the rise of innovative means of payment

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When Covid-19 lockdowns first hit North America two years ago, life changed overnight – with retailers playing canary in the coal mine.

Digital payment systems of all kinds have seen explosive growth

Even in a climate of uncertainty, merchants with a culture of innovation have been able to pivot quickly, adopting new electronic payment technologies to survive the recession. Some businesses have even created ways to thrive during the pandemic, setting themselves up for long-term success as they envision the new normal.

Lockdown restrictions prevented customers from countless physical retailers as only essential merchants such as grocers could operate. Stores that remained open did so at reduced capacity. It was a disaster for the retail sector: according to a report by the National League of Cities, major retailers closed more than 12,000 stores in 2020, and hundreds of thousands of independent businesses also closed.

Millions of retailers and restaurants have turned exclusively to debit and credit cards. Large retail chains already had service agreements and digital terminals to accept multiple payment methods, while smaller businesses needed a quick pivot to embrace digital payments.

Covid-19 has created opportunities for the fintech industry to deliver new, versatile, secure and affordable experiences while accelerating the digital shift. Everyone from start-ups to massive tax institutions are exploring this seismic shift in the marketplace. According to a study by the National Retail Federation and Forrester, contactless payments increased for 69% of retailers in the first eight months of the pandemic.

Much of this advancement in payment methods has come from fintech innovators rushing to meet the new need. These companies (and the retailers leveraging their products) are able to transform on a dime in response to unprecedented economic upheaval. Multi-year contingency plans may have helped some companies survive the pandemic, but executives have dreamed up better systems that can “stop, drop, and roll” and go from survival to success.

The impact on small and medium-sized enterprises (SMEs)

Covid-19 has had a disproportionate impact on SMEs, which often rely more on cash transactions and paper records than their larger counterparts. Research we conducted last year revealed that SMEs have been underserved by the fintech community, generating opportunities for innovation. Many off-chain restaurants without online ordering interfaces have rushed to implement digital integrations with services like Uber Eats, GrubHub or DoorDash.

Hardware stores or clothing stores allowed customers to order and pay for items online and get their products same day with curbside pickup. This approach, ubiquitous in 2022, was an outlier in retail in 2020. Consumers could pay electronically rather than cash, both for convenience and for Covid prevention.

Before the pandemic, these SMEs avoided the cost of these services. New and disruptive businesses now allow businesses to save on payment processing, get paid faster, and pay suppliers and vendors, while gaining insights into cash flow and inventory management.

Xero has partnered with payment startup Wise (formerly TransferWise) to manage accounts and process transactions, while Shopify has introduced Shop Pay installments, allowing customers to “buy now, pay later” . Even social media giant Meta has introduced Shops, allowing business profiles on its Facebook and Instagram platforms to create virtual storefronts.

Consumers use less cash

The use of cash and checks was declining before the pandemic. According to research by EY, Americans paid cash about a third of the time and used checks as often as digital payments. Lockdown has made digital payments mandatory. Before the pandemic, e-commerce accounted for 16% of all retail sales in the United States. Eight weeks into the quarantines, that number rose to 27%. Morgan Stanley reports the value of e-commerce sales was 25% in 2019, and Payments Canada says 62% of shoppers use less cash, while 42% avoid shopping in places that don’t accept cash. contactless payments.

This great migration to cashless systems will continue as the infrastructure increases the speed of transactions. Currently, check clearing can take anywhere from two to five business days, or up to ten days for large amounts. Meanwhile, debit or credit card transactions are virtually instantaneous. If the payer’s account has enough money or credit to complete the transaction, the recipient receives the amount immediately. This is how e-commerce works, but not without risk. A stolen or misused card can cost a retailer or consumer thousands of dollars. The need to authenticate the identity of the online payer is essential.

Many innovative companies are taking up the security challenge. The use of digital wallets is likely to grow. Big players like Apple and Google require biometric verification using fingerprint, face or voice recognition to complete a transaction. Smartphones have become ubiquitous, even in emerging markets and developing countries. Smallholder farmers can sell their crops quickly and securely using their mobile device while protecting their digital money. Seeing the benefits of such systems, companies like BanQu are developing blockchain technologies to provide safer transactions with lower fees.

Innovators fill the void

Digital payments represent a major opportunity for companies willing to innovate in the space and find problems to solve.

Construction software maker Harbr, for example, has created a system to automate contractor billing. Their product relieved an industry-wide bottleneck so severe that federal and state governments demanded that builders pay their workers faster.

While many payment apps focus on the retailer-customer interaction, SparcPay helps retailers pay their vendors, securing transactions with encrypted connections and a protected database while insisting that all members use strong passwords and record transactions in a digital audit trail.

By penetrating these uncharted spaces, companies such as Harbr and SparcPay are ensuring that retailers willing to go digital can thrive.

The future is digital

Digital payment systems of all kinds have seen explosive growth, enriching ideas that help businesses adapt to the new normal. Companies like Drop, which supercharge consumers’ debit and credit cards and offer them rewards with brands like Uber, Grubhub, Sephora and Starbucks on a single app, are streamlining the payment experience on the consumer side.

Cryptocurrencies and associated technologies such as NFTs and blockchain have grown in popularity, while central banks in at least 87 countries have considered a central bank digital currency (CBDC), which would have the same value as the local fiat currency.

The shift from cash to innovative digital payment systems has been developing for years, but the Covid-19 pandemic has undoubtedly accelerated this transition. Everyone in business strategy is excited to see what groundbreaking new ideas innovators are bringing to this emerging space, making people more comfortable with digital payments until cash is no longer king. .


About the Author

Marcus Daniels is a founding partner and CEO of hybrid venture capital studio and venture capital firm Highline Beta.

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