The Q2 2023 earnings season is almost upon us, and with macroeconomic headwinds remaining fairly strong in many markets, this will be a key quarter to get a sense of where the global payments industry is, and what priorities will dominate over the next few cycles.
For many companies in the cross-border payments space, the last few quarters have been a challenge. While the strength of the dollar proved a benefit for some, for others it increased expenses while hitting revenues. Meanwhile, reduced consumer spending and weakening profits have led investors to become increasingly active, particularly in the payment processing space where the growth peaks of the pandemic are now a blip in the rear-view mirror.
However, there have also been promising signs, with the reopening of travel in Asia over the past few quarters boosting cross-border spending, while the B2B payments space has seen growing opportunities as it lures more customers away from banks.
The cross-border payments industry has seen some significant success stories over the past few years, but will this continue into Q2 23? Here’s some of the things to watch out for among global payments companies this earnings season.
Changes to average revenues and volumes per user in remittances
In the remittances and money transfers space, there has been an increased focus on driving up the average revenues per user, which is achieved in part by increasing the volumes sent by customers but also by offering them a broader range of financial services. The latter has prompted a number of players to develop bank-like products, including Western Union’s Digital Banking product, which has already been launched in a select number of markets.
However, this approach is not guaranteed to provide success. Digital remittance player Remitly, for example, recently retired its own migrant banking product Passbook in order to focus on its core money transfers product.
Meanwhile, early indications from UK-based money transfers player Wise, which reported its results a week ago, suggest that some customers are reducing the amounts they are sending. While Wise saw impressive customer growth, its average volume per customer reduced 15% year-on-year. This may be a phenomenon that is purely among the customers with higher send amounts than remittances, which Wise primarily caters to, but it will be worth looking at the remittance companies’ reports closely to see if this becomes a wider industry trend.
Digital developments in money transfers
The shift to digital in remittances and money transfers is a multi-year trend, but we are starting to see a tipping point among some of the more traditional players in terms of how they are looking to grow their business.
Cash isn’t going away completely, but digital has been driving much of the growth for many types of businesses in the space. While some players such as Remitly are completely digital on the send side, digital accounted for 35% of now-private MoneyGram’s revenue and 22% of Western Union’s in Q1 22, and it will be telling to see how much this has changed in Q2.
Watch out too for how companies frame digital relative to other parts of their business: we expect its significance, and how much companies report on it, to only increase over the next few quarters.
Ongoing benefits of reopening travel
Among card networks, payment processors and ATM operators alike, the reopening of travel has been a key narrative recently, particularly in Q1 23. We expect this to continue in Q2, especially given the reopening of key Asian markets and the approach of the main vacation season.
Visa and Mastercard both make significant parts of their revenue from cross-border travel, as do ATM operators such as Euronet, and they will provide key indications for how much of an impact travel will continue to have on the cross-border space.
Changes to consumer spending and the impact on payment processors
Meanwhile, on the ecommerce side, rising inflation is thought to have led many consumers to reduce spending on non-essentials. However, it is not clear how much of a trend this has been over the past few months and whether it will be enough to impact the main narratives of payment processors.
How much of a hit such companies take from changes to consumer spending – if any – will provide critical insights for H2 23, and provide a sense of how much Q4, this sector’s most important quarter, may play out.
Next key moves in B2B payments
B2B payments is the most fragmented of the cross-border payments sectors, with no non-bank player holding more than 1% of the market. However, it has been undergoing something of a quiet revolution over the past few years, with evolving product offerings, market consolidation and an increased focus on SME customers driving change across the space.
Most B2B payments players have generally been doing well over the past few quarters, but where they are adding growth, and how they plan to continue to grow in the future, will be key signs for how the rapidly changing space is set to evolve in the future.
Signs of a crypto season change
Crypto has had a tough year or so and with ongoing regulatory developments, particularly in the US, we’re unlikely to see a rapid shift in fortunes for the industry anytime soon. However, this quarter may provide some signs as to how much longer the crypto winter will last, and if there are any green shoots to focus on.
Of particular interest will be any knock-on impacts from the recent ruling on the US Securities and Exchange Commission lawsuit against Ripple, which found partially in favor of the crypto company. The conclusion of the long-running case may now see traditional players once again work with Ripple, which has previously had partnerships with companies including MoneyGram.
More broadly, look out for partnerships with crypto companies among the traditional players, as well as discussion of global payments-focused products from companies such as Coinbase, for indications of change.
AI enthusiasm may cool
Last quarter the global payments industry and beyond saw artificial intelligence (AI) become the topic of the moment, with companies across the technological spectrum rushing to share details on their use of AI and how they intended to harness it in the future. This was driven by the emergence of generative AI such as ChatGPT, and while there is still strong potential for the space, the fear of missing out and general sense of urgency seems to have dissipated among many companies.
How much AI is mentioned, and the level of detail in proposals, will provide a clearer picture of just how much AI is really likely to be used by the global payments space.
How about investor sentiment?
Half a year ago, activist investors were dominating some of the biggest moves within the industry, driving layoffs, spinouts and other cost-cutting measures. This has led to some major moves in the space, including the recent spinoff of FIS’s Worldpay for almost half what the company paid for it four years ago. Meanwhile, other similar developments are likely to be in the works, with PayPal reported to be looking to sell remittance brand Xoom.
However, it has been some time since any new potential deals of this nature have been announced and the general temperature of the industry appears to have improved. This quarter may provide a sense of whether investors are getting the responses they were looking for, or if they plan to demand further changes over the next few months.
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