What do the disruptors in payments offer to smaller businesses?
The biggest area of Fintech is Digital Payments, by far. In 2016, its global transaction value was about US$ 2,221bn, according to Statista.
Digital Commerce accounted for 98% of the value (5% of transactions were from mobile devices). While peer-to-peer (P2P) International Money Transfers accounted for the remaining 2%. The three main trading blocs account for almost 80% of value, led by the US with US$ 605bn (27%), followed by China with US$ 587bn (26%) and Europe with US$ 541bn (24%).
Two unicorn start-ups in Digital Payments stand out in terms of valuation, according to CB Insights: Stripe and Transferwise. Their business models show why Digital Payments can benefit businesses, particularly small ones.
Founded in Silicon Valley in 2010, it has a valuation of US$ 9.2bn. It allows web developers to integrate the payment processing into their websites, without a merchant account. Stripe allows businesses to accept cards from customers around the world online, on any device. It charges a flat rate of 2.9% + 30¢ per successful charge (under US$ 1m in volume per year, it does not disclose higher volume rates). This rate varies from country to country, but it is always flat; the same as PayPal, without extra service fees. (Its integration is deeper than PayPal, offering a better user experience, arguably. However, it requires web development work to be implemented, where PayPal only requires to copy and paste a few lines of code into a client’s website.)
Launched in 2011, it is one of the biggest fintech start-ups in London with a valuation of US$ 1.1bn. It is disrupting international money transfers with a service at a fee up to 90% lower than most banks. It sends payments to recipients of equivalent transfer amounts and currencies, instead of directly to the recipients identified by senders (the traditional way). This P2P technology avoids currency conversion and transfers crossing borders.
Besides bypassing traditional finance intermediaries, which substantially reduces time and cost in executing payments, Digital Payments start-ups allow businesses and people in countries forgotten by big banks, Visa, Mastercard and others to enter the global financial system.
Hundreds of millions of small businesses and over two billion people around the world live outside the global financial system, according to the Huffington Post. This means that they do not have instant access to bank accounts, the ability to send money or pay bills in a secure and convenient way.
Stripe, Transferwise and other fintechs are working hard on solutions to include more and more of these businesses and people in a better financial system.
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