I love businesses with a simple goal to replace paperwork (e.g., postage, paper and workflow) with electronic transactions. This includes e-procurement, e-invoicing, and e-payments in both the business and consumer worlds. These businesses are easy to love because:
- The value propositions are compellingly simple
- The target markets are gigantic
- They can grow at double-digit rates for more than 20 years and still have market share to take.
The Global Payments Business
The global payments business generates enormous fees and is moving rapidly from paper (e.g., checks and cash) to electronic forms of payment (e.g., cards, ACH, and mobile payments). One way to segment this market is by consumer versus business payments. (Note: I will use the terms “consumer” and “retail”payments interchangeably and “B2B “, commercial”, “wholesale” payments as well on the business side).
Unless you have been hiding under a rock, I need not convince you of the massive changes going on in the consumer payments space. Suffice it to say that Visa, MasterCard, and PayPal (eBay) have all been great investments, in part due to the inevitable desire not to deal with paper. I’m more interested in business payments, but here’s a crude attempt to describe the entire global payments market that represents, according to BCG, $1 Trillion in revenue:
Domestic Electronic Business Payments
The domestic business payments space (green box above on the left) is about 2.5x the size of the consumer payments business in the US ($20 Trillion versus $7.8 Trillion in 2008) in volume, but not in revenue or transactions, so it receives less attention. The domestic business payments market generates a mere $67 billion in fees! Within this market, electronic means of payment (e.g., ACH and procurement cards) have been growing at double-digit rates for at least two decades in the US. Here’s a little eye candy from Visa to drive home the point:
Procurement cards have been a huge success over two decades, and the check to ACH conversion folks (e.g., Paymode-X, AvantGard, AribaPay) are doing quite well. (For more on those players, see my recent post on pymnts.com). A chart for domestic B2B ACH transactions would look similar to the one above. Through the power of compounding, sustained double-digit growth rates build big businesses over time.
Global Business Payments
If you are convinced that the North American electronic business payments market is attractive, then you are likely to be even more interested in the global and cross-border markets . Why?
- The US is an increasingly small part of the business payments market, as emerging markets grow more rapidly than the US
- Cross border trade consistently grows faster than GDP. Online marketplaces, crowdsourcing, digital ad networks, and an increasingly flat world mean further growth in cross border payments
- Procurement cards are less prevalent outside the US, where interchange rates are lower, so new providers have more opportunity
- There is a big profit pool to be attacked in the current outmoded system of correspondent banking and world of foreign exchange (more on that later). This is another reason so many investors are interested in block-chain-based crypto-currencies.
Here’s just a little more eye candy to make these points:
BCG expects international business payments to grow faster than North American (about 10% CAGR), and cross border payments to grow faster still (about 12.5% CAGR). Now consider the growth rates for providers of electronic versus paper solutions in these segments and you can see why 15%-25%+ growth rates are common–and will be for a long time.
Finally, the Cross Border Business Payment Segment
This high-growth, $12 billion market involves the most complicated transactions of all with the richest fees. BCG data suggests that the average retail domestic payment generates $0.71 in revenue, by contrast the average cross-border commercial transaction generates $11.40 in revenue–or 15x!! So, here we have the fastest growing segment with the fattest fees–no wonder so many folks are after this market!
The cross border market as a whole has four basic segments (hat tip to Glenbrook Partners):
As a B2B observer, I’m interested in the non-bank companies in the upper left quadrant, of which there are many. Especially interesting in this segment of supplier payments are two small, public companies you may not have heard of: Intl FCStone in the US and Earthport from Europe. In my next post, I’ll cover both companies at more length.