E-commerce: A Catalyst for Disruptive Fintech Innovation
Ecommerce grew steadily over the last decade thanks to the emergence of mobile technology, marketplaces, social media, and the shift to digital in general. But COVID-19 has been the ultimate catalyst. According to McKinsey, U.S. ecommerce penetration doubled in Q1 2020, effectively jumping 10 years forward in just 90 days.
As consumers switched to online channels for purchasing across all categories – from food to electronics to clothing – businesses around the globe pivoted to digital outlets to sell their products and services. In Q2 2020, new stores created on the Shopify platform grew a whopping 71% compared to Q1 2020, with a record number of merchants added to the platform in Q3.
The rising role of fintech
The growth in ecommerce is creating shock waves across the retail industry, followed by a sonic boom that is reverberating across the financial technology (fintech) sector. The growth in online transactions has led directly to an increase in the volume of digital payments, creating an opportunity for disruptive innovation that has the potential to drive even greater value.
The link between ecommerce and fintech is so inherent that the growth engine of a number of ecommerce companies is often driven from the financial services they provide. Shopify is one example, earning 59% of its revenue from embedded payment products. Aside from the traditional service fees attached to any extension of payment or loan, there’s also the stickiness factor. Buyers and sellers are more likely to remain loyal to retailers and marketplaces that make it easy to transact and engage at deeper levels. There are also tremendous insights to be gained from offering financial services through data collection and trend analysis that can be used to improve other services ecommerce companies offer, such as advertising.
This has fueled some interesting trends and innovative fintech offerings for both buyers and sellers.
Better payment experiences for buyers
In recent years, much of the emphasis for ecommerce innovation was around checkout optimization and removing any friction. But COVID-19 added another dimension with the need for new forms of payments. Newer trends include payment alternatives at checkout, not only with digital wallets, virtual credit and debit cards, but also with QR codes (traditionally less popular in the West) and other forms of touchless transactions.
Buy Now, Pay Later (BNPL)
One of the latest and biggest trends is Buy Now, Pay Later (BNPL), an industry that is expected to grow in global transaction volumes from $285 billion in 2018 to $695 billion by 2025 (according to Business Insider). BNPL helps to relieve the financial stress many people experienced because of the pandemic by creating a win-win situation for both the buyers and the sellers. It typically only involves a soft credit check so consumers can buy what they need and pay over time without impacting their credit score, and sellers can keep inventory moving.
With the growing popularity of BNPL we are seeing the model gradually expanding and can expect more innovation to come. For example, Affirm announced it will soon launch a debit card giving consumers the flexibility of splitting the payment not only at checkout but also post-purchase. This trend will likely hit the B2B side of ecommerce with 70% of B2B buyers saying they are open to making new, fully self-serve or remote purchases. Fueling the shift to digital for B2B payments, BNPL could give businesses much needed liquidity and greater flexibility at checkout. This is especially relevant for SMBs that often reflect similar financial behavior to consumers. In fact, startups like Tillit or Resolve, Affirm’s B2B BNPL spinoff which landed $60 million in funding recently, are already trying to seize this opportunity.
It is worth noting that while regulation of BNPL products is likely to increase, industry players are welcoming it as a way to dispel misconceptions of the tool, further protect customers, and support ongoing innovation.
Re-thinking financial services for sellers
With a rise in demand comes a rise in the need for supply. This requires money. And a lot of it. Sellers need much more working capital, but financing products are expensive or hard to obtain, because financial services providers that aren’t steeped in the world of ecommerce and how sellers operate can have difficulty accurately quantifying risk. Smaller sellers are typically required to provide personal guarantees because their ecommerce business assets don’t suffice as collateral or are forced to turn to friends and family for capital. Fintech companies are trying to fill the gap, but still rely on a partial view of risk and solutions are still fairly expensive. Marketplaces and ecommerce platforms offer good alternatives, but only to selected sellers. So, a gap remains that the industry needs to address.
There is a massive opportunity to completely rethink financing options for ecommerce sellers who need working capital to grow. New fintech entrants that will be able to capture the digital footprint in the ecommerce context, and therefore better evaluate the risk, may be best positioned to reinvent financial services for the benefit of ecommerce sellers instead of trying to copy and paste from existing financial products.
One small step for crypto fans, one giant leap for ecommerce
PayPal, which recently joined other big industry players like MasterCard, Visa and Square, has taken some meaningful steps with regards to crypto. PayPal’s ‘Checkout with Crypto’ is a step towards broad adoption of digital assets as a payment method in digital commerce, but the opportunity is much bigger than that. When you dig deeper, it’s clear that PayPal doesn’t actually enable payment with cryptocurrencies but rather converts them to fiat at checkout because of volatility, supporting cryptocurrencies that are held more as an asset (Bitcoin, Ethereum) than as a transactional currency.
While this is still a huge move towards the adoption of digital assets in ecommerce, the acceptance of stablecoins might be the next logical step to make this “feature” valuable for crypto believers. For example, Visa announced it will allow the use of USDC ( USD Coin, a stablecoin cryptocurrency whose value is pegged directly to the U.S. dollar) to settle transactions on its payment network. In the future we definitely expect to see broader blockchain applications supporting the wider financial needs of ecommerce, and helping to cut the cost of payment by eliminating middlemen, enabling real time tracking of the supply chain, and even potentially enabling smarter and more sophisticated customer loyalty programs.
The future is closer than we think
The rapid acceleration of ecommerce continues into 2021 but financial services have yet to fully adapt. All the ecosystem players – Fintechs, marketplaces, platforms, social media and traditional players – are trying to seize the opportunity. We see multiple announcements of companies reinforcing positions in the financial industry as can be witnessed in Wish announcement. The business models, digital tools, and consumer behaviors we envisioned three-to-five to 10 years down the road are here, and opportunities are ripe for the right fintech innovations.
At Team8 we are committed to bringing to market fintech solutions that will play an important role in enabling and accelerating ecommerce innovation and growth. As we reimagine the end-to-end ecommerce experience for buyers, sellers and marketplaces, we realize that the future is closer than we think. And it’s incredibly exciting to help shape.