The latest State of Fintech Report chronicling investment trends from CB Insights identified strong venture capitalist backing for payments companies last year, despite a steep drop in fourth-quarter activity.
It estimates that payments companies collectively raised US$12bn of investment over the course of 2020, up 3% year on year in 2019. And while the number of overall deals declined 7% to 337, the volume of “mega-rounds” – those involving cash injections of US$100m or more – rose from 30 to 37 as VCs made larger bets on better-established start-ups looking to scale up their business operations.
One of the biggest funding rounds went to Gojek, the Indonesian on-demand multi-service platform and digital payment technology group which started as a ride-hailing business back in 2009 before expanding into mobile payments and electronic wallets (eWallets) in 2015. A group of investors including Tencent Holdings, PayPal, Google, Formation Group and Sequoia Capital India put an additional US$150m into the company last November, bringing total investment to a staggering US$4.7bn to date.
Gojek now has a market capitalisation of almost US$10bn – DOCOMO Digital CEO Jonathan Kriegel charts the company’s rapid growth and portfolio expansion in his blog detailing Indonesia’s eWallet adoption trends here. At the opposite end of the scale, Brazilian payments platform provider Conductor received US$150m of funding, taking its total to a somewhat more modest US$170m.
Acquisitions support international expansion and digital banking
2020 also saw some significant acquisitions by larger payment providers intended to support their rapid expansion in digital banking. They include Visa’s deal for YellowPepper, a company which has developed APIs to facilitate greater interoperability of money transfers between issuers, processors and governments.
Terms of the YellowPepper deal were not disclosed, but elsewhere Stripe reputedly paid US$200m for PayStack. This Nigerian start-up also offers APIs able to integrate payment services into online and offline transactions quickly. A similar takeover saw Sendwave, the Kenyan app-based remittance firm focussed on the African market, acquired by online money transfer company WorldRemit for an estimated US$500m last August.
While the World Bank has predicted that the value of global remittances declined by 20% in 2020 due to decreasing wages and employment opportunities for migrant workers across the world, it suggests transfers will recover quickly in 2021 as economic restrictions are gradually restricted.
BNPL firms popular VC targets
Some of the most popular VC investment targets were buy now pay later (BNPL) firms, noted CB Insights. These are payment providers that allow customers to purchase goods and services online and pay for them either at a later date (typically 14-30 days) or through regular instalments over several months.
Funding for BNPL start-ups grew at a compound annual growth rate (CAGR) of 93% between 2016 and 2020. Just five firms received US$106m between them at the start of that period, expanding to almost US$1.5bn invested in 20 companies last year.
Large banks too are moving into the BNPL market. The latest example is the Royal Bank of Canada, which partnered Bread (acquired by payment and loyalty solution provider Alliance Data for US$450m in December) to offer pay overtime options on high-value purchases at select online retailers throughout the country.
Pandemic accelerating BNPL growth
BNPL credit agreements now account for substantial portions of total eCommerce payments in certain regions of the world. The trend is especially noticeable in Europe, with BNPL credit financing 24% of all eCommerce payments in Sweden, 18% in Germany and 8% in Austria and Finland in 2019 according to the Worldpay Global Payments 2020 report. A survey of 101k merchants conducted by European payment service provider Mollie suggests that the use of BNPL services like Klarna and ClearPay to fund Black Friday purchases in 2020 more than doubled over the previous year.[i]
That BNPL spending boom will continue according to fintech research firm Kaleido Intelligence. Its Digital BNPL & ePOS Financing: Market Outlook 2020 report estimates that combined BNPL and electronic point of sale (ePOS) financing will grow from US$285bn in 2018 to reach US$680bn by 2025. That growth will be driven primarily by “credit hungry” millennial and Gen Z shoppers. And mobile BNPL specifically will dramatically outstrip the online channel, registering a 16% CAGR between 2018 and 2025, versus just 1% for online.
Many features previously considered innovative are now table stakes for payments companies facilitating consumer purchases concluded CB Insights. And that includes integration with adjacent products like BNPL credit and other lending services – more important now than ever given reduced consumer spending power and widespread closures of physical retail premises, driving more people to source essential goods and services online.
[i] WorldRemit to Acquire Sendwave in $500 Million Payments Deal, Bloomberg, 25th August 2020
[ii] Black Friday payment data reveals rapid growth of buy now, pay later, Finextra, 30th November 2020