The Future of Payments
Last Thursday, I had the opportunity to moderate an interesting panel on the “Future of Payments” at Finnovista’s yearly Fintech event called Finnosummit in Bogota, Colombia. This is a topic about which I have definite opinions. Since I was moderating the panel with experienced executives from MercadoPago and Mastercard, it wasn’t appropriate for me to elaborate on my views, so I will use this blog to share my thoughts on the subject.
For the longest time, I’ve felt there were a number of opportunities available in the payments space, particularly in Latin America. After researching this a little and, over the years, meeting a number of startups in the space, I’ve become more and more convinced of the same.
A number of years ago, as an advisor to the founders of a local startup called Tappsi, I advised them to start their own payments company. Though it’s not a good idea to focus on building more than one startup, I felt that their company would be acquired in the near term (took about 9 more months for this to happen) and I felt the opportunity was ripe as well as this being a great space for these talented entrepreneurs and Yadah Yadah Yadah, today, their new company, TPaga, is off to the races.
After this experience, while working for the Open Innovation team (led by a great guy called Gustavo Vinacua) at a bank called BBVA, where I traveled throughout Latin America getting to know the top startups in each country, I was transferred to the New Digital Business team.
To the bank’s credit, I was given leeway to choose where I wanted to work within the team. There was a group focused on alliances and another focused on intrapreneurship or startups launched from within the bank. Nonetheless, there was a manager named Rafael Hernandez (from Spain, but living in Mexico) focused on special acquisition project within the payments space, with whom I had had several incredibly stimulating conversations.
When we both thought about the best space in which to help the bank, instead of a multitude of options (e.g., lending, robo-advisors, Online banking, etc.), we were (and are) convinced that the payments space was top on the list. From my perspective, this was the area that more powerfully combined: the bank’s natural advantages (e.g., breadth, funding, etc.), an incredible market opportunity and a natural platform to serve as a stepping stone into other businesses (e.g., lending).
Since I had experience in Corporate Venture Capital, my thinking was that the bank would be best served by making a sizeable investment in a strong payments player in Latin America. Nonetheless, during one of our dinners, Rafael was talking about an outright acquisition. I was, initially, surprised and a bit fearful because of how ambitious the idea was compared to my own paradigm. Nonetheless, I soon realized that this was the best way to go, especially, if the bank wouldn’t interfere too much with running the startup once acquired.
Needless to say, a few months later, I was working for Rafael on just this endeavor (identifying and acquiring a payments startup). Digressing a bit, it’s tough to overstate the importance of working with amazing bosses and Gustavo and Rafael were top-notch professionally as well as personally. About a year ago, we announced the acquisition of OpenPay. This company has three serial entrepreneur co-founders who are all passionate about product and have built a world-class (verified by several international experts) technology platform, but the real asset is having these three founders on the bank’s side!
BBVA has acquired a couple of service companies and some startups, but all of the startups that have been acquired have been in the online banking space. The OpenPay acquisition not only marks the first startup acquisition in Latin America by the bank but also, the first non-online banking acquisition. Although I am biased, I truly believe that the OpenPay acquisition, within five years, has the potential to be the bank’s most successful new digital business (measured by profits and new revenue generation). Only time will tell.
Aside from the quality of the startup and it’s founders, there are other reasons that I say this. Worldwide, payments is set to grow at a Compound Annual Growth Rate (CAGR) 4% in the US and 9% in Latin America, according to McKinsey. More importantly, digital payments will be growing yearly at a rate of 10% up to 2020. More importantly, digital payments, where OpenPay is strongest, are projected to continue growing yearly at a rate of 10% up till 2020. Finally, margins on retail payments in Latin America (8%) are double those in the US (4%) and in other geographies.
With respect to the future, during the panel, I asked about reactions to Jack Dorsey’s recent statement, as the CEO of Square, affirming that he believes that Bitcoin will be the currency of the Internet replacing the dollar. As the old saying goes, “Predictions are hard, especially about the future.” There are a lot of reasons that Dorsey could be wrong, but what if he’s right? At the very least, I would be wary of companies that don’t take this type of disruption very seriously and feel warm and fuzzy behind a security blanket of regulation.
Some barriers to entry such as regulation and litigation sometimes work indefinitely and, sometimes, they are temporary. An example of the latter is the case of the music industry and Napster when the best defense was litigation against this new competitor (as well as against 13 year-olds). With respect to digital currency, previous attempts (e.g., E-gold) ended in failure because of mismanagement, some criminal activity, and litigation. Nonetheless, although Bitcoin’s eventual success is far from assured, I do believe it (or another cryptocurrency) has a possibility of impacting the payments space substantially.
There are other issues such as instant payments, PSD2, and others. The key, in my mind, is that payments are at the center of our economic activity. In the end, payments are information and, in an age where information is becoming more and more digitized, this will be a fascinating and exciting space in the years to come.