What we have observed recently by working with clients throughout the Payments ecosystem
By Kurt Strawhecker
In a continuing series of articles, we at The Strawhecker Group (TSG) have attempted to make some sort of sense of the COVID-19 pandemic and resulting economic crisis, especially as it relates to the global payments industry. See below for a selection of industry trends we have observed recently that we expect to outlive the pandemic.
Payments are forever
Based on preliminary August month-end data, TSG’s AIM platform indicates a ~5% increase in year over year card volume over the same period last year. It is not the increases seen in previous year over year growth rates, but given COVID-19 and the resulting financial crisis, it is quite a remarkable achievement. Flash back to the dark days of April during the nationwide shutdown; not many payments executives were forecasting a 5% increase in volume by August.
When you combine the resiliency of those numbers with the performance of publicly traded payments companies, it tells quite the story. Note that payments companies have done better than the broader market for years, according to TSG’s Payments Index. Starting in the first quarter of 2011, a $100 investment in an index of more than 25 payments stocks that TSG tracks would have been worth $670 by this year’s second quarter, representing a 22% compound annual growth rate. That compares with a $234 result for the equivalent $100 investment in the S&P 500 over the same period, which had a compound annual growth rate of 10%. As in previous financial crises and national emergencies, the payments industry survives and thrives.
Is work from home here to stay?
Let’s start with the question that affects all of us, whether we are in management, sales, IT, product, or operations. Luckily, many payments related positions can be accomplished effectively from a home environment (assuming you are fortunate enough to have childcare needs in place), and most of the companies TSG has the privilege to work with, pulled it off with aplomb. However, running customer service functions and operational centers pose a much bigger challenge – and it showed. Previous TSG research revealed that when merchants needed help the most during the April to June timeframe, some customer service response times slipped, and information was hard for merchants to obtain in certain cases.
So, our prediction is, yes, work from home will remain in some areas of payments companies (as it always has) – but most positions will slowly migrate back to the office.
Leaders learn to pivot
In a previous article we spoke about “pivoting” and how the merchants (really all companies in the face of the financial crisis) that made changes in their approach to products, delivery and customers were the ones that tended to survive and, to some extent, actually thrive in this new, never-before-experienced environment.
To pivot successfully, one must lead. People look to leaders for guidance when confusion and lack of direction ensue. We have seen successful leadership before. Great wartime leaders have shown true leadership during a seemingly unsurmountable situation.
At the risk of being melodramatic, here are two quotes that seem to match our current situation:
“The best way to predict your future is to create it.” Abraham Lincoln
“Take a method and try it. If it fails, admit it frankly, and try another. But by all means, try something.” Franklin D. Roosevelt
With our current financial crisis and nascent recovery there are plenty of impediments to charting a clear path for almost all businesses, but showing up for our teams and leading, and in some cases pivoting from our previous business plans, can turn failure into success.
Contactless payments are connecting with consumers
Americans are quickly gaining interest in contactless payments. According to Trevor Rubel, President and COO at AuthVia, “We’re already seeing it as a function of convenience, speed, and integrating payments into an already evolving experience with merchants. Really, what’s happened is this has just accelerated that. The need for contactless, as well as integrated payments, is only going to grow over time. Again, I think we will redefine the definition of contactless payments, but it’s going to continue to garner awareness and continue to evolve.”
Of course, contactless point of sale (POS) options are much more predominant in non-U.S. markets, but the pandemic has encouraged consumers to try contactless payment methods in a variety of merchant situations.
According to Daniel Wolfe, Editor-in-Chief at PaymentsSource, “One common expectation is that people will shun cash, perceiving it as dirty and a vector for transferring the virus, and instead favor contactless cards. The benefit of contactless cards over other types of card payments, such as EMV chip-and-PIN, is that they minimize contact with point of sale readers.” (Source)
Many TSG acquiring clients pivoted their cloud POS systems to enable a touchless payment environment via the customer’s smartphone, as a quick response to the demand for contactless transactions – especially in restaurants. For instance, Toast, a leading cloud-based POS/acquirer to the restaurant industry provided a unique contactless system to their customers in March.
An accelerated rush to develop more relevant technologies
The latest developments in digital payments (and the adoption of those tools) point to the growing ambition of digital payment providers and thus, post-COVID-19, digital payments adoption by merchants and consumers will not slowdown. The shift in consumer payment behavior (during and post COVID-19) could even disintermediate consumers from traditional payments players/incumbents that have legacy technology and are not quick to pivot or adjust their models, ushering in a more dynamic industry landscape. We are (and will continue) witnessing faster and more widespread adoption of emerging technologies and models. We believe that we will see an acceleration in the uptake of payment technologies post COVID-19 that address the needs of the new normal, including mobile solutions, non-contact authentication, proximity services, cloud-based services and tools for communications and collaboration.
