticals the services they need because they are geared to serve everyone.
Payments fintechs, who can create products for these verticals, are in a great position to deliver a competitive offering. By catering to a specific vertical, a payments fintech can become the ‘go-to’ for businesses within that specialism.
This creates a huge growth opportunity as customers become loyal to the firm that meets their vertical-specific needs.
Why verticalisation?
This is a critical time. The steps fintech leaders take now are likely to shape their company’s future, and its ability to survive. But amongst the uncertainty, verticalisation is a plausible route forward for many payments fintechs. And one approach that could save a firm in the long run.
Whilst the consumer space is heavily congested, sectors like healthcare, travel and education have long been underserved by payments offerings. The universal approach of consumer payments products is not fit for larger size transactions, or complexities like payment plans for tuition payments. A broad-brush approach simply doesn’t work here.
As the big players attempt to seize finite volumes from fierce competition, investment and innovation has been flowing towards banks, challengers and fintechs that are developing B2B vertical-specific payment services. Corporates in vertical markets need to build vastly expensive ‘work arounds’ to bring cash management in-line with their wider business processes. Time, money and effort is being poured into solving this problem, piecemeal, for each and every organisation.
Fintechs are perfectly equipped to solve this problem and deliver a competitive and desirable offering that these vertical markets will want to use. Not only does fintech fit the puzzle, the size of said markets makes it a potential gold mine for these firms at a time where other markets are drying up.
Growth and uncertainty
Mass-market payments are becoming increasingly unprofitable and un-investable. Coupled with market uncertainty, there is a big storm brewing in the payments industry. Verticalisation is not only a smart business choice for payments fintechs, but now also a necessity. This is where firms are going to find opportunity in a damaged market.
Payment companies will only win if they build a “deep and narrow” approach to own entire industry-sectors. Whether that is healthcare, manufacturing, education or travel, fintech solutions can offer vertical businesses a more efficient service that fits their needs.
Pivoting a business can be difficult, but with the industry at a crossroads, moving into verticals will be the right thing for many. By targeting verticals, payments fintechs will find safe passage through the storm, bouncing back from the economic downturn.