Payment tech: How to invest

Date: 14 Apr 2023


The payment technology sector has seen significant growth in recent years, as more and more consumers and businesses have shifted towards digital payment methods. This has led to a rise in the number of payment technology companies and increased demand for investment in this sector.

Concentrating on the main tech trends circulating at the moment in the private wealth sector, Tuhinabhra Mahapatra, Head of Next Generation Payments, Synechron, and Aravind Irodi, Senior Director – Technology, Synechron say: “We have been seeing asset and wealth managers accelerate their investment in digital transformation. This has been largely spurred by investor preferences shifting toward digital engagement and the overall desire of firms to drive efficiency and growth, but also due to growing pressure on investment firms from customers and regulators to provide more sophisticated ESG data – something which can only be properly facilitated with technology. AI, data analytics and cloud migration are also attracting sustained investment from the industry. The main trends we are seeing include: 

  • Increased momentum in the digitalization of wealth managers: The creation of paperless clients via next-gen automated infrastructure is delivering a more seamless onboarding process, reducing delays and inaccuracies (accuracy rates are around 90-95% after implementing RPA – which also cuts costs by 50%) whilst freeing up staff time for other revenue-driving tasks. Cybersecurity goes hand in hand with digitalization due to the number of cyber attacks in recent years – attacks which are becoming more prevalent. 
  • Enhanced Communication Protocols: By year end 2023, more than 80% of wealth management firms will replace their client reporting and communication systems. We expect to see a more significant deployment of robotic assistants and chatbots ushering in the official arrival of the digitally enhanced financial adviser. The use of chatbots can resolve problems before an actual human staff member needs to get involved, thus reducing costs by up to 30%. 
  • ESG (Environmental, Social, and Governance): ESG has become increasingly important in the world of WealthTech as investors become more conscious of the environmental and social impacts of their investments. With clients increasingly demanding their wealth managers align with sustainable values, regulatory bodies are simultaneously ramping up legislation to clamp down on greenwashing – false claims of a product/activity being eco-friendly. Wealth providers are looking to technology applications to facilitate a lot of the hard work in this area and ensure they remain compliant from a regulatory point of view. 

The wealth sector is in the midst of a technology revolution that is creating value by improving efficiency and productivity using exciting innovations such as advanced analytics, AI, cloud and machine learning tools. The effective deployment of these new technologies will see a boost to business operations and profitability for the sector.”

Most of the money spent in tech seems to go towards payment tech with much faster payment services. Tuhinabhra Mahapatra and Aravind Irodi stress: “Faster payments are important for the global asset management industry as they can improve the customer experience, reduce settlement times, enhance liquidity, increase transparency, improve security, and ultimately provide a competitive advantage. As a result, we are likely to see continued investment in payment tech within the asset management industry to meet the demand for faster and more efficient payment services. 

In terms of specific innovations, we are seeing wealth management firms investing significantly in developing digital payment systems that enable their clients to conveniently transfer funds, view account balances, and access investment portfolios from their personal electronic devices. Whilst this provides a more seamless customer experience and makes it easier for clients to manage their investments, it also brings with it the need to ensure cybersecurity measures are robust. Overall, this helps wealth providers to reduce the time and costs associated with traditional payment methods, such as wire transfers. 

Wealth managers are also exploring blockchain technology as a way of enhancing security and transparency of transactions. Blockchain can help to reduce the risk of fraud and improve the speed and efficiency of asset transfers. Outside of pure wealth management businesses, banks are investing heavily in their payment technology stacks to ensure compliance with the ISO 20022 standard. Simultaneously, several major securities market infrastructures have already implemented ISO 20022 for their messaging protocols, and the adoption in the securities industry is expected to continue to grow in coming years. They are spending on upgrading their messaging platforms and middleware solutions, developing new APIs to enable customer access to real-time data, and partnering with fintech companies to integrate with cutting-edge technologies. Europe has made significant headway in this area compared with other regions.”

Payment tech has also led to a need for increased security around payments – a fertile bed for investments as many companies experience growth. This issue has built up over time but was exacerbated by the modification to the 2007 Payment Services Directive (PSD) which was updated in 2018 to PSD2 with new regulatory technical standards on strong customer authentication and common and secure open standards of communication, as well as guidelines on incident reporting and guidelines on security measures for operational and security risks. It was developed by the European Banking Authority in close cooperation with the ECB, payment service providers must comply with all of the laws.

One way to access these are through Payment technology funds which are investment funds that focus on companies involved in the development, production, and distribution of payment processing technologies. These funds invest in companies that develop payment systems, payment gateways, payment processing software, and other payment-related technologies. Payment technology funds typically invest in a diversified portfolio of companies involved in the payment technology sector. These funds may also invest in other related industries such as financial technology (fintech), e-commerce, and mobile technology.

The wealth sector has also developed co-funding and private equity expertise and private equity firms often invest in the tech sector due to the potential for high returns on investment. Some of the reasons for this include the rapid pace of innovation, high growth potential, and the ability of tech companies to disrupt traditional industries.

Private equity firms will invest in tech companies in various ways, including venture capital, growth equity, and buyouts. Venture capital firms typically invest in early-stage tech companies that have high growth potential but may not yet be profitable. Growth equity firms invest in more established tech companies that have proven revenue streams and are looking to scale. Buyout firms acquire a controlling stake in a mature tech company and look to improve its operations and profitability.

Some recent examples of private equity investments in the payment tech sector include Square’s IPO: In November 2015, Square, a payments technology company founded by Twitter’s Jack Dorsey, went public in an IPO that valued the company at around $2.9 billion.

Quoted in CNBC, Christopher Austin, a lawyer focusing on IPOs and acquisitions at Orrick, Herrington & Sutcliffe in New York, says that with start-ups commanding such high valuations, investors are now more likely to turn to ratchets (guarantee’s or further incentives like shares, if valuations or sale dates are not met).“There’s enough nervousness in the market right now that we’ll probably see more of these,” Austin said. “These provisions happen when people feel prices are getting ahead of the actual valuations of companies.”

A good strategy for investing in payment tech is:

  1. Identify the latest trends in payment technology: Payment technology is rapidly evolving, and keeping up-to-date with the latest trends can help you identify potential investment opportunities. For instance, emerging payment technologies like blockchain, mobile payments, and digital currencies are gaining traction and may be worth exploring.
  2. Evaluate the company’s business model: Look for payment technology companies with sustainable business models and a track record of generating revenue and profits. It’s also essential to evaluate the company’s competitive advantage and market positioning.
  3. Consider the regulatory environment: Payment technology is subject to various regulations, depending on the jurisdiction. It’s essential to consider the regulatory environment in the region you are investing in and evaluate the potential impact of regulations on the company’s operations.
  4. Diversify your portfolio: As with any investment, diversification is crucial. Consider investing in payment technology companies across different regions, sectors, and business models to reduce your risk exposure.
  5. Seek professional advice: It’s essential to seek professional advice from financial advisors or investment managers to help you identify potential investment opportunities and manage your portfolio effectively.

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