Integrated payments tools are sticking with us
The ability to attract and keep merchants and enable them to sell more—that makes the integrated-payments model so appealing for payments companies. “We are not seeing a slowdown. If anything, we have seen an uptick in discussions about integrated payments,” Jared Drieling, TSG’s Senior Director of Consulting and Market Intelligence, told Digital Transactions. That’s in part because merchants need flexibility in their ability to accept payments via multiple channels. That need has been accentuated during the COVID-19 response and this trend will not be going away anytime soon.
“Payments providers offering these viable options through their partners clearly have a distinctive edge,” Drieling says. “We will see more and more integrated-payments partnerships.” This highlights the value of knowing the merchant’s industry. “Clearly, the vertically focused independent software vendors (ISVs) are much more educated around the needs for that particular vertical,” Drieling said. “Payment providers taking on ISV partners was a trend prior to the COVID-19 restrictions, but now they will boost their efforts to identify potential ISVs and partner with them”, he said. Coupling that demand with the ability to deliver multiple payment methods will generate more interest in the model. “They allow payment providers to be more flexible.”
The great migration to ecommerce will continue
The growth of ecommerce and the proliferation of companies like Shopify and BigCommerce has been discussed ad nauseum. This will continue, as according to the Department of Commerce, by the end of year, it is estimated that 2020 will have seen 18% more ecommerce sales as compared to 2019. The players that enable these types of payments are merging together, and those payment companies that partner, buy, or build solutions that can meet merchants’ needs are the most poised for success.
TSG’s GEM platform, which measures the performance of payment gateways, reported that the average number of required items in the merchant acquiring underwriting process for a U.S. new merchant is 17 items. For context, the most number of items required tracked by TSG is 37 and the least is 8 items. 37 items certainly meets underwriting requirements, but is it necessary? These are the questions that need to be asked and addressed during this ecommerce explosion.
Long live P2P (person to person payments)
Clearly, consumers were using P2P payments before the pandemic, and by most sources, the majority plan to continue doing so (and more so) after the virus is contained. As an industry, we’ve seen consistent growth from a P2P perspective and the pandemic only catapulted the adoption with consumers. We’re certainly seeing more people starting to take advantage of P2P tools and services and this trend will not abate anytime soon.
Forward-thinking payments providers are capitalizing on this trend; for example, Square was already expanding its Cash App’s features beyond simple P2P transfer with things like, Cash Boost, a rewards program, and Cash App Investing.
Retention overtakes sales as priority #1
While sales and growth are in the DNA of all industry executives, we are seeing many TSG clients turn to merchant retention as a key to a winning 2021 strategy. First, in order to build a strategy for retention, understanding why merchants leave is important. TSG is developing tools within its AIM platform that allow portfolio managers to break apart “attrited merchants” into two groups:
Churned (merchants that changed payments providers)Burned (closed/out of business merchants)
In addition, TSG is working to augment its AIM offering to provide customers with predictive attrition analytics that will be able to identify merchants that have a high risk of attrition before they attrite, allowing acquirers to proactively work to retain high value merchants.
There will be new vertical industry winners and losers
Due to the massive shift in consumer and business trends, we have witnessed changed priorities and even the ways products and services are purchased – which have impacted traditional norms and historical preferences.
Think about the construction vertical. With six months of hunkering down at home there has been a huge demand among consumers to upgrade their current home environment – now that we are spending so much time in it. According to a Bank of America survey of 1,054 Americans about their attitudes and shopping habits during the pandemic, it found that more than 70% have decided to tackle home improvement projects, with more planned for 2021. TSG’s most recent AIM Market React Report shows that the construction vertical has experienced a 42% increase in card volume since February.
Acquirers are seeking to identify these new greenfield opportunities to focus their go-forward sales strategies. By identifying emerging growth markets, acquirers hope to take advantage of the core growth tendencies of an industry, but also the likely higher margins typically found in less competitive verticals, vs. highly competitive industries such as retail and restaurant.
What a difference six months can make in one’s perspective. While the struggle continues, we are seeing some interesting new trends that may outlive this crisis that payments players need to be aware of to adjust to the new normal. Here’s to a very robust 2021!
TSG Can Help. Now.
With a focus on specialized solutions for the Payments Industry, we are committed to providing our clients with industry leading consulting and analytics. Let us know your needs by emailing Info@TheStrawGroup.com.
COVID-19 Resource Round-Up
Since the pandemic began, TSG has released a variety of COVID-19 content to highlight the impact to the payments industry. Please visit our landing page for the complete list of content.
The post TSG Commentary – Payments Trends that Will Outlive COVID appeared first on The Strawhecker Group.