Payments startups and other fintech challengers are bracing themselves for an extended winter which will see investment activity continue to plummet, writes Hokodo’s founder and CEO Louis Carbonnier.
In Q3 of 2022, European venture funding dropped to its lowest in nearly two years, down 44 per cent year-on-year.
For many pay techs, symbiotic partnerships with incumbent financial institutions might be their best bet at securing stable funding during 2023. The focus for many will be on preserving their runway for at least the next 18 months and demonstrating profitability to the investors who remain in play.
Against a backdrop of investment drought, embedded finance has a key role to play. While traditional investors retreat, there’s an opportunity for embedded finance to bridge the gap that is left behind.
In France, trade credit accounts for €700bn of business trade, compared with €250bn of business loans and €60bn of factoring, making it the main source of financing for the SME economy. These figures alone highlight the important role that embedded lending solutions could play in the coming months.
However, it’s not all bad news, 2022 has been a year of significant progress in the payments space, setting the stage for further changes still to come in the next year.
Embedded payments aren’t going anywhere
Embedded finance is one of the most exciting facets of payments and an area in which I see significant change on the horizon. Payments used to be viewed as “boring infrastructure” but they’ve become the wedge to make all kinds of new services accessible to a wider audience via APIs.
In 2020, the revenue of embedded payments alone was $16.1bn, and that figure is projected to reach $140.8bn by 2025. Over the past couple of years, a huge number of businesses have begun to realise the true potential that embedded financial services offer.
Banks have slowly been losing their monopoly over financial services as tech firms, retailers and other non-traditional players continue to pump out digital-first solutions that are more cost-effective and more efficient than the products offered by incumbents.
As the demand for these services grows and expectations heighten, I think we’ll see some really innovative and entrepreneurial activity in embedded payments.
Off the back of this, another trend we’ll see is big banks and financial institutions seeking out fintech partners with whom to collaborate.
The best of these relationships will be symbiotic: the banks will benefit from the agility and tech that they just can’t harness in-house, while the fintechs get access to premium funding and a vast new audience.
Embedded finance increases accessibility to financial services and products in two main ways. Firstly, by bringing in insurance or lending, for example, at the point of need, fintech companies significantly lower the barriers to entry.
Secondly, thanks to additional data sources, they are able to bridge the financing and insurance gap. In embedded finance, everyone's a winner, which is why I advocate for it so strongly.
The resurrection of the QR code
The pandemic gave new life to the humble QR code. While various COVID safety measures were still in place, pub and restaurant goers used their phones to access contact-free menus and payment portals.
However, even though the majority of drinking and dining experiences are now back to normal, QR codes continue to enjoy their resurgence. This year, QR codes accumulated a global total of more than 6.8 million scans – up 433 per cent from 2021.
Recent research forecasts that global spending via QR code payments will top $3 trillion by 2025, up 25 per cent from this year. This growth will be driven by a focus on promoting financial inclusion in developing countries as well as the development of innovative payment methods in other regions.
Merging the offline and online worlds
QR codes are just one facet of a wider trend that will see the lines blur between online and offline payments.
All research points to the conclusion that consumers desire a shopping experience that combines the best that the online and offline worlds have to offer: the option to touch, see and try products without having to deal with queues and crowds, the price transparency offered by online shopping mixed with the ability to take home purchases immediately.
Naturally, payments have a big part to play in this, with tech like digital wallets and in-store BNPL just the first manifestation.
The views and opinions expressed are not necessarily those of AltFi.