Although the payment sector might seem like the thing of the past, there are various niche opportunities emerging and we need a different perspective to understand and monetize that. Within the Fintech sector, the payment segment is the most mature. In every geography, the innovation in the payment segment has driven innovation in other Fintech segments and acted as an enabler for other sectors such as ecommerce, gaming, etc.
Many new business models have emerged because of the ability to receive and pay money in different formats. For e.g., the ability to execute “high volume-low value” transactions digitally has led to the emergence of:
- Micro-insurance products in sectors such as travel, hospitality, and ecommerce
- Consumer lending businesses which can disburse thousands of loans in a day directly to the customers’ bank accounts in a few clicks
- Ecommerce companies can process thousands of refunds in a day, leading to a better customer experience
The payment sector can be classified in different ways:
1) How we send and receive money, i.e, the sender and receiver relationship. There are many categorizations such as B2B, B2C, G2C, etc.
Below is the chart which captures the split of the global market size:
2) Another way to look at it is via different functions as explained below:
- Receivables: A business receives money via different channels/methods such as offline or online, real-time transfer, subscription method, offline/online POS, etc.
- Payables: A business makes payments for various use cases such as business spend management, employee expense management, utility bill payments, payroll, tax, etc.
- Lending: Excess capital in the business can be used to provide credit to customers or intermediaries or various forms such as working capital, corporate cards, invoice-based financing, term loan, etc. The returns generated from this come back into the firm via receivables.
- Treasury: If there’s excess capital after these usages or transient capital before being used, then it is managed by the treasury function. Both the treasury capital and the returns generated from treasury management remain within the company
Understanding how the money moves inside an organization or types of organization is key to understanding the problems for which the solutions can be built. For e.g. solving the problem of longer payment settlement time by providing early payment (credit embedded) could be very helpful for SMBs in the manufacturing sector where SMBs are squeezed by the larger corporate clients.
Monetization is a big topic in itself but I have tried to highlight the strategy often adopted by payments-focused businesses. Businesses try to capture money movement in B2B space via different entry points – corporate cards, expense management software, payables, or receivables management software. In most cases, monetization starts with earning an interchange fee followed by float income, subscription fees, and interest income from lending.?
- Understanding the finance team: The product should be built by keeping the finance teams in perspective. The customers (here companies) vary in size (revenue, number of employees, etc.) and with different sizes, companies’ finance teams vary significantly. With size varies the maturity and with maturity varies the way the work is done- inhouse vs external, adoption of SaaS, etc. E.g. Employee expense management is mostly outsourced in companies
- Capture more of the payment flow: Following the money movement inside the organization helps to create productivity tools with the motive to capture more of the payment flow. E.g. Expanding from receivables payment platform to payable platform to complete procure to pay solution.
- Thinking strategically about where is the most value creation: Targeting a segment which constitutes a large profit pool and is less commoditized in the value chain makes sense (easier said than done). Innovation has moved from transaction to strategic finance. Startups in B2B space are moving up the chain from just payments to strategic finance, helping CFO and decision makers to make quick and effective decisions. Moreover, technological innovation has enabled various building blocks which are in place to act as enablers for the sophisticated solutions to be built, capturing more of the payment flows and charging SaaS fees for the tools.
