Before we dive in, wanted to quickly plug out new report coming out for FTT+ subscribers on Buy Now, Pay Later. We’ll dive into what consumer trends are pointing to for the future, ways these players could continue to expand, and what hurdles stand in their way.

​In part 1, we talked about different phases of fintech over the past few decades. ​

In part 2, we focused on the impact COVID had on the relationship between fintech companies and US regulators.

Today, we’re talking about how COVID has changed consumer behavior, and thus impacted things like payments and banking.

Contactless Payments

Of course, e-commerce is a great indicator of the changes of the last 10 months, but we’re also seeing statistically significant shifts in consumer fintech adoption too. So I think it’s super important to not only dive into the history, but also what specific changes are driving these shifts. Let’s start off with payments.

Contactless payments have been around in the US for roughly a decade or so. But it’s had an uphill battle. Payments suffers from a chicken-and-egg problem. In this case, it was between tech companies and merchant equipment. Technology giants like Apple, Google, and Samsung offered mobile wallets to US consumers relatively easily back in ~2014, but merchants didn't have the right equipment to facilitate contactless payments (remember when Apple Pay was, like, only available at Walgreens?). Six years later, and only a pandemic could cause consumers to rapidly shift their behavior.

During that same period, retailers have been forced to upgrade to new payment terminals, thanks to changes like chip-and-pin cards (EMV cards). And with the infrastructure now in place to support consumer demand, contactless is quickly becoming the new preferred method in a COVID era where people are trying to touch as little as possible.

It also seems like in-store contactless payments, or NFC payments, are expanding beyond younger demographics. In a NRF survey conducted in May, 19% of respondents said they’d made their first contactless payment transaction that month. Since previous surveys from the National Retail Federation indicated that over 70% of Gen Z’s and millennials use contactless payments, we’re making a pretty safe assumption that some of that 19% is made up of older demographics that are using contactless payments for the first time. We’ve seen a similar shift in P2P payments with the introduction of Zelle, which has now become the largest P2P payment provider in the US. Anecdotally, I was at a Target recently picking up a yoga mat and the elderly lady next to me was telling her cashier how she only uses the “tap to pay.” Not super relevant but I thought it was funny cause my dad calls it that too 🤦‍♂️.

Beyond contactless NFC payments, something else is taking off in the US too:

QR Codes

If you told me 4 years ago QR codes would take off, I would have laughed at you. A longstanding joke in payments was that US consumer behavior wouldn't shift towards something as confusing as a QR code payment. (Here’s Gary Vee saying he never recommends retailers use QR codes.)

But that article is from 6 years ago—over time, things changed. QR codes started becoming more popular with millennials and Gen Z; Snapchat introduced Snapcodes that were essentially custom QR codes so people could add each other more easily in person. Naturally, Instagram and Facebook copied it, which introduced QR codes to a massive American audience. Now Venmo and CashApp let users more easily share their profiles via a QR code. For software companies, QR codes are a great solution to pass information at a physical location. Naturally, messaging and chatting was a great fit.

Interestingly, when COVID hit, QR codes started being used for other purposes, namely digital menus. Some POS systems like Toast have enabled payments through their digital menu, though the product isn't that impressive. I tried to use it over the summer, but ended up buying 2 rounds of drinks by accident because the order didn't process properly.

I think the popularity of QR codes hints at the potential for entrepreneurs and companies to start developing highly customized products for different types of merchants. If I’m selling shoes online, I don’t need QR codes, I need Stripe. If I’m a restaurant, or a gas station, or another type of merchant, I may want the fully physical but digital experience a QR code can offer. With the possibility of adding other products like bank accounts or forecasting software, expanding beyond just a QR code payment product is easier than ever too. If you're an entrepreneur thinking about these kinds of problems, hit me up at ian@fintechtoday.co.

E-Commerce Growth

The e-commerce industry’s surge has made a massive impact on payments in 2020.

​This quote from CNBC says it all:

"Retailers have been adjusting to the record-high online sales. During the second quarter, Best Buy reported year-over-year online sales growth of 242%. It tapered to a 174% increase during the third quarter, compared with the prior year. Target reported 195% e-commerce growth during the second quarter and a 155% increase during the third. Macy’s online sales jumped 53% during the second quarter and then were up 27% one quarter later versus the same period last year."

With online payment processors taking a percentage of the cut, this is probably a good thing. While the growth of privately owned payment processing startups is something that’s a bit difficult to deduce, you can take Stripe’s skyrocketing valuation as an indicator: Back in April 2020, Stripe raised $600M at a $36B valuation, and at the time the company had $2B in cash on its balance sheet. In late November, Bloomberg reported that Stripe was talking to investors about raising at a $100B valuation.

That cash balance is key—it’s not like Stripe needs this capital to survive. This is purely opportunistic—investor demand for a piece of Stripe must be so high right about now. Profilic investor and operator Elad Gil wrote a piece recently on “index companies” that illuminates the investment opportunity around Stripe. There are basically companies that are a proxy for an entire market, or like Gil says, how Stripe is a proxy for the online commerce industry.

While Stripe can be a proxy for the whole market, other fintech players can benefit from the same investor perspective. The growth in e-commerce helps fintech companies that influence the purchasing decision process, like Buy Now Pay Later companies. Because of Affirm’s software approach to installment loans, and now its focus on B2B partnerships with companies like Shopify, it’s also seen strong growth and investor interest.

Challenger Bank Strong Run Continues

Lastly, 2020 and COVID resulted in a massive consumer move towards neobanks. Later stage fintech companies have been on an absolute tear, growth-wise. There are three big examples that I want to point to:

• Current: The neobank startup raised $131M at a $750M valuation in November 2020, and the previous fall, raised a $20M Series B. Account growth has skyrocketed between then too: in fall 2019, Current had 500K accounts. In June 2020, it reported 1 million accounts, and last month, Current told TechCrunch it had 2 million members.
• Chime: The most valuable fintech startup in the US had a huge 2020 too. In December 2019, Chime raised $500M at a $5.8B valuation, after jumping from a valuation for $1.5B in March 2019. In September 2020, Chime raised $438M at a $14.5 B valuation. Again, like other private companies, growth numbers are hard to come by but CEO Chris Britt told CNBC that the company’s “adding hundreds of thousands accounts per month.”
• Cash App: Lastly, the Square-owned neobank played a big role in consumer fintech and for Square in 2020. As merchant lending took a hit with COVID in Q1, Square relied on Cash App for growth in 2020. Cash App launched stock trading—which is now used by 2.5 million users, helped users get their stimulus payments faster and helped distribute stimulus payments to millions of Americans (as did Chime and Currnet.) Cash App is now used by 30M people monthly.

The thing is, all of these companies, and loads of earlier consumer fintech startups, have a ton of room to grow. Chime and Current just raised large sums of money, which will be used to expand the team and product suite. Public market investors are expecting a big 2021 for Cash App—Square’s CFO said the subsidiary is “too profitable,” which implies a big focus on reinvesting Cash App products to fuel product growth. One area for obvious expansion is installment loans, something that helps both Square sellers and buyers.

In our final report of the year next Tuesday, we’ll highlight some of the institutional-led changes that have impacted banks, both big and small.

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