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The digital payments industry in Europe and China

Bocconi Students Fintech Society
7 min readNov 11, 2020

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An overview of the market: the major players, the role of VC and predictions for the future

The scene in the digital payments industry is currently highly fragmented and diversified, with few major players, low barriers to entry and a lot of competition. In addition, the array of services provided is wide and ranges from digital wallets and digital bank cards to digital currencies, net banking, and contactless payments in points-of-sale. We can nonetheless identify some companies that managed to increase their popularity and market share over the years and that now dominate the scene. To do this, it is necessary to distinguish such companies by geographical areas, because of the highly differentiated customer needs and regulatory environments across markets.

Major Players in the Digital Payments Industry

The digital payments industry is highly dynamic, continuously shaped by new players coming in every year and mergers and acquisitions. The last outstanding transaction in Europe has been the €15bn merger through incorporation of Sia in Nexi, which gave birth to one of Europe’s largest fintech groups. Through the union of payment services and digital infrastructure, they ultimately target combined revenues of €2bn. This is a milestone event in this industry and will be determinant for the penetration of digital payments in the European market, especially in Italy. In fact, Cassa Depositi e Prestiti, a financial institution controlled by the Italian Ministry of Economics and Finance, currently owns a share of more than 25% in the group. Italy has traditionally been less favorable to change and transformations and usually lags behind other European countries when it comes to digitalization. This is not to say that Italy does not have room for innovation. The Startup Intelligence Observatory in collaboration with the Innovative Payments of the Politecnico of Milan counted 476 active start-ups at national and international level in the Innovative Payments sector, born since 2015 and which received funding in the last couple of years. Among these, it is worth mentioning Soisy, Splitty Pay, Matipay, Soldo, PayDo, and many others. However, this is the first time that Italian digital payments companies reach a size that would allow them to potentially compete with other international giants.

Furthermore, this merger will also put pressure on other European providers to consolidate and increase in size so as to have the resources and power to compete with the new-born group. The largest fintech company in the payments industry by valuation at the European level is now Adyen (Netherlands) worth $44.5bn, which is followed by Klarna (Sweden) worth $10.6bn, Checkout (UK) and Revolut (UK) worth $5.5bn, Transferwise (UK) worth $5bn, Greensill (UK), and N26 (Germany) worth $3.5bn.

As for China, it used to be a market with very few players in the banking sector, which was badly regulated and managed, with customers being offered only a restricted range of services. China’s three tech giants, Baidu, Alibaba and Tencent, then intervened and enabled the transformation of China into one of the “closest cashless economies” in the world, as most transactions now take place through mobile phone, amounting to US$12.77 trillion in the first 10 months of 2017. The scene is now certainly dominated by Ant Financial, which controls Alipay platform and is currently the biggest Fintech company worldwide. Ant Financial had recently announced its double IPO on the Shanghai and Hong Kong stock markets, where it expected to be valuated more than 200 billion dollars. This was predicted to be one of the biggest IPOs in history, one that would enable China to set the lead in the fintech market and further expand itself in the financial industry. However, just a few days before the day it was expected to take place, the listing got suspended because of “major issues” including changes in “the financial technology regulatory environment.
Worth mentioning also WeChat Pay, the well-established payment service embedded in the popular messaging app, which Alipay currently lacks. This is also its advantage on Ant Financial, in fact “[Peer-to-peer] payments are easier on WeChat. You chat with friends, look at ‘moments’ [the news feed in the app], and it becomes more natural to pay on WeChat,” said Zennon Kapron, director of Kapron Asia, a Singapore-based consultancy.

VC investments: what is their role?

During 2018, VC investments in the digital payments industry represented 50% of total investments in the US and 10% in China, compared to 2014–1017. This can be mostly attributed to the US$14bn investment in Ant Financial realized by Sequoia Capital, which made this the single largest fundraising ever obtained by a private company.

The massive availability of investments in China as well as the complete openness of the country for innovation allowed for massive growth in the past. However, now this tendency is slowing down because of more stringent regulations by the government. This only means that the growth and funding will be more controlled, but the development of the Chinese fintech industry at large is far from being over.

The future of the payments industry: predictions

In the report “The future of digital payments — Choices to consider for a new ecosystem” realized by Deloitte, we are provided with an analysis of the possible future scenarios of the digital payments industry. They define four situations shaped along two parameters: “customer value proposition” and “number of players”:

  1. Spoilt for choice: fragmented market and differentiated customer value proposition. The wide array of products and the high number of companies leads to a market characterized by high quality, loyalty schemes, targeted marketing and creation of ecosystems aimed to retain customers. A greater range of capabilities is necessary to satisfy different client needs and at different price levels.
  2. Price war: fragmented market and cost leadership (low differentiation). This implies strong competition among issuers in the few general services provided and low margins due to pressures to lower prices, discounts and loyalty programs, and high expenditures in marketing to attract customers. This, in turn, reduces the quality of products and the innovation level.
  3. Loss leadership: concentrated market and cost leadership (low differentiation). Competition is driven by scale and led by players who can afford it. The product is differentiation is lower and unable to satisfy more niche customers, leading to little innovation. Furthermore, competition between big network players leads to discounts and loyalty schemes, and lower prices.
  4. Winner takes all: concentrated market and differentiated customer value proposition. Customers have a wide array of options provided by few companies, and therefore little switching options. Prices tend to be higher because of low competition.

It is nonetheless very hard to predict with more certainty which will be the destiny of this industry. There are many determinants that keep shaping and redefining it year by year, through a complicated game of start-ups companies and governments playing together.

For instance, the recent pandemic showed us how much a single event can have a huge impact on the sector. So, here’s some food for your brain: in your opinion, what will be the future of the payments industry?

Bocconi Students Fintech Society

Author:

Arianna Sossi - Board Member - Bocconi Students Fintech Society | LinkedIn

View Arianna Sossi's profile on LinkedIn, the world's largest professional community. Arianna has 4 jobs listed on…

www.linkedin.com

Sources:

Fintech
Digital Payments Market
Digital Payment
Banking
Ant Financials

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Bocconi Students Fintech Society
Bocconi Students Fintech Society

Written by Bocconi Students Fintech Society

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